Set off and carry forward of losses in taxation

Set off means adjustment of losses from some heads with income of other head(s) to get the taxable income. The provision of set off is laid in section 37 of Income Tax Ordinance 1984. There are seven heads of income namely salary, interest on securities, house property, agriculture, business and profession, capital gain and miscellaneous. Set off of losses can be done against these sources prescribed in the law.

There is no question of loss in case of income from salary so the provision of set off is not applicable in case of salary as source of income. Loss arising out of the source of income from securities can be set off against any other heads of income. Loss arising out of the source of income from house property also can be set off against any other heads. Loss in case of agriculture can be set off against any other heads except income from capital gain. Loss arising out of business other than speculation business can be set off against any head except income from capital gain and house property. Loss from speculation business can only be set off against any other speculation business. Loss in the source of capital gain can be set off only against other capital gain. Losses in cases of miscellaneous sources of income cannot be set off.

When losses under a head is not possible to set off wholly against same year's income from the head allowed in the Income Tax Ordinance 1984, it is allowed to transfer the unadjusted amount of losses to next year(s) for set off and this means carry forward of losses. Carry forward is not as flexible as set off as it allows to set off after carry forward against the same head only. Sections 38-42 of Income Tax Ordinance explain the process of carry forward.

Income from salary is not subject to carry forward because there is no question of loss in salary. Loss in case of securities cannot be carried forward. Loss in case of income from house property cannot be carried forward as well.

Loss in the source of agricultural income can be carried forward only against income from agriculture and the time limitation is up to 6 year. Loss in the head of business or profession (except speculation business) can be carried forward up to 6 years and can be set off only against income from business or profession. Loss in the source of income from speculation business can be carried forward up to 6 years and set off against only speculation business.

Loss in the head of capital gain can be carried forward if the amount exceeds 5000 taka up to 6 years and set off only against only income from capital gain. Loss in the head of miscellaneous source is not subject to carry forward.

The writer is a Student of Law, University of Dhaka.