Inter source adjustment [Section 70] :
(i) Under this section, the losses incurred by the assessee in respect of one source shall be set-off against income from any other source under the same head of income, since the income under each head is to be computed by grouping together the net result of the activities of all the sources covered by that head. In simpler terms, loss from one source of income can be adjusted against income from another source, both the sources being under the same head.
Example 1: Loss from one house property can be set off against the income from another house property.
Example 2: Loss from one business, say textiles, can be set off against income from any other business, say printing, in the same year as both these sources of income fall under one head of income. Therefore, the loss in one business may be set -off against the profits from another business in the same year.
(ii) Inter-source set-off, however, is not permissible in the following cases –
(a) Long-term capital loss
(1) Where the net result in respect of any short term capital asset is a loss, such loss shall be allowed to be set-off against income, if any, for that assessment year under the head “capital gains” in respect of any othe r capital asset, and
(2) Where the net result in respect of any long-term capital asset is a loss, such loss shall be allowed to be set-off against income, if any, for that assessment
year under the head “capital gains” in respect of any other asset not being a short-term capital asset.
Thus, short-term capital loss is allowed to be set off against both short -term capital gain and long-term capital gain. However, long-term capital loss can be set-off only against long-term capital gain and not short-term capital gain.
(b) Speculation loss – A loss in speculation business can be set-off only against the profits of any other speculation business and not against any other business or professional income. However, losses from other business can be adjusted against profits from speculation business.
(c) Loss from the activity of owning and maintaining race horses – See section 74A(3) in para 10.13 of this chapter.
(iii) It must be noted that loss from an exempt source cannot be set -off against profits from a taxable source of income. For example, long-term capital loss on sale of shares sold through a recognized stock exchange cannot be set -off against long-term capital gains on sale of land.