SET OF AND CARRY FORWARD OF LOSSES

Intersource Adjustment ( Sec 70)

If the result for any assessment year, in respect of any source under any head of income is loss. the assessee
is entitled the assesee is entitled to have the amount of loss set off against his income from any other source
under the same head of income for the same assessment year.
Example: X has two Business A and Business B. While Business A Returns on income of Rs 3.5 Lac,
Business B is a loss of Rs 1 Lac . In this case loss of Rs 1 lac from business can be set off.
Exception:
1) Loss from speculation business can be set off only against speculation income . Loss from a nonspeculation business can be set against speculation and non speculation income . Section 43(5) provides that
a transaction settled without actual delivery will be a speculative transaction. Loss on account of the
derivative trading cannot be treated as speculative loss,
2) Long term capital loss : Long term capital loss can be set off only against long term capital gain. Short
term capital loss can be set off against any long term and short capital gain.
3) Loss from activity of maintaining and owning of horse race : Loss of maintaining of horse race can be
set off only against income of maintaining of Horse race.
4)Loss from the source , the income of which is exempt cannot be set off against any income .
5) Loss from lottery , card games, gambling , betting etc cannot be set off against any income.
Inter head Adjustment (Sec 71)

If the result for any assessment year, in respect of any head of income is loss. the assessee is entitled the
assesee is entitled to have the amount of loss set off against his income from any other head for the same
assessment year.

Exception:
1) Loss from speculation business can be set off only against speculation income . Loss from a nonspeculation business can be set against speculation and non speculation income

2) Capital loss : Capital loss can be set off only against Capital gain.

3) Business loss cannot be set off against salary income

4)Loss from activity of maintaining and owning of horse race : Loss of maintaining of horse race can be
set off only against income of maintaining of Horse race.

5) Loss cannot be setoff against winnings from lotteries, crossword puzzles

Carry forward of Loss
If a loss cannot be set off either under the same head or under different head in the same year the loss have
be carried forward
HEAD

Setoff

Years to carried forward

Loss from House property (Sec 71 B)

Income from House property

8 years

Loss from Business and profession (other Income

from
Business
and 8 years
than speculation business) ( Sec 72)
profession(including
speculation
business)
Loss from speculation Business
Speculative Business income
4 years
( Sec 73)
Loss under head short term capital gain Income from capital gain
( Sec 74)

8 years

Loss under head Long term capital Income form Long term capital gain 8 years
gain( Sec 74)
only
Loss from owning and maintaining of Income
form
owning
Horse race
maintaining of horse race
( Sec 74 A)

and 4 years

Sequence of set off : The sequence applicable for set off of losses shall be first, inter- source off shall be
made u/s 70, thereafter , inter head set off shall be made u/s 70, there after inter head set off shall be
made .
Sec 80: A Return on loss have to be submitted then only loss can be carried forward.

Continuity of Business is not necessary : The business and profession in which the loss was business is
carried on may not continue to be carried on by assessee during the year in which brought forward loss is
sought to be set off.

CAPITAL GAINS
CAPITAL GAIN

Capital asset is defined to mean property of any kind, held by the assessee, whether or not connected with
his business or profession. Property may be tangible or intangible. Land, buildings, vehicles, goodwill,
tenancy rights, leaseholds rights, licenses, patents, trademarks etc. are some examples of capital assets.
EXCLUDES SPECIFIED ASSETS
The following assets are, however, excluded from the definition of capital assets:
1)any stock-in-trade, consumable stores or raw material held for the purpose of business or profession
(whose sale is taxed as profits from business).
2)personal effects of the assessee, i.e. movable property, including wearing apparel and furniture, held for
his personal use or for the use of any member of his family dependent upon him; excluding jewellery;
ornaments of gold, silver, platinum or any precious metal (even if worked or sewed into any wearing
apparel); precious or semi-precious stones (even if set in any furniture, utensil or wearing apparel);
archaeological collections; drawings; paintings; sculptures or any work of arts.
3) agricultural land in India, which is not situated in an urban area i.e.
in any area within the jurisdiction of a municipality or a cantonment board having a population of 10,000 or
more; orin any notified area, within 8 Kilometers of an area .
SHORT TERM CAPITAL ASSET
Capital assets are divided into two types - short term assets and long term assets. Normally, short-term
capital asset means a capital asset held by an assessee for not more than 36 months immediately prior to its
date of transfer. However, in the following cases, an asset, held for not more than 12 months, is treated as
short-term capital asset
1)Equity-or preference shares in a company (whether shares are quoted or not).
2) Securities (like debentures, Government securities) listed in a recognised stock exchange in India.
3)Units of Unit Trust of India (whether quoted or not).
4)Units of mutual funds specified under section 10(23D) (whether quoted or not).
5)Zero Coupon Bond.
LONG TERM CAPITAL ASSET
An asset other than a short-term capital asset is regarded as a long-term capital asset. Thus,
shares/securities/units held for 12 months (or more) or any other asset held for 36 months (or more) are long
term assets. Gains from transfer of long term capital assets give rise to long term capital gains

Sec
54

Assessee
Individual
and HUF

Conditions
1)Residential house to be
transferred.
2)It must be a long term capital
asset.
3)The income from such asset is
chargeable under the head
Income from house property .
4)Within one year before or 2
years after the date of transfer,
a residential house is purchased
or within a period of 3 years
after the date of transfer, a
residential
house
is
constructed.
5) If the new house is
transferred within 3 years from
date of acquisition , the long
term capital gain which is
exempt from tax is taxable.
Sales consideration
Less: (cost of acquisition less
exemption given earlier under
sec 54)
Short term gain

Quantum of exemption.
If the cost of the new residential house is greater
then the whole of the capital gain. Otherwise to
the extent of the cost of the new residential house.

Sec
54 B

Assessee
Individual

Conditions
1)Agricultural land to be
transferred.
2) It must have been used in the
2 year immediately preceding
the date of transfer for
agricultural purposes either by
the assessee or his parent.
3)Within 2 years from the date
of transfer another agricultural
land is purchased.
4) If the agricultural land is
transferred within 3 years from
date of acquisition , the long
term capital gain which is
exempt from tax is taxable.
Sales consideration
Less: (cost of acquisition less
exemption given earlier under
sec 54)
Short term gain

Quantum of exemption.
If the cost of the new residential house is greater
then the whole of the capital gain. Otherwise to
the extent of the cost of the new residential house.

Sec
54 D

Assessee
Any
Assessee

Conditions
1)There must be compulsory
acquisition.
2)The property acquired is
land and building forming part
of an industrial undertaking.
3) The asset must have been
used in the 2 years immediately
preceding the date of transfer
of the assessee for the purpose
of the business.
4)Within a period of 3 years
after the date of transfer any
other land or building is
purchased or constructed for
the industrial undertaking
existing are newly set up.
5) If the new land and building
forming part of an industrial
undertaking.
is transferred
within 3 years from date of
acquisition , the long term
capital gain which is exempt
from tax is taxable.
Sales consideration
Less: (cost of acquisition less
exemption given earlier under
sec 54)
Short term gain

Quantum of exemption.
If the cost of the new residential house is greater
then the whole of the capital gain. Otherwise to
the extent of the cost of the new residential house.

Sec
54 EC

Assessee
Any Assesee

Conditions
1)The asset transferred is a
long term capital asset.
2) Within a period of 6 months
from the date of transfer, the
amount of capital gains should
have been invested in the
specified bonds issued by Rural
Electrification
Corporation
(REC) Limited or National
Highways Authority of India
(NHAI).
3)Assessee shall not transfer; or
convert; or avail loan or
advance on the security of the
above bonds within a period of
3 years from the date of its
acquisition.

Quantum of exemption.
If the cost of the new residential house is greater
then the whole of the capital gain. Otherwise to
the extent of the cost of the new residential house.

Sec
54 F

Assessee
Any Assesee

Conditions
1) The asset transferred is a
long term capital asset, not
being a house.
2)Within a period of 1 year
before or 2 years after the date
of transfer, a residential house
is purchased or within a period
of 3 years after the date of
transfer a residential house is
constructed.
3) The assessee does not own
more than one residential
house on the date of transfer.
4)The assessee within a period
of 3 years after the date of
transfer construct/ purchase
any residential house other
than the new asset, the amount
of
exemption
claim
is
withdrawn

Quantum of exemption.
If the cost of the new residential house is not less
than the net consideration then the whole of the
capital gain. Other wise the capital gain in the
same proportion as the cost of the new residential
house bears to the net consideration

Sec
54 G

Assessee
Any Assesee

Conditions
1)Machinery, plant, building,
or land used for the business of
an Industrial undertaking
situated in an urban area is
transferred.
2)Transfer is due to shifting to
any area other than an urban
area.
3)Within a period of 1 year
before or 3 years after the date
of
transfer
purchased
machinery, plant or acquired
building or land or constructed
building and completed shifting
to the new area.

Quantum of exemption.
If the cost of the new assets and expenses
incurred for shifting are greater than the capital
gain, the whole of such capital gain. Otherwise
capital gain to the extent of the cost of the new
asset.

Scheme of Deposit : Under sec 54, the new residential property can be purchased within 2 years or 3 years
from the date of transfer of original asset. The tax payer have to submit the return of income by July 31 or
September 30.If the amount is not utilized for purchase of new purchase or construction of new house till
due date of submission of return of income then it should be deposited under capital gain account scheme
before the due date. If the amount is not fully utilized, then the amount of unutilized money would be
regarded as long term capital gain.

Income from house property

Income from house property:

An analysis of S. 22 indicates that the following three conditions must be satisfied before any income can
be charged to tax as Income from House Property:

The property must consist of any buildings or lands appurtenant thereto. This is called the House
Property.

The property must be owned by the assessee.

The property must not be occupied by the owner for the purpose of any business or profession
carried on by the owner, the profits of which are taxable.

INCOME FROM HOUSE PROPERTY

A. Fair Rent
B. Municipal Value
C. Higher of [A] and [B]
D. Standard Rent, if any
E. Lower of [C] and [D] = [RLV]
F. Actual Rent
G. GAV { Higher of E and F}
Less: Municipal taxes paid
F. NAV
Less : Deduction u/s sec 24
Standard deduction
(NAV * 30%)
Interest

Income from house property

Municipal taxes is allowed as deduction if the following condition is satisfied:

Muncipal taxes is paid by the owner

Muncipal taxes is paid during the Previous year.

INTEREST
Interest Payable on Loan For Property
The interest payable on amounts borrowed for (1) acquisition, (ii) construction, (iii) repairs, (iv)
reconstruction of property can be deducted from the Net Annual Value. This is the only deduction
allowed from NAV, in addition to Standard Deduction. Interest is allowable on accrual basis, whether
actually paid or not, irrespective of the method of accounting followed by the assessee. The purpose of
borrowing must be related to the property i.e. its purchase, construction, repair, renewal or reconstruction. If
loan is taken by mortgaging the house but for any other reason, e.g. daughters marriage, the interest cannot
be deducted.
Interest Payable For Pre-construction Period:

Where property has been (i) constructed or (ii) purchased with borrowed funds, the interest payable
for the period prior to acquisition or construction can be deducted in 5 equal installments
beginning with the previous year in which property is acquired or constructed and 4 succeeding
years.

Interest is to be aggregated from the date of borrowing till the end of the previous year prior to the
year in which the house is completed (and not till the date of completion of construction

It should be noted that (a) a new loan can be taken specifically to repay the original loan taken
for purchase/construction of a house. The interest on such new loan can also be deducted as
explained above. (b) If interest is not paid in time, the late payment charges or interest on
interest cannot be deducted. (c) Brokerage paid for arranging the housing loan cannot be
deducted. (d) Only simple, and not compound, interest can be deducted. (e) a certificate from
the lender specifying the amount of interest should be furnished by the assessee.

Amount Deductible on account of interest :

In case of one house whose annual value is taken as Nil (being a house used for self-occupation or lying
vacant due to the owner residing at work-place away from such house), interest can be claimed upto
(i) Rs. 30,000, if the loan is taken for acquisition, construction, repairs or renewals; or (ii) upto Rs.
1,50,000, if such property is acquired or constructed within 3 years from the end of the financial year
in which the capital was borrowed, with loan taken on or after 1st April, 1999. [Note that higher limit
of Rs. 1,50,000 applies only to loans taken for acquisition or /construction; and not for repairs,
renewal, re-construction etc.]. In any other type of property, any amount of interest can be claimed

BASIC CONCEPTS
Basic Concepts

Assessment yearSection 2(9) of the Act defines an assessment year as the period of 12months
commencing on the first day of April every year

Comments: An assessment year begins on1st April every year and ends on 31 st March of the next year.
For eg. The current assessment year 2012-13 has begun on 1st April,2012 and will end on 31 st
March,2013.

A financial year means the period of 12 months from1st April to the following 31 st March. The income
earned by a person during one financial year is taxed in the next financial year. The year in which the
income is earned is called previous year and in the next year in which the income is taxed is called
assessment year. Thus the total income of the person during the financial year (previous year) 2011-12
will be taxed in the next financial year (assessment year) 2012-13
Previous yearsection3 of the Act defines previous year as follows: For the purpose of this act,
previous year means the financial year immediately preceding the assessment year
Comments: income earned in one year (called previous year) is taxed in the next year (called
assessment year)..The total income earned by a person from whatever sources during the period from
1st April,2011 to 31st March,2012 will be taxed in the current assessment year 2012-13. The previous
year is uniform for all persons and is to be followed in respect of all types of income, irrespective of
the accounting year; it has to prepare separate Accounts for the period1st April, to31 st March, to
compute its taxable income.
Person Sec 2 (31)
Individual-means a natural person i.e human being. It includes a male female a minor and even a
lunatic
HUF-consists of all persons lineally descended
grandchildren)&their wives and unmarried daughters

from

Hindu

ancestor

(children&

CompanyFirm- is a taxable entity distinct from its partners

Association of persons- AOP means an association in which 2 or more persons join in for a common
purpose or a common action for earning income. An AOP can have any
personi.e(i)Individual(ii)HUF(iii)a company etc as a member. Following are the examples of an
association of persons (a) Joint venture (b) a trust (c)a club(d)a cooperative society.
Body of individuals- BOI means a team of individuals carrying on some activity with the object of
earning income. An association of persons may consist of non individuals but a Body of Individuals
consists of only individuals or human beings and cannot have any other person (eg a firm, HUF) as
a member.
Local Authority-means a municipality, a district board, a Port Commissioner, or any other authority
legally entitled to control or manage a municipal or a local fund