SET OF AND CARRY FORWARD OF LOSSES: ILLUSTRATION 2

During the tax year 2009, Mr. Shahid received the following incomes:

Rs. 120,000 Salary

Income from other sources 70.000

Taxable income Rs. 190,000

During the year, Mr. Shahid sustained a loss from property amounting to Rs. 75,000 and a business loss of Rs. 36,000.

Solution

According to the general principle of section 56 of Income Tax Ordinance, 2001, these losses can be adjusted against the other income of Mr. Shahid in the same year. Provided that if a person has sustained a loss under the head “income from business” and also a loss under any other head of income, the loss from that other head should be set off first and the loss under “income from business” shall be set off last.

So in this case, Mr. Shahid will first set off the loss from property (Rs. 190,000-75,000) and the loss from business shall be set off after that (Rs. 115,000-36,000). Thus, his taxable income will be Rs. 79,000.

If a company is registered in Pakistan or Azad Jammu and Kashmir (AJ&K), and it is operating hotels at both the places, and it sustains a loss from business at one place, the loss can be adjusted against company’s income at the other place.

This new section has been added through Finance Act, 2007, so that the companies operating hotels in Pakistan are encouraged to open and operate their business in Azad Jammu and Kashmir also.

To these general principle of ‘set off of losses’ there are a few

exceptions which are as under:

Set Off of Speculation Loss

First exception to the general principle is in respect of speculation loss. Under section 58 the speculation business should be treated as a separate and distinct business.

Where a person sustains a loss in any tax year in respect to Dfa Ho of any speculation business, he can set off such loss only against profits of another speculation business carried on by him. It means that loss from speculation business cannot be adjusted against another head.