When income from a particular head and a loss from another head or same head is adjusted, it is called set off of loss against income'. A loss when not set off due to legal bar or due to insufficiency of income from other eligible source or head, it may be carried forward to a subsequent year for set off against income of that year. This write-up discusses how the Direct Taxes Code (DTC) has been drafted with regard to set off and carry forward of losses'.

Income from ordinary sources

Though DTC uses the expression income from ordinary sources', it is not defined in Section 314. However, from a reading of Sections 60 to 62 it can be understood that all incomes chargeable to tax except income from special sources' fall in the category of income from ordinary sources'.

What follows are some of the salient features proposed in the new dispensation.

No discrimination in set off of losses: Any loss from business, house property or residuary source is eligible for set off against income from employment' or capital gain from any investment asset (it may be noted that any gain or loss from business capital asset is treated as part of business income/loss). However, no loss from any ordinary source is eligible for set off against income from any of the special sources

Sub-classification within ordinary source: The DTC classifies income from ordinary sources with some sub-classification, such as (i) capital gain/loss from investment asset; (ii) income or loss from speculative business; and (iii) income or loss from the activity of owning and maintaining race horses. Losses from these sources are to be adjusted only against the respective incomes and cannot be adjusted against other incomes.

Liberal set off benefits: In view of the above classification with riders thereon given above, loss from house property is eligible for set off even after carry forward against any income, except income from special sources. Similarly, loss from business could be set off against salary income, which is contrary to Section 71(2A) of the Income-Tax Act, 1961.

Absence of transition provisions: One conspicuous absence in the DTC is the transition provisions to address the issues relating to carry forward of losses under the present I-T Act and the fate of such losses with the tenure for carry forward rights or benefits in the DTC regime.

No time limit for carry forward and set-off: No time limitation is put for carry forward of losses for set off in the subsequent financial years in the DTC and hence it seems that a loss quantified under DTC under any head is eligible for carry forward and set off indefinitely without any time limitation.

However, the eligibility for carry forward of loss is subject to filing of return within the prescribed due date' mandated by Section 67 of the DTC.

Expressions used with or without caption: A look at Section 60 of the DTC would show that various expressions have been used with caption in one place and without it in another, in spite of having a specific definition for each of them. Examples are Section 60(4) vis--vis Sections 60(8) and 60(10).

Definitions not appropriately depicted: All the incomes from ordinary sources are aggregated with internal set off subject to certain exclusions and the resultant is called gross total income from ordinary sources'. The meaning of the expressions gross total income' and gross total income from ordinary sources' are defined in Sections 314(109) and 314(110) respectively though such expressions have not been given in the caption in Sections 61(2) and 61(3) to show proper usage .

Income from special sources

Income from special sources are clearly spelt out in Part 3 of the First Schedule to DTC and it covers winnings from lottery or crossword puzzle, income from horse racing, card game or any other game, gambling or betting. Additionally, the schedule covers income of non-residents from income by way of interest, dividend (on which no DDT was paid), non-resident sportspersons who are not citizens of India and non-residents sports association or institution.

Incomes from special sources are liable for flat rate of tax similar to present status with no basic exemption limit whatsoever.

The accompanying table shows the broad coverage of DTC provisions with regard to aggregation of income with set off and carry forward of losses.