Sett Off of Losses under Income Tax Ordinance 2001

Question: Define set off of losses. How different losses can be set off under the provisions of income tax ordinance 2001?
Answer: 

Head/Sources of income:

According to income tax ordinance 2001, there five heads of income i.e. income from salary, income from property, income from business, Capital gain, income from other source. A person may drive income from all these five heads of income or he may have more than one source of income under one head.
                                                     Set off of losses:
During the income year, the taxpayer may have income from one source and can sustain losses from other source. However a person cannot suffer any loss under the head of “income from salary”because salary cannot be negative. Income tax ordinance 2001, allows assesses to adjust these losses against income from year. This process is called set off of losses mean.
“Adjusting the value of losses against income profit or gain of the same year is called set off of losses”
How to set off of losses:
According to provisions of income tax ordinance certain losses are adjustable only against profit or income of the same source while some of losses may be adjusted against profit or income of all source income.
For the purpose of “set off of losses” heads of income categorized into following three categories.
Category-A
1. Income from all salary
2. Income for property
3. Income from non-speculation business
4. Income from other source
Category-B
Income from speculation business
Category-C
Income from capital assets
It must be noted that losses of category B and C cannot be adjusted against category A.
                                                       Rules to set off losses:
1. Set off losses against source:
Capital losses and loss from speculation business adjustable against the income or profit of the same source only, its mean capital losses and speculation business losses cannot be set off against any other income or profit of the other sources.
2. Losses can be set off against all sources:
Losses from following source of income can be set off against all other source of income.
• Loss from property
• Loss from non-speculation business
• Loss other source of income

3. Set off of speculation losses:
According to section 58(b) speculation business should be treated as separate or distinct business. So loss from speculation business must be adjusted against profit or income from speculation business only.
4. Set of capital losses:
According to section 59 treatments to capital losses is same as we treated speculation losses. Whenever a tax payer sustains any capital loss it will be set off against capital gains of the same year only.
5. Set off of AOP losses:
According to section 93(2) if loss is sustained by an association of person. It will be adjusted as follow:
1. Firstly AOP will set off its losses against its income earned from any other source during the year
2. If loss is still not fully absorbed it will be divided among the partners as per their profit sharing ratio, who will adjust it against their personal incomes.
6. Set off losses of certain companies:
When two or more companies are amalgamated. The losses of merging companies can be set of against the income of amalgamated companies. Similarly amalgamated company can be set of its losses against income of the merging company. However such amalgamation scheme must be approved by the atat bank of Pakistan or security exchange commission of Pakistan.
7. Losses of companies operating hotels:
This new section has been added through finance act 2007, its objective is to encourage hotel companies to open and operate hotel in Azad jammu& Kashmir.
A registered company (in Pakistan or in azadjammu&kashmir), if sustain any loss either in Pakistan or in AJK, the company can set off loss of one place against at other place.
8. Order to set off losses:
If a taxpayer sustains losses under more than one source of income. While adjusting the losses, loss from “income from business” will be set off at last. For example Mr. Ali has loss from both property and business income. In such case loss from business income will be adjusting the loss from property income.
9. Losses of business exempt from tax:
Losses of person or business that enjoy tax holidays were not adjustable, but after an amendment through finance act 2003 now the losses sustain during such period can be set off and carry forward even after the expiry of exemption period.