Income Tax 2025

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Set off and carry forward of losses from specified activity ​

115 (1) ​

Any loss incurred by the assessee in the specified activity during any tax year, shall not be set off against the income, if any, from any source other than specified activity for the said tax year.

115 (2) ​

The unabsorbed loss from the specified activity for any tax year shall be carried forward to the subsequent tax year and shall be set off,–– (a) only against the income from specified activity, if any, computed for such subsequent tax year, and so on; and (b) only when the specified activity is carried on by the assessee in that tax year.

115 (3) ​

The unabsorbed loss from the specified activity referred to in sub-section (2) shall not be carried forward for more than four tax years immediately succeeding the tax year in which such loss was first computed.

115 (4) ​

In this section,––

  • (a) “income by way of stake money” means the gross amount of prize money received by the owner of race horses participating in horse races on their winning a particular position in such race;
  • (b) “loss incurred by the assessee in the specified activity” means the amount by which the income by way of stake money, if any, falls short of the expenditure, not being capital expenditure, incurred wholly and exclusively for maintaining race horses;
  • (c) “race horse” means a horse upon which wagering or betting may be lawfully made in a horse race;
  • (d) “specified activity” means the activity of owning and maintaining race horses;
  • (e) “unabsorbed loss from the specified activity” means any loss computed in respect of the specified activity carried on by the assessee during the tax year, which has not been, or is not wholly, set off against income, if any, of the specified activity under sub-section (1) for the said tax year.
Explanation

Section Summary: ​

This section (Section 115) deals with the treatment of losses incurred from a "specified activity," which is defined as owning and maintaining race horses. It outlines how such losses can be set off against income and carried forward to future years. The key focus is on restricting the set-off of these losses to income from the same specified activity and limiting the carry-forward period to four years.

Key Changes: ​

  1. Restricted Set-Off: Losses from the specified activity (owning and maintaining race horses) can only be set off against income from the same activity, not against other sources of income.
  2. Carry-Forward Rules: Unabsorbed losses can be carried forward for up to four years but only if the specified activity continues in those years.
  3. Definition of Terms: The section introduces specific definitions for terms like "income by way of stake money," "loss incurred in the specified activity," and "unabsorbed loss."

Practical Implications: ​

  1. Taxpayers Owning Race Horses: Taxpayers involved in owning and maintaining race horses can no longer use losses from this activity to reduce taxable income from other sources (e.g., salary, business income, etc.). Losses can only offset income from the same activity.
  2. Carry-Forward Limitation: If the taxpayer stops the activity of owning race horses, any unabsorbed losses cannot be carried forward. Additionally, losses can only be carried forward for four years.
  3. Compliance Burden: Taxpayers must maintain detailed records of income and expenses related to race horses to compute losses accurately and ensure compliance with the carry-forward rules.

Critical Concepts: ​

  1. Specified Activity: Refers to owning and maintaining race horses. This is the only activity covered under this section.
  2. Income by Way of Stake Money: Prize money received by the owner of race horses for winning positions in races.
  3. Loss Incurred in Specified Activity: The excess of expenses (non-capital) over income from stake money.
  4. Unabsorbed Loss: Losses that cannot be set off in the current year and are carried forward to future years, subject to the four-year limit.

Compliance Steps: ​

  1. Record-Keeping: Maintain detailed records of all income (stake money) and expenses related to maintaining race horses.
  2. Separate Computation: Compute losses from the specified activity separately and ensure they are not set off against other income sources.
  3. Carry-Forward Tracking: Track unabsorbed losses and ensure they are set off against income from the specified activity in subsequent years, within the four-year limit.
  4. Disclosure in Tax Returns: Clearly disclose income and losses from the specified activity in the tax return, adhering to the prescribed format.

Examples: ​

  1. Scenario 1: Mr. A owns race horses and incurs a loss of ₹5 lakh in FY 2023-24 due to high maintenance costs and low stake money. Under this section, Mr. A cannot set off this ₹5 lakh loss against his salary income. He can only carry it forward to offset against future income from owning race horses, provided he continues the activity and does so within four years.

  2. Scenario 2: Ms. B stops owning race horses in FY 2024-25. She had an unabsorbed loss of ₹3 lakh from FY 2023-24. Since she is no longer engaged in the specified activity, she cannot carry forward this loss to FY 2024-25 or beyond.

This section ensures that losses from owning and maintaining race horses are treated separately and do not reduce taxable income from other sources, while also imposing a time limit on their carry-forward.