Loss, in simple terms, means excess of expense over income. Loss arises when income earned during the financial year by the taxpayer is less than the expenditures incurred by him during the year. There might be house property loss or capital loss or loss from business/profession/other income.
Losses under “Income from other sources” could occur in following 2 types:-
A) Loss from the business of owning and maintaining race horses.
If the taxpayer is running a business of owning and maintaining race horses, then the profits from this business are taxable under the head “Income from other sources”. If, during any financial year, the amount spent on expenses is more than income earned, loss arises from this business. Income Tax Act, 1961 has provided following rules to set-off and carry forward of losses from this business:
- A loss occurred from the business of owning and maintaining race horses can be set off against profits from owning and maintaining race horses only. This loss cannot be set off against any other incomes.
- If loss still exists then it can be carried forward to next financial year.
- Loss from this activity can be carried forward to the next 4 financial years only. If the loss still persists after 4 financial years, then balance loss shall be forgone.
E.g. Miss Kamal is running a business of owning & maintaining race horses. Her business receipts during F.Y. 2015-16 were Rs. 12,60,000/- whereas the expenses spent were Rs. 14,28,000/-.
How much loss Miss Kamal have incurred? And how the same could be carried forward?
- She incurred loss of Rs. 1,68,000/- during the year from the business of owning & maintaining race horses. Such loss can be set off only against profits of the same business. Since she is not having profits, the loss shall be carried forward and set-off upto next 4 financial years i.e. F.Y. 2019-20.
B) Other loss under ‘Income from other sources’.
- Other loss from “income from other sources” can be set off against any other income during a financial year.
- However, loss from “Income from other sources” cannot be carried forward to the next year.
E.g. Mr. Kaushal invests in bonds of private sector companies through his broker. He received Rs. 1,80,000/- during the F.Y. 2015-16 as interest. However, the aggregate of expenses spent such as brokerage, taxes, other charges etc. amounts to Rs. 1,98,000/-. He also received savings bank interest of Rs. 16,000/-. What will be tax treatment of this loss?
- The loss of Rs. 18,000/- suffered by Mr. Kaushal is available to be set-off against any income like salary, capital gains, other source incomes etc. However such loss should be set-off during current financial year only. In this case, Mr. Kaushal is having interest earned of Rs. 16,000/- which is available to be set-off during F.Y. 2015-16. The balance loss of Rs. 2,000/- shall be forgone and not allowed to carry forward to the next financial year.