Man paid lower income tax by setting off business loss against long term capital gains but received income tax notice; wins case in ITAT Delhi

When Mr Chandra from Kaka Nagar, Delhi, filed his income tax return (ITR) for AY 2022-2023 on October 22, 2022, he used his business loss to reduce his long term capital gains. This single incident became the point of a long-standing dispute with the Income Tax Department.

What happened was, Chandra had declared a total income of Rs 17.39 lakh. He had a business loss of Rs 10.12 lakh and LTCG of Rs 21.29 lakh. The Centralised Processing Centre (CPC) Bengaluru reviewed his ITR and changed the sequence of set off and adjusted the business loss first against the income from house property (Rs 7,69,087) and the balance against income from other services.

As a result, only LTCG remained subject to tax. This meant, the deduction claimed under Chapter VI-A of Rs 1,85,000 was rejected and Chandra’s income was recalculated at Rs 19,24,950.


Chandra disagreed with this decision. His chartered accountant, Sumit Goel, filed an appeal in ITAT Delhi after CIT (A) dismissed their appeal.

Also read: What are set off and carry forward losses?

Business loss can't be set-off with long term capital gains?

Karanjot Singh Khurana, Partner, DMD Advocates, said to ET Wealth Online: The Income Tax law allows an individual to set-off losses under one head of income, for instance, business loss against income earned by a taxpayer under another head of income, for instance rental income, during the same financial year.

In the present case, Chandra had earned capital gains, rental income and some income from other sources, while simultaneously incurring a business loss. Accordingly, Chandra chose to set off the business loss against the capital gains and computed the gross income basis the balance capital gains, along with the rental income and income from other sources. Since, the income comprised of rental income and income from other sources, Chandra claimed deduction of certain investments (presumably for payments such as life insurance, PF deposits etc.) and offered the remaining total income to tax.

However, while processing Chandra's income tax return (ITR), the business loss was first adjusted against his income from house property (rental income) and the balance was thereafter adjusted against income from other sources, in accordance with the sequence in which the heads of income appeared in the relevant income tax return (ITR) form filed by Chandra

Consequently, as a result of this sequence, the rental income and income from other sources were entirely absorbed by the business loss, leaving only the income under the head ‘Capital Gains’ chargeable to tax. Khurana says that since, the law does not permit set-off of payment based deductions against the capital gains, resultantly there was an increase in Chandra's tax liability.

Feeling aggrieved, Chandra filed an appeal with the Income Tax Appellate Tribunal who decided in his favour and held that while the law enables set-off of certain losses against incomes from other heads within the same financial year, no specific sequence of adjustment is provided in law.

Khurana says that it was thereby held by ITAT Delhi that Chandra is entitled to choose the sequence in which the business loss is set off against income under different permissible heads. ITAT Delhi further held that merely because the different heads of income are arranged in a particular sequence in the income tax return form, it does not imply that the taxpayer is required to follow the same sequence while setting off the loss as the Act does not prescribe any specific sequence for such set-off.

Khurana says that there is no specific sequence of set-off mentioned in the law and now this case shows that ITAT Delhi held that where the law does not prescribe a particular order, the taxpayer may choose the sequence in which the eligible loss is set off against income under different heads, subject to the restrictions prescribed under the Act as provided in the below chart.

Chart showing income tax set-off rules

Head of income where taxpayer has incurred loss	Head(s) of income against which such loss can be set off	Head(s) of income against which such loss cannot be set off
Non-speculative business loss	Any other business/profession income, House property, Capital Gains (STCG & LTCG), Other Sources (except winnings from betting / gambling type activities, crossword puzzles, lottery, card games, races)	Salary income
Speculative business loss	Only speculative business income	Every other head other than speculative business
Short-Term Capital Loss (STCL) (includes loss on listed equity STCG)	STCG and LTCG	Business income, Salary, House property, Other sources
Long-Term Capital Loss (LTCL)	Only LTCG	STCG, or any other head of income
House property loss	Any other head of income, except (except winnings from betting / gambling type activities, crossword puzzles, lottery, card games, races)	Amount of set-off of loss capped at Rs 2 lakh against non-house-property income
Other sources loss	Any other head of income including Other Sources (except winnings from betting / gambling type activities, crossword puzzles, lottery, card games, races)	N/A
Loss from owning/maintaining race horses	Only income from owning/maintaining race horses	Any other income/head

Source: DMD Advocates

Also read: Rs 9.91 lakh income tax refund for senior citizen after proving that he mistakenly paid income tax on tax-free bonds; ITAT Delhi order explained

ITAT Delhi discussion

Vimal Kumar, Judicial member, and Renu Jauhri, accountant member of ITAT Delhi, heard this case.

ITAT Delhi referenced Section 71 of the Income Tax Act and said that it is clear that the loss from business can be set off against the assessable income under any head of income including ‘Capital Gains’ and no order of sequence has been prescribed under the Act.

Accordingly, ITAT Delhi said that they are of the considered view that Chandra is entitled to choose the order in which he wishes to set off the business loss against income from other heads (except the ‘salaries’) and merely because the heads are arranged in a particulars sequence in the ITR Form, does not imply that it is mandatory for him to follow the same sequence while setting off the loss.

On this ground, Chandra won the case.