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Income tax is a composite tax on the income of a person earned during a period of one previous year. An assessee might has different sources of income under the same head of income. Similarly, it might happen that assessee have income under different head of income. The net result from a particular source or head may be a loss. This loss can be set off against other sources or head in a specific order or manner.
The provisions for set off or carry forward and set off of losses are contained in section 70-79 of Income Tax Act 1961. It involves the following steps:
Step 1: Inter source adjustments under the same head of income [Intra Head Adjustment];
Step 2: Inter head adjustments in the same assessment year at the time of aggregation of income of various heads [Inter Head Adjustments];
Step 3: Carry forward of loss to subsequent assessment years [C/F of Losses]