Set-off and Carry Forward of Losses: Compliance under Income Tax Act, 1961

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The document issued by the Income Tax Department explains the framework governing set-off and carry forward of losses under income tax law.

Set-off refers to adjusting losses against profits in the same assessment year, either within the same head of income (intra-head) or across different heads (inter-head). Intra-head adjustment allows losses from one source to be set off against income from another source under the same head, while inter-head adjustment permits residual losses to be adjusted against income under other heads, subject to specified restrictions. Current year losses are required to be set off before carried-forward losses, and taxpayers may choose the most beneficial mode of set-off in the absence of a prescribed method.

Carry forward of losses applies when losses cannot be fully set off in the same year due to insufficient income. Such losses can be carried forward to subsequent years and adjusted against eligible income, subject to conditions and time limits. House property losses, business losses, and capital losses are generally allowed to be carried forward for up to eight assessment years, while speculative losses can be carried forward for four years. Certain losses, such as those from specified businesses under Section 35AD and unabsorbed depreciation, may be carried forward indefinitely.

The law imposes several restrictions on set-off and carry forward. Losses cannot be set off against undisclosed income detected during search or survey proceedings, unexplained income taxable under Section 115BBE, income from gambling or lotteries, income from virtual digital assets, or specified income of trusts and institutions. Losses from virtual digital assets are treated as non-adjustable and cannot be set off even against similar income. Similarly, gambling losses cannot be adjusted against any income.

Specific rules apply to different heads of income. Under house property, losses can be set off against other heads up to a limit of ₹2 lakh in a year, with the balance carried forward for eight years. Business losses can generally be set off against other income except salary, but speculative and specified business losses have restricted applicability. Capital losses can only be set off against capital gains, with long-term losses restricted to long-term gains.

Carry forward is subject to conditions such as timely filing of income tax returns, except in cases like house property losses and unabsorbed depreciation. Certain exceptions allow transfer of losses in cases of inheritance, amalgamation, demerger, and business reorganisation, provided statutory conditions are satisfied. In amalgamation, accumulated losses and unabsorbed depreciation of the predecessor may be carried forward by the successor subject to continuity of business and asset holding requirements.

The document also outlines special provisions for concessional tax regimes, where losses attributable to disallowed deductions cannot be set off or carried forward. Additionally, restrictions exist for closely held companies, where carry forward of losses depends on continuity of shareholding, subject to specified exceptions.

Overall, the framework establishes detailed rules for adjusting and carrying forward losses, balancing taxpayer relief with restrictions to prevent misuse, while ensuring compliance with statutory provisions governing different categories of income.

Income Tax Department
Ministry of Finance, Government of India

Page Contents

Set-off and Carry Forward of Losses
Rules for Set-off of Losses
Intra-Head Adjustment
Inter-Head Adjustment of Losses
Carry Forward of Losses
Loss Under the Head “House Property”
Loss under the Head of PGBP
Set-off and Carry-forward of Losses in Amalgamation and Demerger
Set-off and Carry-forward of Losses in Amalgamation of Banks, Government Companies, and Cooperative Banks
Restriction on Losses of Closely Held Companies
No Set-off of Loss from Undisclosed Income
Loss under the Head Capital Gains
Losses from certain specified sources falling under the head “Income from other sources”
Set-off and Carry Forward of Losses
Rules for Set-off of Losses
Intra-Head Adjustment
Inter-Head Adjustment of Losses
Carry Forward of Losses
Loss Under the Head “House Property”
Loss under the Head of PGBP
Set-off and Carry-forward of Losses in Amalgamation and Demerger
Set-off and Carry-forward of Losses in Amalgamation of Banks, Government Companies, and Cooperative Banks
Restriction on Losses of Closely Held Companies
No Set-off of Loss from Undisclosed Income
Loss under the Head Capital Gains
Losses from certain specified sources falling under the head “Income from other sources”
Extract of Relevant Sections of Income-tax Act, 1961
- Section – 70 – Set off, or carry forward and set off
- Section – 71 – Set off of loss from one head against income from another.
- Section – 71B – Carry forward and set off of loss from house property.
- Section – 72 – Carry forward and set off of business losses.
- Section – 72A – Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc. 72A.
- Section – 72AA – Carry forward and set off of accumulated loss and unabsorbed depreciation allowance in scheme of amalgamation in certain cases.
- Section – 72AB – Provisions relating to carry forward and set-off of accumulated loss and unabsorbed depreciation allowance in business reorganisation of cooperative banks.
- Section – 73 – Losses in speculation business.
- Section – 73A – Carry forward and set off of losses by specified business.
- Section – 74 – Losses under the head “Capital gains”.
Tax Tutorials – Set off and carry forward of losses under the Income-tax Law

Set-off and Carry Forward of Losses

Introduction

Set-off means adjustment of losses against the profits from another source/head of income in the same assessment year. If losses cannot be set-off in the same year due to inadequacy of eligible profits, then such losses are carried forward to the next assessment year for adjustment against the eligible profits of that year.

Set-off of Losses

Intra-head Adjustment: Loss from one source of income can be set-off against income from another source under the same head (e.g., loss from one house property against income from another house property).
Inter-head Adjustment: Residual losses after intra-head adjustment can be set-off against income under other heads (e.g., house property loss against business income).

Carry Forward of Losses

Losses that cannot be set off in the current year may be carried forward for adjustment in subsequent years, subject to certain conditions:
- Eligible Losses for Carry Forward (for a specified number of years):
  - House property loss
  - Business/profession loss
  - Capital gains loss
  - Income from other sources
- Unlimited Carry Forward: Unabsorbed depreciation, as well as losses arising from unabsorbed capital expenditure on scientific research or family planning.

Restrictions on Set-off and Carry Forward of Losses

Undisclosed Income: Losses cannot be set-off against undisclosed income detected during search/survey/requisition.
Virtual Digital Assets (VDAs): Loss from VDAs cannot be set-off against other income or even income from other VDAs and vice-versa.
Unexplained Income: Losses cannot be set-off against income taxable under Section 115BBE.
Specified Income of Trusts/Institutions: Any trust, fund or institution referred under Section 10(23C)(iv)to (via) or Section 11 cannot set off any loss against income taxable under Section 115BBI.
Gambling Losses: Losses from gambling activities cannot be set-off against any income and vice-versa.

Special Provisions

Concessional Tax Regimes: Assessee opting for concessional tax regimes is required to forgo specified exemptions and deductions. Consequently, any losses or unabsorbed depreciation attributable to such deductions cannot be set off or carried forward. Only the balance loss, if any, will be allowed to be carried forward and set off.

Rules for Set-off of Losses

Introduction

Set-off refers to adjusting losses against profits either from the same source/head of income (intra-head adjustment) or from different heads of income (inter-head adjustment) during the same assessment year. If full adjustment isn’t possible, losses may be carried forward to future years for adjustment against eligible profits.

Key Rules for Set-off

Intra-Head Adjustment (Section 70): Losses are first adjusted against income within the same head, e.g., business loss against business income.
Inter-Head Adjustment (Section 71): If losses remain after intra-head adjustment, they can be adjusted against income under other heads, except specified restrictions.

General Rules

Mode of Set-off:No particular mode of set-off has been prescribed by the income-tax law. In absence of any particular mode of set-off, the assessee is entitled to claim a set-off which is most beneficial. [Circular No 26, Dated 07-07-1955]
Current Year Priority: Current year losses take precedence over carried-forward losses.
Concessional Tax Regimes: Under sections like 115BA, 115BAA, etc., losses or unabsorbed depreciation attributable to disallowed deductions under the regime cannot be set-off or carried forward.
Clubbing Provisions: Losses can be set-off against clubbed income included in the total income.

Restrictions on Set-off

Losses cannot be set-off against:

Undisclosed income discovered during search, requisition or survey (Section 79A).
Income from gambling, betting, or lotteries (Section 115BB).
Unexplained income (Section 115BBE).
Income from virtual digital assets (Section 115BBH).
Specified income of trust/institutions income (Section 115BBI).
Winnings from online games (Section 115BBJ).

Intra-Head Adjustment

Introduction

Intra-head adjustment allows the set-off of losses from one source of income against income from another source within the same head of income. Specific rules and exceptions govern these adjustments, such as limiting long-term capital losses to only long-term capital gains.

General Rules for Intra-Head Adjustment

Losses from one source can be set-off against profits from another source within the same head of income.
- Example: Loss from one house property can be adjusted against income from another house property.
Types of permissible adjustments:
- House Property Loss: Set-off against other house property income.
- Short-Term Capital Loss: Adjustable against both long-term and short-term capital gains.
- Non-Speculative Business Loss: Can be adjusted against speculative, non-speculative and specified business income.

Exceptions to Intra-Head Adjustment

There are certain exceptions to the general rule.

Long-Term Capital Loss: Can only be set-off against long-term capital gains.
Speculation Losses: Only adjustable against speculation profits.
Specified Business Loss: Loss from specified business under Section 35AD can only be adjusted against profits from other specified businesses.
Race Horses: Losses incurred on owning/maintaining race horses can only be set-off against income from the same source.
Gambling Losses: Losses from gambling activities cannot be set-off against any income, including gambling winnings.
Virtual Digital Assets: Losses from the transfer of virtual digital assets, cannot be adjusted against any income, including gains from another VDAs.
Undisclosed Income: Losses whether brought forward or otherwise, or unabsorbed depreciation cannot be set-off against undisclosed income discovered during searches or surveys or requisition under Section 79A.
Unexplained Income: Losses are not adjustable against unexplained income taxable under Section 115BBE.
Specified Trust/Institution Income: Losses of any trust, fund or institution referred to in sub-clause (iv), (v), (vi) and (via) of Section 10(23C) or Section 11 cannot be set-off against specified income under Section 115BBI.

Inter-Head Adjustment of Losses

Introduction

Inter-head adjustment allows for the set-off of losses from one head of income against income from another head within the same assessment year. Certain exceptions apply, such as capital losses being adjustable only against capital gains.

Rules for Inter-Head Adjustment

House Property Losses: Losses from house property can be set-off against income under any other head.
Exceptions:
- Loss exceeding Rs. 2 lakhs cannot be set-off in the current year; the excess loss is allowed to be carried forward.
- Losses cannot be set-off against specified incomes, such as undisclosed income (Section 79A), gambling winnings (Section 115BB), unexplained income (Section 115BBE), virtual digital assets (Section 115BBH), specified trust/institution income (Section 115BBI) or winning from online game (115BBJ).
- No set-off allowed to assessee under the concessional tax regime (Section 115BAC).
Business or Profession Losses: Losses from business or profession or unabsorbed depreciation can be set-off against any income under any head.

Exceptions:

Speculation losses can only be adjusted against speculation income.
Losses from specified business (Section 35AD) can only be adjusted against profits of other specified businesses.
Salary income cannot absorb business losses.
Losses cannot be set-off against certain incomes (e.g., gambling winnings, virtual digital assets, unexplained income).

Capital Losses:

Losses from capital gains (short-term or long-term) cannot be adjusted against income from other heads.
Special Rule: Loss from the transfer of virtual digital assets is not adjustable against any income, making it a dead loss.

Carry Forward of Losses

Introduction

When losses cannot be fully set off within the same year due to inadequate eligible profits, they may be carried forward to subsequent assessment years for adjustment against eligible profits under the same income head. This ensures taxpayers can efficiently manage losses over time.

Key Provisions for Carry Forward of Losses

Losses Eligible for Carry Forward:

House Property Losses: Unadjusted losses can be carried forward for 8 years.
Speculative Losses: Can only be adjusted against speculative income within 4 subsequent years.
Non-Speculative Business Losses: Can be carried forward for 8 years.
Losses from Specified Businesses (Section 35AD): Carried forward indefinitely.
Capital Losses: Short-term or long-term losses carried forward for 8 years.
Losses from Owning and Maintaining Race Horses: Carried forward for 4 years.
Conditions for Carry Forward: Assessees under concessional tax regimes (Sections 115BA, 115BAC, etc.) cannot carry forward losses and unabsorbed depreciation attributable to deductions not allowed under such regimes.
Transferability of Losses: Losses can generally be carried forward by the original assessee.

Exceptions:

Inheritance: A successor by inheritance can carry forward the predecessor’s losses, subject to the remaining period within the 8-year limit from the year the loss was first incurred.
Amalgamation or Demerger: Subject to conditions under Sections 72A and 72AA losses and unabsorbed depreciation can be carried forward by amalgamated or resulting companies.
Business Reorganization: In cases of reorganization referred under Sections 47(xiii), (xiv), and (xiiib), the successor entity can carry forward the predecessor’s losses. For reorganizations occurring on or after April 1, 2025, such losses can be carried forward for 8 assessment years from the year following the one in which the loss was originally incurred by the predecessor.
Business Reorganization of Co-operative Banks: The successor co-operative bank can set off the accumulated loss and unabsorbed depreciation of the predecessor, provided conditions under Section 72AB are satisfied. If any condition is violated, the previously allowed set-off is deemed income of the year of non-compliance.

Mandatory Filing of Returns:

Losses can only be carried forward if the income tax return is filed within the due date of return filing.
Exceptions: House property losses and unabsorbed depreciation can be carried forward even if the return is filed after the due date.
Condonation of Delay: CBDT has prescribed circumstances under which delay in filing returns may be condoned, allowing carry forward of losses despite late filing:
Principal CIT/CIT: Empowered to accept/reject condonation requests if the amount involved does not exceed Rs. 1 crore per assessment year.
Chief CIT: Authorized for cases involving amounts above Rs. 1 crore and up to Rs. 3 crore.
Principal Chief CIT: Empowered for cases involving amounts exceeding Rs. 3 crore.

Applications for condonation must be filed within the 6 years from the relevant assessment year. Further, the condonation application should be disposed of within 6 months from the end of the month in which the application is received by the competent authority, as far as possible.

Loss Under the Head “House Property”

Introduction

Loss under the head “Income from House Property” arises when:

Self-Occupied Property: The interest on housing loans exceeds the annual value (nil for self-occupied).
Let-Out Property: The aggregate of interest on housing loans and municipal taxes exceeds the rental income.

Losses can be set off against other incomes in the same year or carried forward for adjustment in subsequent years.

Set-Off and Carry Forward Rules

Intra-Head Adjustment:

Loss from one house property can be set off against income from another house property.
Exception: If the assessee has opted for the concessional tax regime under Section 115BAC, loss from self-occupied property cannot be set off.

Inter-Head Adjustment:

Loss under “House Property” can be set off against income from other heads within the same year, subject to exceptions:

Maximum loss of Rs. 2 lakh can be set off; the remainder is carried forward.
No set-off is allowed against:
Undisclosed income (Section 79A).
Income from gambling (Section 115BB).
Unexplained income (Section 115BBE).
Income from transfer of VDAs (Section 115BBH).
Specified income of trusts/institutions (Section 115BBI).
Winnings from online games (Section 115BBJ).
Assessee opting for the concessional tax regime under Section 115BAC cannot set-off house property loss against income under any other head.

Carry Forward of Losses:

Unabsorbed house property loss can be carried forward for 8 assessment years.
Carried-forward losses can only be set off against “Income from House Property” in subsequent years.

Additional Points

Late Filing of Returns: Loss under “House Property” can be carried forward even if the return of income is filed after the due date.

Time Limits for Set-Off:

Intra-Head: Adjusted in the same year.
Inter-Head: Adjusted in the same year against eligible income.
Carry Forward: Set-off within 8 years.

Loss under the Head of PGBP

Introduction

Business losses may arise as speculative, non-speculative, or specified business losses. Provisions regulate the set-off against other incomes and the carry-forward period for unadjusted losses.

Set-off and Carry-forward of Losses

Set-off: Adjusting losses against income in the same assessment year.
Intra-head Adjustment: Loss from one business source of income can be set off against income from another source under the same head.

Exceptions:

🞍 Speculative losses: Only adjusted against speculative profits.
🞍 Specified business losses (Section 35AD): Adjusted only against profits from other specified businesses.
🞍 Losses under concessional tax regimes (Sections 115BAA, 115BAC, etc.): Not allowed if linked to disallowed deductions.

Note: However, normal business losses can be set off against income from a speculative business or a specified business.

Inter-head Adjustment: Loss under business or profession can be adjusted against other heads except:

Speculative losses and specified business losses cannot be set-off against income taxable under any other head.
Losses under concessional tax regimes (Sections 115BAA, 115BAC, etc.): Not allowed if linked to disallowed deductions.

Carry-forward: Unadjusted losses are carried forward to future years for set-off against eligible income:

Non-speculative Losses: Set off against any business income within 8 years.

Exceptions: The time limit of 8 years to set-off the carried forward losses does not apply in the following three circumstances:

Unabsorbed depreciation and unabsorbed capital expenditure on scientific research or family planning can be carried forward indefinitely until fully set off.
If an industrial undertaking is discontinued due to calamities (like flood, fire, war, etc.), losses can be set off in the year it is revived—provided revival occurs within 3 years of discontinuation. If profits are insufficient, the loss can be set off against other business income of that year. Unabsorbed losses can be carried forward for 7 assessment years from the year of revival.
Speculative Losses: Only against speculative profits within 4 years.
Specified Business Losses: Indefinitely carried forward until set off against specified business profits.

Restrictions

Business losses and unabsorbed depreciation cannot be set off against:

Salary income
Undisclosed income or unexplained income (Sections 79A, 115BBE)
Income from virtual digital assets, gambling, winnings from online games, or specified trust incomes.

Preconditions for Carry-forward

Same Assessee: Losses can be carried forward only by the taxpayer who incurred them, except in cases of inheritance, amalgamation, demerger, or specific reorganisations.
Timely Return Filing: Returns must be filed on or before the due date to claim carry-forward rights, barring exceptions like unabsorbed depreciation.

Order of Set-off

Set off in the following sequence:

Current year’s expenses (e.g., scientific research, family planning)
Current year’s depreciation
Current year’s business loss
Brought forward business losses
Unabsorbed expenditure on family planning
Unabsorbed depreciation
Unabsorbed capital expenditure on scientific research

Set-off and Carry-forward of Losses in Amalgamation and Demerger

Introduction

In case of amalgamation or demerger, the successor company (amalgamated or resulting company) may carry forward and set off the losses and unabsorbed depreciation of the predecessor company (amalgamating or demerged company) if specific conditions are met.

Amalgamation

Definition

Amalgamation under Section 2(1B) involves the merger of one or more companies with another company or the merger of multiple companies to form one company. Key conditions include:

All assets and liabilities of the amalgamating company transfer to the amalgamated company.
Shareholders holding at least 75% in value of the amalgamating company become shareholders of the amalgamated company.
It should not result from one company purchasing property from another, or from distribution of such property after the latter’s winding up.

Applicability

Accumulated business losses and unabsorbed depreciation of the amalgamating company are treated as loss and depreciation of the amalgamated company for the previous year in which amalgamation has taken place, if there is an amalgamation of:

Companies owning industrial undertakings, ships, or hotels with another company; or
Banking companies with a specified banks; or
One or more public sector company or companies with one or more public sector company or companies; or
An erstwhile public sector company with one or more company or companies.

Conditions for Set-off or Carry forward

For the Amalgamating Company:

Must have been in business for at least three years.
Should have held at least 75% of the book value of fixed assets held by it 2 years prior to the date of amalgamation.

For the Amalgamated Company:

Must continue the business of the amalgamating company for at least five years.
Should hold 75% of the acquired fixed assets for at least five years.
Must comply with Rule 9C, which lays down additional conditions to ensure the amalgamation is for genuine business purposes aimed at reviving the amalgamating company’s business.

Note: If any of the above conditions are not met, the unabsorbed business loss and depreciation claimed by the amalgamated company shall be deemed its income in the year of non-compliance.

Carry-forward Period

Losses: Can be carried forward for 8 years from the year of amalgamation. However, for amalgamations effective on or after April 1, 2025, losses of the predecessor entity can be carried forward by the successor for 8 assessment years, starting from the year immediately following the year in which the original predecessor entity incurred the loss.

“Original predecessor entity” means predecessor entity in respect of the first amalgamation under Section 72A(1).

Unabsorbed depreciation: Indefinite.

Special Provisions for Erstwhile Public Sector Companies

Carried forward losses and unabsorbed depreciation are limited to amounts as of the date of strategic disinvestment. Section 79 conditions on shareholding changes do not apply, provided the government retains 51% voting power.

Rule 9C Compliance

The amalgamated company owning an industrial undertaking must achieve 50% of installed production capacity within four years of amalgamation and maintain it for five years. Certification in Form 62 is required annually.

Demerger

Definition

Demerger (Section 2(19AA)) refers to the transfer of one or more undertakings by a company to a resulting company, subject to:

All assets and liabilities transfer to the resulting company;
The transfer occurs at book values;
The resulting company issues its shares to the shareholder of the demerged company on a proportionate basis;
Shareholders holding at least 75% of the demerged company become shareholders of the resulting company;
It should not be done as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company; and
The transfer is made on a going concern basis.

Treatment of Losses

Directly Relatable Losses/Unabsorbed Depreciation:

Transferred to the resulting company and carried forward.
Losses: Balance of eight years.
Unabsorbed Depreciation: Indefinite period.

Common Losses/Depreciation:

Apportioned between the demerged and resulting companies based on asset ratios.

Restrictions on amalgamated company opting for concessional tax regimes

Where the amalgamated company has opted for concessional tax regimes of Section 115BAA or Section 115BAB, it shall not be allowed to set-off and carry forward of losses or unabsorbed depreciation of the predecessor company (amalgamating or demerged co.) to the extent such losses or depreciation that are attributable to the deductions which are not allowed on opting for such regimes.

Set-off and Carry-forward of Losses in Amalgamation of Banks, Government Companies, and Cooperative Banks

Introduction

In cases of amalgamation involving banking companies, government general insurance companies, or cooperative banks, the successor entity can carry forward and set off the accumulated losses and unabsorbed depreciation of the predecessor entity, provided specific conditions are fulfilled.

Amalgamation of Banking Companies/Institutions or Government Companies

Applicability

The provisions apply to the amalgamation of:

One or more banking company with other banking institutions under a Central Government-sanctioned scheme.
One or more banking company with any other banking institution or other company following strategic disinvestment within five years from the disinvestment year.
Corresponding new banks merging with other corresponding new banks under a Central Government scheme.
Government companies engaged in the general insurance business with any other Government company engaged in similar business under a sanctioned scheme by Central Government.

Key Points

Losses and unabsorbed depreciation of the predecessor are treated as those of the successor in the year of amalgamation.
These are set off first against the successor’s business profits, with any balance adjusted under general provisions relating to set-off and carry forward of losses.

Carry-forward Period

Losses: Allowed for 8 years from the amalgamation year.
Depreciation: Indefinitely carried forward.

However, amalgamations effective on or after April 1, 2025, the successor can carry forward the losses for 8 assessment years starting from the year immediately following the year in which the loss was first incurred by the original predecessor entity.

Definitions

Strategic Disinvestment: Involves reducing government shareholding below 51% and transferring control to a buyer.

Original predecessor entity: means predecessor entity in respect of the first amalgamation.

Amalgamation of Cooperative Banks

Where amalgamation of a co-operative bank has taken place during the previous year and certain conditions are satisfied, the successor Co-operative bank is allowed to set off the accumulated loss and unabsorbed depreciation of the predecessor co-operative bank as if the amalgamation had not taken place. (i.e., for unexpired period).

Eligibility Criteria

Predecessor Co-operative Bank Conditions:

Engaged in banking for at least three years.
Held at least 75% of the book value of fixed assets for two years before amalgamation.

Successor Co-operative Bank Conditions:

Must continue the predecessor’s business for at least five years.
Retain at least 75% of predecessor’s fixed assets for five years after amalgamation.
The successor co-operative bank is required to comply with additional conditions prescribed to ensure that the amalgamation is for genuine business purposes of revival of the business of the predecessor Co-operative bank.

Consequences of Non-compliance

If conditions are not met, previously set-off losses and unabsorbed depreciation are added to the successor’s income for the non-compliance year.

Demerger of Cooperative Banks

In case of a co-operative bank’s reorganisation through demerger, the accumulated loss and unabsorbed depreciation shall be carried forward and set off in the following manner.

Treatment of Losses

Directly Attributable Losses: Entire loss and unabsorbed depreciation attributable to the transferred undertaking are carried forward by the resulting cooperative bank.
Common Losses: Allocated between the demerged and resulting banks in proportion to asset distribution.

Restriction on Losses of Closely Held Companies

Introduction

Section 79 restricts the set-off of carried forward losses in closely held companies if substantial changes occur in voting power. Exceptions apply for eligible start-ups and under specific circumstances like strategic disinvestment or resolution plans under IBC.

Set-off and Carry Forward of Losses Compliance under Income Tax Act, 1961

Conditions for Carry forward and Set-off of Losses

Closely Held Companies:

Losses can be carried forward and set off only if at least 51% of voting power is beneficially held by the same persons:

On the last day of the previous year in which loss occurred.
On the last day of the previous year, when set-off is claimed.

Eligible Start-ups: Start-up companies incorporated between 01-04-2016 and 31-03-2030, with a turnover not exceeding Rs. 100crore and holding a valid “eligible business” certificate from the Inter-Ministerial Board of Certification, can carry forward losses if either of the following conditions is met in the year of set-off:

At least 51% of the voting power is beneficially held by the same persons who held it on the last day of the year when the loss was incurred, or
100% of the shareholders on the last day of the year in which the loss was incurred continue to hold their shares on the last day of the preceding year in which the loss is set-off.

Exceptions to Section 79:

Closely held companies or eligible start-ups can carry forward losses despite shareholding changes, if the change meets specified conditions.

Shareholding or voting power changes due to death or gift.
Amalgamation or demerger of a foreign parent company with its Indian subsidiary.
Strategic disinvestment of erstwhile public sector companies by the Government.
Resolution plans approved under IBC.
Cases where the NCLT has suspended the Board and appointed new directors.
Changes due to relocation of offshore funds to IFSC.

No Set-off of Loss from Undisclosed Income

Introduction

Section 79A prohibits the set-off of any loss (brought forward or otherwise) or unabsorbed depreciation against undisclosed income discovered through search, requisition, or survey.

Prohibition on Set-off of Losses

Losses cannot be set-off against undisclosed income found during:

A search under Section 132.
A requisition under Section 132A.
A survey under Section 133A(excluding Section 133A(2A)).

Meaning of Undisclosed Income

Income Represented by any Asset or Book Entry or transaction: Includes money, bullion, jewellery, or other valuables, or book entries/transactions not recorded in regular books or disclosed to the PCCIT/CCIT/PCIT/CIT before the search, survey or requisition date.
Income Represented by False Expenditure: Includes entries for expenses found false during search, survey or requisition that would not have been detected otherwise.

Loss under the Head Capital Gains

Introduction

Losses under “Capital Gains” are classified as Short-term Capital Loss (STCL) and Long-term Capital Loss (LTCL). They must be distinctly computed and disclosed in income tax returns, with specific rules for set-off and carry forward.

Set-off and Carry Forward Rules

Intra-head Adjustment:

STCL: Can be set-off against any capital gain (short-term or long-term).
LTCL: Can be set-off only against long-term capital gains.

Inter-head Adjustment: o Losses under “Capital Gains” cannot be set-off against income from other heads.

Carry Forward:

o Unadjusted STCL or LTCL can be carried forward for up to 8 assessment years.
o LTCL can be adjusted only against LTCG; STCL can be adjusted against STCG or LTCG.
o Filing the return by the due date is mandatory for carry forward, subject to condonation for delay by the Assessing Officer or CBDT.

Loss on Virtual Digital Assets (VDAs)

Loss on transfer from VDAs cannot be set off against any income, including gains from other VDAs and vice-versa. Such losses are treated as “dead losses” and are not eligible for carry forward.

Losses from certain specified sources falling under the head “Income from other sources”

Set-off of losses from activity of owning & maintaining horse races

Loss from owning & maintaining horse races can be set off only against income from the same activity. If there is no stake money income in a year, the entire expenditure incurred on maintaining race horses will be treated as a loss from that activity.

Carry Forward of losses from activity of owning & maintaining horse races

Losses can be carried forward for up to 4 assessment years, subject to continuation of the activity. Filing of returns by the due date is mandatory, with condonation allowed in specific cases.

Set-off and Carry Forward of Losses

Introduction

Set-off of Losses

Intra-head Adjustment: Loss from one source of income can be set-off against income from another source under the same head (e.g., loss from one house property against income from another house property).
Inter-head Adjustment: Residual losses after intra-head adjustment can be set-off against income under other heads (e.g., house property loss against business income).

Carry Forward of Losses

Losses that cannot be set off in the current year may be carried forward for adjustment in subsequent years, subject to certain conditions:
- Eligible Losses for Carry Forward (for a specified number of years):
  - House property loss
  - Business/profession loss
  - Capital gains loss
  - Income from other sources
- Unlimited Carry Forward: Unabsorbed depreciation, as well as losses arising from unabsorbed capital expenditure on scientific research or family planning.

Restrictions on Set-off and Carry Forward of Losses

Undisclosed Income: Losses cannot be set-off against undisclosed income detected during search/survey/requisition.
Virtual Digital Assets (VDAs): Loss from VDAs cannot be set-off against other income or even income from other VDAs and vice-versa.
Unexplained Income: Losses cannot be set-off against income taxable under Section 115BBE.
Specified Income of Trusts/Institutions: Any trust, fund or institution referred under Section 10(23C)(iv)to (via) or Section 11 cannot set off any loss against income taxable under Section 115BBI.
Gambling Losses: Losses from gambling activities cannot be set-off against any income and vice-versa.

Special Provisions

Concessional Tax Regimes: Assessee opting for concessional tax regimes is required to forgo specified exemptions and deductions. Consequently, any losses or unabsorbed depreciation attributable to such deductions cannot be set off or carried forward. Only the balance loss, if any, will be allowed to be carried forward and set off.

Rules for Set-off of Losses

Introduction

Key Rules for Set-off

Intra-Head Adjustment (Section 70): Losses are first adjusted against income within the same head, e.g., business loss against business income.
Inter-Head Adjustment (Section 71): If losses remain after intra-head adjustment, they can be adjusted against income under other heads, except specified restrictions.

General Rules

Mode of Set-off:No particular mode of set-off has been prescribed by the income-tax law. In absence of any particular mode of set-off, the assessee is entitled to claim a set-off which is most beneficial. [Circular No 26, Dated 07-07-1955]
Current Year Priority: Current year losses take precedence over carried-forward losses.
Concessional Tax Regimes: Under sections like 115BA, 115BAA, etc., losses or unabsorbed depreciation attributable to disallowed deductions under the regime cannot be set-off or carried forward.
Clubbing Provisions: Losses can be set-off against clubbed income included in the total income.

Restrictions on Set-off

Losses cannot be set-off against:

Undisclosed income discovered during search, requisition or survey (Section 79A).
Income from gambling, betting, or lotteries (Section 115BB).
Unexplained income (Section 115BBE).
Income from virtual digital assets (Section 115BBH).
Specified income of trust/institutions income (Section 115BBI).
Winnings from online games (Section 115BBJ).

Intra-Head Adjustment

Introduction

General Rules for Intra-Head Adjustment

Losses from one source can be set-off against profits from another source within the same head of income.
- Example: Loss from one house property can be adjusted against income from another house property.
Types of permissible adjustments:
- House Property Loss: Set-off against other house property income.
- Short-Term Capital Loss: Adjustable against both long-term and short-term capital gains.
- Non-Speculative Business Loss: Can be adjusted against speculative, non-speculative and specified business income.

Exceptions to Intra-Head Adjustment

There are certain exceptions to the general rule.

Long-Term Capital Loss: Can only be set-off against long-term capital gains.
Speculation Losses: Only adjustable against speculation profits.
Specified Business Loss: Loss from specified business under Section 35AD can only be adjusted against profits from other specified businesses.
Race Horses: Losses incurred on owning/maintaining race horses can only be set-off against income from the same source.
Gambling Losses: Losses from gambling activities cannot be set-off against any income, including gambling winnings.
Virtual Digital Assets: Losses from the transfer of virtual digital assets, cannot be adjusted against any income, including gains from another VDAs.
Undisclosed Income: Losses whether brought forward or otherwise, or unabsorbed depreciation cannot be set-off against undisclosed income discovered during searches or surveys or requisition under Section 79A.
Unexplained Income: Losses are not adjustable against unexplained income taxable under Section 115BBE.
Specified Trust/Institution Income: Losses of any trust, fund or institution referred to in sub-clause (iv), (v), (vi) and (via) of Section 10(23C) or Section 11 cannot be set-off against specified income under Section 115BBI.

Inter-Head Adjustment of Losses

Introduction

Rules for Inter-Head Adjustment

House Property Losses: Losses from house property can be set-off against income under any other head.
Exceptions:
- Loss exceeding Rs. 2 lakhs cannot be set-off in the current year; the excess loss is allowed to be carried forward.
- Losses cannot be set-off against specified incomes, such as undisclosed income (Section 79A), gambling winnings (Section 115BB), unexplained income (Section 115BBE), virtual digital assets (Section 115BBH), specified trust/institution income (Section 115BBI) or winning from online game (115BBJ).
- No set-off allowed to assessee under the concessional tax regime (Section 115BAC).
Business or Profession Losses: Losses from business or profession or unabsorbed depreciation can be set-off against any income under any head.

Exceptions:

Speculation losses can only be adjusted against speculation income.
Losses from specified business (Section 35AD) can only be adjusted against profits of other specified businesses.
Salary income cannot absorb business losses.
Losses cannot be set-off against certain incomes (e.g., gambling winnings, virtual digital assets, unexplained income).

Capital Losses:

Losses from capital gains (short-term or long-term) cannot be adjusted against income from other heads.
Special Rule: Loss from the transfer of virtual digital assets is not adjustable against any income, making it a dead loss.

Carry Forward of Losses

Introduction

Key Provisions for Carry Forward of Losses

Losses Eligible for Carry Forward:

House Property Losses: Unadjusted losses can be carried forward for 8 years.
Speculative Losses: Can only be adjusted against speculative income within 4 subsequent years.
Non-Speculative Business Losses: Can be carried forward for 8 years.
Losses from Specified Businesses (Section 35AD): Carried forward indefinitely.
Capital Losses: Short-term or long-term losses carried forward for 8 years.
Losses from Owning and Maintaining Race Horses: Carried forward for 4 years.
Conditions for Carry Forward: Assessees under concessional tax regimes (Sections 115BA, 115BAC, etc.) cannot carry forward losses and unabsorbed depreciation attributable to deductions not allowed under such regimes.
Transferability of Losses: Losses can generally be carried forward by the original assessee.

Exceptions:

Inheritance: A successor by inheritance can carry forward the predecessor’s losses, subject to the remaining period within the 8-year limit from the year the loss was first incurred.
Amalgamation or Demerger: Subject to conditions under Sections 72A and 72AA losses and unabsorbed depreciation can be carried forward by amalgamated or resulting companies.
Business Reorganization: In cases of reorganization referred under Sections 47(xiii), (xiv), and (xiiib), the successor entity can carry forward the predecessor’s losses. For reorganizations occurring on or after April 1, 2025, such losses can be carried forward for 8 assessment years from the year following the one in which the loss was originally incurred by the predecessor.
Business Reorganization of Co-operative Banks: The successor co-operative bank can set off the accumulated loss and unabsorbed depreciation of the predecessor, provided conditions under Section 72AB are satisfied. If any condition is violated, the previously allowed set-off is deemed income of the year of non-compliance.

Mandatory Filing of Returns:

Losses can only be carried forward if the income tax return is filed within the due date of return filing.
Exceptions: House property losses and unabsorbed depreciation can be carried forward even if the return is filed after the due date.
Condonation of Delay: CBDT has prescribed circumstances under which delay in filing returns may be condoned, allowing carry forward of losses despite late filing:
Principal CIT/CIT: Empowered to accept/reject condonation requests if the amount involved does not exceed Rs. 1 crore per assessment year.
Chief CIT: Authorized for cases involving amounts above Rs. 1 crore and up to Rs. 3 crore.
Principal Chief CIT: Empowered for cases involving amounts exceeding Rs. 3 crore.

Loss Under the Head “House Property”

Introduction

Loss under the head “Income from House Property” arises when:

Self-Occupied Property: The interest on housing loans exceeds the annual value (nil for self-occupied).
Let-Out Property: The aggregate of interest on housing loans and municipal taxes exceeds the rental income.

Losses can be set off against other incomes in the same year or carried forward for adjustment in subsequent years.

Set-Off and Carry Forward Rules

Intra-Head Adjustment:

Loss from one house property can be set off against income from another house property.
Exception: If the assessee has opted for the concessional tax regime under Section 115BAC, loss from self-occupied property cannot be set off.

Inter-Head Adjustment:

Loss under “House Property” can be set off against income from other heads within the same year, subject to exceptions:

Maximum loss of Rs. 2 lakh can be set off; the remainder is carried forward.
No set-off is allowed against:
Undisclosed income (Section 79A).
Income from gambling (Section 115BB).
Unexplained income (Section 115BBE).
Income from transfer of VDAs (Section 115BBH).
Specified income of trusts/institutions (Section 115BBI).
Winnings from online games (Section 115BBJ).
Assessee opting for the concessional tax regime under Section 115BAC cannot set-off house property loss against income under any other head.

Carry Forward of Losses:

Unabsorbed house property loss can be carried forward for 8 assessment years.
Carried-forward losses can only be set off against “Income from House Property” in subsequent years.

Additional Points

Late Filing of Returns: Loss under “House Property” can be carried forward even if the return of income is filed after the due date.

Time Limits for Set-Off:

Intra-Head: Adjusted in the same year.
Inter-Head: Adjusted in the same year against eligible income.
Carry Forward: Set-off within 8 years.

Loss under the Head of PGBP

Introduction

Business losses may arise as speculative, non-speculative, or specified business losses. Provisions regulate the set-off against other incomes and the carry-forward period for unadjusted losses.

Set-off and Carry-forward of Losses

Set-off: Adjusting losses against income in the same assessment year.
Intra-head Adjustment: Loss from one business source of income can be set off against income from another source under the same head.

Exceptions:

🞍 Speculative losses: Only adjusted against speculative profits.
🞍 Specified business losses (Section 35AD): Adjusted only against profits from other specified businesses.
🞍 Losses under concessional tax regimes (Sections 115BAA, 115BAC, etc.): Not allowed if linked to disallowed deductions.

Note: However, normal business losses can be set off against income from a speculative business or a specified business.

Inter-head Adjustment: Loss under business or profession can be adjusted against other heads except:

Speculative losses and specified business losses cannot be set-off against income taxable under any other head.
Losses under concessional tax regimes (Sections 115BAA, 115BAC, etc.): Not allowed if linked to disallowed deductions.

Carry-forward: Unadjusted losses are carried forward to future years for set-off against eligible income:

Non-speculative Losses: Set off against any business income within 8 years.

Exceptions: The time limit of 8 years to set-off the carried forward losses does not apply in the following three circumstances:

Unabsorbed depreciation and unabsorbed capital expenditure on scientific research or family planning can be carried forward indefinitely until fully set off.
If an industrial undertaking is discontinued due to calamities (like flood, fire, war, etc.), losses can be set off in the year it is revived—provided revival occurs within 3 years of discontinuation. If profits are insufficient, the loss can be set off against other business income of that year. Unabsorbed losses can be carried forward for 7 assessment years from the year of revival.
Speculative Losses: Only against speculative profits within 4 years.
Specified Business Losses: Indefinitely carried forward until set off against specified business profits.

Restrictions

Business losses and unabsorbed depreciation cannot be set off against:

Salary income
Undisclosed income or unexplained income (Sections 79A, 115BBE)
Income from virtual digital assets, gambling, winnings from online games, or specified trust incomes.

Preconditions for Carry-forward

Same Assessee: Losses can be carried forward only by the taxpayer who incurred them, except in cases of inheritance, amalgamation, demerger, or specific reorganisations.
Timely Return Filing: Returns must be filed on or before the due date to claim carry-forward rights, barring exceptions like unabsorbed depreciation.

Order of Set-off

Set off in the following sequence:

Current year’s expenses (e.g., scientific research, family planning)
Current year’s depreciation
Current year’s business loss
Brought forward business losses
Unabsorbed expenditure on family planning
Unabsorbed depreciation
Unabsorbed capital expenditure on scientific research

Set-off and Carry-forward of Losses in Amalgamation and Demerger

Introduction

Amalgamation

Definition

Amalgamation under Section 2(1B) involves the merger of one or more companies with another company or the merger of multiple companies to form one company. Key conditions include:

All assets and liabilities of the amalgamating company transfer to the amalgamated company.
Shareholders holding at least 75% in value of the amalgamating company become shareholders of the amalgamated company.
It should not result from one company purchasing property from another, or from distribution of such property after the latter’s winding up.

Applicability

Companies owning industrial undertakings, ships, or hotels with another company; or
Banking companies with a specified banks; or
One or more public sector company or companies with one or more public sector company or companies; or
An erstwhile public sector company with one or more company or companies.

Conditions for Set-off or Carry forward

For the Amalgamating Company:

Must have been in business for at least three years.
Should have held at least 75% of the book value of fixed assets held by it 2 years prior to the date of amalgamation.

For the Amalgamated Company:

Must continue the business of the amalgamating company for at least five years.
Should hold 75% of the acquired fixed assets for at least five years.
Must comply with Rule 9C, which lays down additional conditions to ensure the amalgamation is for genuine business purposes aimed at reviving the amalgamating company’s business.

Note: If any of the above conditions are not met, the unabsorbed business loss and depreciation claimed by the amalgamated company shall be deemed its income in the year of non-compliance.

Carry-forward Period

Losses: Can be carried forward for 8 years from the year of amalgamation. However, for amalgamations effective on or after April 1, 2025, losses of the predecessor entity can be carried forward by the successor for 8 assessment years, starting from the year immediately following the year in which the original predecessor entity incurred the loss.

“Original predecessor entity” means predecessor entity in respect of the first amalgamation under Section 72A(1).

Unabsorbed depreciation: Indefinite.

Special Provisions for Erstwhile Public Sector Companies

Rule 9C Compliance

Demerger

Definition

Demerger (Section 2(19AA)) refers to the transfer of one or more undertakings by a company to a resulting company, subject to:

All assets and liabilities transfer to the resulting company;
The transfer occurs at book values;
The resulting company issues its shares to the shareholder of the demerged company on a proportionate basis;
Shareholders holding at least 75% of the demerged company become shareholders of the resulting company;
It should not be done as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company; and
The transfer is made on a going concern basis.

Treatment of Losses

Directly Relatable Losses/Unabsorbed Depreciation:

Transferred to the resulting company and carried forward.
Losses: Balance of eight years.
Unabsorbed Depreciation: Indefinite period.

Common Losses/Depreciation:

Apportioned between the demerged and resulting companies based on asset ratios.

Restrictions on amalgamated company opting for concessional tax regimes

Set-off and Carry-forward of Losses in Amalgamation of Banks, Government Companies, and Cooperative Banks

Introduction

Amalgamation of Banking Companies/Institutions or Government Companies

Applicability

The provisions apply to the amalgamation of:

One or more banking company with other banking institutions under a Central Government-sanctioned scheme.
One or more banking company with any other banking institution or other company following strategic disinvestment within five years from the disinvestment year.
Corresponding new banks merging with other corresponding new banks under a Central Government scheme.
Government companies engaged in the general insurance business with any other Government company engaged in similar business under a sanctioned scheme by Central Government.

Key Points

Losses and unabsorbed depreciation of the predecessor are treated as those of the successor in the year of amalgamation.
These are set off first against the successor’s business profits, with any balance adjusted under general provisions relating to set-off and carry forward of losses.

Carry-forward Period

Losses: Allowed for 8 years from the amalgamation year.
Depreciation: Indefinitely carried forward.

Definitions

Strategic Disinvestment: Involves reducing government shareholding below 51% and transferring control to a buyer.

Original predecessor entity: means predecessor entity in respect of the first amalgamation.

Amalgamation of Cooperative Banks

Eligibility Criteria

Predecessor Co-operative Bank Conditions:

Engaged in banking for at least three years.
Held at least 75% of the book value of fixed assets for two years before amalgamation.

Successor Co-operative Bank Conditions:

Must continue the predecessor’s business for at least five years.
Retain at least 75% of predecessor’s fixed assets for five years after amalgamation.
The successor co-operative bank is required to comply with additional conditions prescribed to ensure that the amalgamation is for genuine business purposes of revival of the business of the predecessor Co-operative bank.

Consequences of Non-compliance

If conditions are not met, previously set-off losses and unabsorbed depreciation are added to the successor’s income for the non-compliance year.

Demerger of Cooperative Banks

In case of a co-operative bank’s reorganisation through demerger, the accumulated loss and unabsorbed depreciation shall be carried forward and set off in the following manner.

Treatment of Losses

Directly Attributable Losses: Entire loss and unabsorbed depreciation attributable to the transferred undertaking are carried forward by the resulting cooperative bank.
Common Losses: Allocated between the demerged and resulting banks in proportion to asset distribution.

Restriction on Losses of Closely Held Companies

Introduction

Conditions for Carry forward and Set-off of Losses

Closely Held Companies:

Losses can be carried forward and set off only if at least 51% of voting power is beneficially held by the same persons:

On the last day of the previous year in which loss occurred.
On the last day of the previous year, when set-off is claimed.

At least 51% of the voting power is beneficially held by the same persons who held it on the last day of the year when the loss was incurred, or
100% of the shareholders on the last day of the year in which the loss was incurred continue to hold their shares on the last day of the preceding year in which the loss is set-off.

Exceptions to Section 79:

Closely held companies or eligible start-ups can carry forward losses despite shareholding changes, if the change meets specified conditions.

Shareholding or voting power changes due to death or gift.
Amalgamation or demerger of a foreign parent company with its Indian subsidiary.
Strategic disinvestment of erstwhile public sector companies by the Government.
Resolution plans approved under IBC.
Cases where the NCLT has suspended the Board and appointed new directors.
Changes due to relocation of offshore funds to IFSC.

No Set-off of Loss from Undisclosed Income

Introduction

Section 79A prohibits the set-off of any loss (brought forward or otherwise) or unabsorbed depreciation against undisclosed income discovered through search, requisition, or survey.

Prohibition on Set-off of Losses

Losses cannot be set-off against undisclosed income found during:

A search under Section 132.
A requisition under Section 132A.
A survey under Section 133A(excluding Section 133A(2A)).

Meaning of Undisclosed Income

Income Represented by any Asset or Book Entry or transaction: Includes money, bullion, jewellery, or other valuables, or book entries/transactions not recorded in regular books or disclosed to the PCCIT/CCIT/PCIT/CIT before the search, survey or requisition date.
Income Represented by False Expenditure: Includes entries for expenses found false during search, survey or requisition that would not have been detected otherwise.

Loss under the Head Capital Gains

Introduction

Set-off and Carry Forward Rules

Intra-head Adjustment:

STCL: Can be set-off against any capital gain (short-term or long-term).
LTCL: Can be set-off only against long-term capital gains.

Inter-head Adjustment: o Losses under “Capital Gains” cannot be set-off against income from other heads.

Carry Forward:

o Unadjusted STCL or LTCL can be carried forward for up to 8 assessment years.
o LTCL can be adjusted only against LTCG; STCL can be adjusted against STCG or LTCG.
o Filing the return by the due date is mandatory for carry forward, subject to condonation for delay by the Assessing Officer or CBDT.

Loss on Virtual Digital Assets (VDAs)

Loss on transfer from VDAs cannot be set off against any income, including gains from other VDAs and vice-versa. Such losses are treated as “dead losses” and are not eligible for carry forward.

Losses from certain specified sources falling under the head “Income from other sources”

Set-off of losses from activity of owning & maintaining horse races

Carry Forward of losses from activity of owning & maintaining horse races

Losses can be carried forward for up to 4 assessment years, subject to continuation of the activity. Filing of returns by the due date is mandatory, with condonation allowed in specific cases.

Extract of Relevant Sections of Income-tax Act, 1961

Section – 70 – Set off, or carry forward and set off

Set off of loss from one source against income from another source under the same head of income.

70. (1) Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income, other than “Capital gains”, is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head.

(2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset.

(3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset.

Section – 71 – Set off of loss from one head against income from another.

71. (1) Where in respect of any assessment year the net result of the computation under any head of income, other than “Capital gains”, is a loss and the assessee has no income under the head “Capital gains”, he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head.

(2) Where in respect of any assessment year, the net result of the computation under any head of income, other than “Capital gains”, is a loss and the assessee has income assessable under the head “Capital gains”, such loss may, subject to the provisions of this Chapter, be set off against his income, if any, assessable for that assessment year under any head of income including the head “Capital gains” (whether relating to short-term capital assets or any other capital assets).

(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head “Profits and gains of business or profession” is a loss and the assessee has income assessable under the head “Salaries”, the assessee shall not be entitled to have such loss set off against such income.

(3) Where in respect of any assessment year, the net result of the computation under the head “Capital gains” is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against income under the other head.

(3A) Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head “Income from house property” is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to set off such loss, to the extent the amount of the loss exceeds two lakh rupees, against income under the other head.

(4) Where the net result of the computation under the head “Income from house property” is a loss, in respect of the assessment years commencing on the 1st day of April, 1995 and the 1st day of April, 1996, such loss shall be first set off under sub-sections (1) and (2) and thereafter the loss referred to in section 71A shall be set off in the relevant assessment year in accordance with the provisions of that section.

Section – 71B – Carry forward and set off of loss from house property.

71B. Where for any assessment year the net result of computation under the head “Income from house property” is a loss to the assessee and such loss cannot be or is not wholly set off against income from any other head of income in accordance with the provisions of section 71, so much of the loss as has not been so set-off or where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year and—

(i) be set off against the income from house property assessable for that assessment year; and

(ii) the loss, if any, which has not been set off wholly, the amount of loss not so set off,

shall be carried forward to the following assessment year, not being more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.

Section – 72 – Carry forward and set off of business losses.

72. (1) Where for any assessment year, the net result of the computation under the head “Profits and gains of business or profession” is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—

(i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year;

(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on :

Provided that where the whole or any part of such loss is sustained in any such business as is referred to in section 33B which is discontinued in the circumstances specified in that section, and, thereafter, at any time before the expiry of the period of three years referred to in that section, such business is re-established, reconstructed or revived by the assessee, so much of the loss as is attributable to such business shall be carried forward to the assessment year relevant to the previous year in which the business is so re-established, reconstructed or revived, and—

(a) it shall be set off against the profits and gains, if any, of that business or any other business carried on by him and assessable for that assessment year; and

(b) if the loss cannot be wholly so set off, the amount of loss not so set off shall, in case the business so re-established, reconstructed or revived continues to be carried on by the assessee, be carried forward to the following assessment year and so on for seven assessment years immediately succeeding.

(2) Where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section.

(3) No loss (other than the loss referred to in the proviso to sub-section (1) of this section) shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.

Section – 72A – Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc. 72A.

72A. (1) Where there has been an amalgamation of—

(a) a company owning an industrial undertaking or a ship or a hotel with another company; or

(b) a banking company referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a specified bank; or

(d) an erstwhile public sector company with one or more company or companies, if the share purchase agreement entered into under strategic disinvestment restricted immediate amalgamation of the said public sector company and the amalgamation is carried out within five years from the end of the previous year in which the restriction on amalgamation in the share purchase agreement ends,

then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly:

Provided that the accumulated loss and the unabsorbed depreciation of the amalgamating company, in case of an amalgamation referred to in clause (d), which is deemed to be the loss or, as the case may be, the allowance for un-absorbed depreciation of the amalgamated company, shall not be more than the accumulated loss and unabsorbed depreciation of the public sector company as on the date on which the public sector company ceases to be a public sector company as a result of strategic disinvestment.

Explanation.—For the purposes of clause (d),—

(i) “control” shall have the same meaning as assigned to in clause (27) of section 2 of the Companies Act, 2013 (18 of 2013);

(ii) “erstwhile public sector company” means a company which was a public sector company in earlier previous years and ceases to be a public sector company by way of strategic disinvestment by the Government;

⁷² [(iii) “strategic disinvestment” means sale of shareholding by the Central Government or any State Government or a public sector company, in a public sector company or in a company, which results in—

(a) reduction of its shareholding to below fifty-one per cent; and

(b) transfer of control to the buyer:

Provided that the condition laid down in sub-clause (a) shall apply only in a case where shareholding of the Central Government or the State Government or the public sector company was above fifty-one per cent before such sale of shareholding:

Provided further that requirement of transfer of control referred to in sub-clause (b) may be carried out by the Central Government or the State Government or the public sector company or any two of them or all of them.]

(2) Notwithstanding anything contained in sub-section (1), the accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company unless—

(a) the amalgamating company—

(i) has been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years;

(ii) has held continuously as on the date of the amalgamation at least three-fourths of the book value of fixed assets held by it two years prior to the date of amalgamation;

(b) the amalgamated company—

(i) holds continuously for a minimum period of five years from the date of amalgamation at least three-fourths of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation;

(ii) continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation;

(iii) fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.

(3) In a case where any of the conditions laid down in sub-section (2) are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with.

(4) Notwithstanding anything contained in any other provisions of this Act, in the case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall—

(a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in the hands of the resulting company;

(b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be.

(5) The Central Government may, for the purposes of this Act, by notification in the Official Gazette, specify such conditions as it considers necessary to ensure that the demerger is for genuine business purposes.

(6) Where there has been reorganisation of business, whereby, a firm is succeeded by a company fulfilling the conditions laid down in clause (xiii) of section 47 or a proprietary concern is succeeded by a company fulfilling the conditions laid down in clause (xiv) of section 47, then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the predecessor firm or the proprietary concern, as the case may be, shall be deemed to be the loss or allowance for depreciation of the successor company for the purpose of previous year in which business reorganisation was effected and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly:

Provided that if any of the conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv) to section 47 are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the successor company, shall be deemed to be the income of the company chargeable to tax in the year in which such conditions are not complied with.

(2) Where there has been reorganisation of business whereby a private company or unlisted public company is succeeded by a limited liability partnership fulfilling the conditions laid down in the proviso to clause (xiiib) of section 47, then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the predecessor company, shall be deemed to be the loss or allowance for depreciation of the successor limited liability partnership for the purpose of the previous year in which business reorganisation was effected and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly :

Provided that if any of the conditions laid down in the proviso to clause (xiiib) of section 47 are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the successor limited liability partnership, shall be deemed to be the income of the limited liability partnership chargeable to tax in the year in which such conditions are not complied with.

Following sub-section (6B) shall be inserted after sub-section (6A) of section 72A by the Finance Act, 2025, w.e.f. 1-4-2026:

(6B) Where any amalgamation or business reorganisation, as the case may be, is effected on or after the 1st April, 2025, any loss forming part of the accumulated loss of the predecessor entity under sub-section (1), (6) or (6A), being—

(a) the amalgamating company; or

(b) the firm or proprietary concern; or

(c) the private company or unlisted public company,

as the case may be, which is deemed to be the loss of the successor entity, being—

(i) the amalgamated company; or

(ii) the successor company; or

(iii) the successor limited liability partnership,

as the case may be, shall be carried forward in the hands of the successor entity for not more than eight assessment years immediately succeeding the assessment year for which such loss was first computed for original predecessor entity.

(7) For the purposes of this section,—

(a) “accumulated loss” means so much of the loss of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limited liability partnership or the amalgamating company or the demerged company, as the case may be, under the head “Profits and gains of business or profession” (not being a loss sustained in a speculation business) which such predecessor firm or the proprietary concern or the company or amalgamating company or demerged company, would have been entitled to carry forward and set off under the provisions of section 72 if the reorganisation of business or conversion or amalgamation or demerger had not taken place;

(aa) “industrial undertaking” means any undertaking which is engaged in—

(i) the manufacture or processing of goods; or

(ii) the manufacture of computer software; or

(iii) the business of generation or distribution of electricity or any other form of power; or

(iiia) the business of providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services; or

(iv) mining; or

(v) the construction of ships, aircrafts or rail systems;

Following clause (ab) shall be inserted after clause (aa) of sub-section (7) of section 72A by the Finance Act, 2025, w.e.f. 1-4-2026:

(ab) “original predecessor entity” means predecessor entity in respect of the first amalgamation under sub-section (1) or first business reorganisation under sub-section (6) or (6A);

(b) “unabsorbed depreciation” means so much of the allowance for depreciation of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limited liability partnership or the amalgamating company or the demerged company, as the case may be, which remains to be allowed and which would have been allowed to the predecessor firm or the proprietary concern or the company or amalgamating company or demerged company, as the case may be, under the provisions of this Act, if the reorganisation of business or conversion or amalgamation or demerger had not taken place;

(c) “specified bank” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955) or a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959) or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980).

Section – 72AA – Carry forward and set off of accumulated loss and unabsorbed depreciation allowance in scheme of amalgamation in certain cases.

72AA. Notwithstanding anything contained in sub-clauses (i) to (iii) of clause (1B) of section 2 or section 72A, where there has been an amalgamation of—

⁷³[(i) one or more banking company with—

(a) any other banking institution under a scheme sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of the Banking Regulation Act, 1949 (10 of 1949); or

(b) any other banking institution or a company subsequent to a strategic disinvestment, wherein the amalgamation is carried out within a period of five years from the end of the previous year during which such strategic disinvestment is carried out; or]

(ii) one or more corresponding new bank or banks with any other corresponding new bank under a scheme brought into force by the Central Government under section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) or under section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980) or both, as the case may be; or

(iii) one or more Government company or companies with any other Government company under a scheme sanctioned and brought into force by the Central Government under section 16 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972),

the accumulated loss and the unabsorbed depreciation of such banking company or companies or amalgamating corresponding new bank or banks or amalgamating Government company or companies shall be deemed to be the loss or, as the case may be, allowance for depreciation of such banking institution or [company or] amalgamated corresponding new bank or amalgamated Government company for the previous year in which the scheme of amalgamation was brought into force and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.

Following proviso shall be inserted in section 72AA by the Finance Act, 2025, w.e.f. 1-4-2026:

Provided that where any scheme of such amalgamation is brought into force on or after the 1st April, 2025, any loss forming part of the accumulated loss of the predecessor entity, being—

(a) the banking company or companies; or

(b) the amalgamating corresponding new bank or banks; or

(c) the amalgamating Government company or companies,

as the case may be, which is deemed to be the loss of the successor entity, being—

(i) the banking institution or company; or

(ii) the amalgamated corresponding new bank or banks; or

(iii) the amalgamated Government company or companies,

Explanation.—For the purposes of this section,—

(i) “accumulated loss” means so much of the loss of the amalgamating banking company or companies or amalgamating corresponding new bank or banks or amalgamating Government company or companies under the head “Profits and gains of business or profession” (not being a loss sustained in a speculation business) which such amalgamating banking company or companies or amalgamating corresponding new bank or banks or amalgamating Government company or companies, would have been entitled to carry forward and set off under the provisions of section 72, if the amalgamation had not taken place;

(ii) “banking company” shall have the meaning assigned to it in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);

(iii) “banking institution” shall have the meaning assigned to it in sub-section (15) of section 45 of the Banking Regulation Act, 1949 (10 of 1949);

(iv) “corresponding new bank” shall have the meaning assigned to it in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) or, as the case may be, clause (b) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980);

(v) “general insurance business” shall have the meaning assigned to it in clause (g) of section 3 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972);

(vi) “Government company” means a Government company as defined in clause (45) of section 2 of the Companies Act, 2013 (18 of 2013), which is engaged in the general insurance business and which has come into existence by operation of section 4 or section 5 or section 16 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972);

⁷⁵[(via) “strategic disinvestment” shall have the meaning assigned to it in clause (iii) of the Explanation to clause (d) of sub-section (1) of section 72A;]

(vii) “unabsorbed depreciation” means so much of the allowance for depreciation of the amalgamating banking company or companies or amalgamating corresponding new bank or banks or amalgamating Government company or companies which remains to be allowed and which would have been allowed to such banking company or companies or amalgamating corresponding new bank or banks or amalgamating Government company or companies, if the amalgamation had not taken place.

Following clause (viii) shall be inserted after clause (vii) of the Explanation to section 72AA by the Finance Act, 2025, w.e.f. 1-4-2026:

(viii) “original predecessor entity” means predecessor entity in respect of the first amalgamation.

Section – 72AB – Provisions relating to carry forward and set-off of accumulated loss and unabsorbed depreciation allowance in business reorganisation of cooperative banks.

72AB. (1) The assessee, being a successor co-operative bank, shall, in a case where the amalgamation has taken place during the previous year, be allowed to set off the accumulated loss and the unabsorbed depreciation, if any, of the predecessor co-operative bank as if the amalgamation had not taken place, and all the other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.

(2) The provisions of this section shall apply if—

(a) the predecessor co-operative bank—

(i) has been engaged in the business of banking for three or more years; and

(ii) has held at least three-fourths of the book value of fixed assets as on the date of the business reorganisation, continuously for two years prior to the date of business reorganisation;

(b) the successor co-operative bank—

(i) holds at least three-fourths of the book value of fixed assets of the predecessor co-operative bank acquired through business reorganisation, continuously for a minimum period of five years immediately succeeding the date of business reorganisation;

(ii) continues the business of the predecessor co-operative bank for a minimum period of five years from the date of business reorganisation; and

(iii) fulfils such other conditions as may be prescribed to ensure the revival of the business of the predecessor co-operative bank or to ensure that the business reorganisation is for genuine business purpose.

(3) The amount of set-off of the accumulated loss and unabsorbed depreciation, if any, allowable to the assessee being a resulting co-operative bank shall be,—

(i) the accumulated loss or unabsorbed depreciation of the demerged co-operative bank if the whole of the amount of such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting co-operative bank; or

(ii) the amount which bears the same proportion to the accumulated loss or unabsorbed depreciation of the demerged co-operative bank as the assets of the undertaking transferred to the resulting co-operative bank bears to the assets of the demerged co-operative bank if such accumulated loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting co-operative bank.

(4) The Central Government may, for the purposes of this section, by notification in the Official Gazette, specify such other conditions as it considers necessary, other than those prescribed under sub-clause (iii) of clause (b) of sub-section (2), to ensure that the business reorganisation is for genuine business purposes.

(5) The period commencing from the beginning of the previous year and ending on the date immediately preceding the date of business reorganisation, and the period commencing from the date of such business reorganisation and ending with the previous year shall be deemed to be two different previous years for the purposes of set off and carry forward of loss and allowance for depreciation.

(6) In a case where the conditions specified in sub-section (2) or notified under sub-section (4) are not complied with, the set off of accumulated loss or unabsorbed depreciation allowed in any previous year to the successor co-operative bank shall be deemed to be the income of the successor co-operative bank chargeable to tax for the year in which the conditions are not complied with.

(7) For the purposes of this section,—

(a) “accumulated loss” means so much of loss of the amalgamating co-operative bank or the demerged co-operative bank, as the case may be, under the head “Profits and gains of business or profession” (not being a loss sustained in a speculation business) which such amalgamating co-operative bank or the demerged co-operative bank, would have been entitled to carry forward and set-off under the provisions of section 72 as if the business reorganisation had not taken place;

(b) “unabsorbed depreciation” means so much of the allowance for depreciation of the amalgamating co-operative bank or the demerged co-operative bank, as the case may be, which remains to be allowed and which would have been allowed to such bank as if the business reorganisation had not taken place;

(c) the expressions “amalgamated co-operative bank”, “amalgamating co-operative bank”, “amalgamation”, “business reorganisation”, “co-operative bank”, “demerged co-operative bank”, “demerger”, “predecessor co-operative bank”, “successor co-operative bank” and “resulting co-operative bank” shall have the meanings respectively assigned to them in section 44DB.

Section – 73 – Losses in speculation business.

73. (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.

(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—

(i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and

(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.

(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business.

(4) No loss shall be carried forward under this section for more than four assessment years immediately succeeding the assessment year for which the loss was first computed.

Explanation.—Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads “Interest on securities”, “Income from house property”, “Capital gains” and “Income from other sources”, or a company the principal business of which is the business of trading in shares or banking] or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.

Section – 73A – Carry forward and set off of losses by specified business.

73A. (1) Any loss, computed in respect of any specified business referred to in section 35AD shall not be set off except against profits and gains, if any, of any other specified business.

(2) Where for any assessment year any loss computed in respect of the specified business referred to in sub-section (1) has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee has no income from any other specified business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—

(i) it shall be set off against the profits and gains, if any, of any specified business carried on by him assessable for that assessment year; and

(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.

Section – 74 – Losses under the head “Capital gains”.

74. (1) Where in respect of any assessment year, the net result of the computation under the head “Capital gains” is a loss to the assessee, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—

(a) in so far as such loss relates to a short-term capital asset, it shall be set off against income, if any, under the head “Capital gains” assessable for that assessment year in respect of any other capital asset;

(b) in so far as such loss relates to a long-term capital asset, it shall be set off against income, if any, under the head “Capital gains” assessable for that assessment year in respect of any other capital asset not being a short-term capital asset;

(c) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.

(2) No loss shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.

(3) [Omitted by the Finance Act, 2002, w.e.f. 1-4-2003.]

⁷²Sub. by Act No. 08 of 2023, w.e.f. 1-4-2023.

⁷³by Act No. 08 of 2023, w.e.f. 1-4-2023.

⁷⁴by Act No. 08 of 2023, w.e.f. 1-4-2023.

⁷⁵by Act No. 08 of 2023, w.e.f. 1-4-2023.

Tax Tutorials – Set off and carry forward of losses under the Income-tax Law

Loss from exempted source of income cannot be adjusted against taxable income

If income from a particular source is exempt from tax, then loss from such source cannot be set off against any other income which is chargeable to tax.

E.g., Agricultural income is exempt from tax, hence, if the taxpayer incurs loss from agricultural activity, then such loss cannot be adjusted against any other taxable income.

Meaning of intra-head adjustment

If in any year the taxpayer has incurred loss from any source under a particular head of income, then he is allowed to adjust such loss against income from any other source falling under the same head.

The process of adjustment of loss from a source under a particular head of income against income from other source under the same head of income is called intra-head adjustment, e.g. Adjustment of loss from business A against profit from business B.

Restrictions to be kept in mind while making intra-head adjustment of loss

Following restrictions should be kept in mind before making intra-head adjustment of loss:

1) Loss from speculative business cannot be set off against any income other than income from speculative business. However, non-speculative business loss can be set off against income from speculative business.

2) Long-term capital loss cannot be set off against any income other than income from long-term capital gain. However, short-term capital loss can be set off against long-term or short-term capital gain.

3) No loss can be set off against income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature.

4) Loss from the business of owning and maintaining race horses cannot be set off against any income other than income from the business of owning and maintaining race horses.

5) Loss from business specified under section 35AD cannot be set off against any other income except income from specified business (section 35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing and building a housing projects, etc.).

Meaning of inter-head adjustment

After making intra-head adjustment (if any) the next step is to make inter-head adjustment. If in any year, the taxpayer has incurred loss under one head of income and is having income under other head of income, then he can adjust the loss from one head against income from other head, E.g., Loss under the head of house property to be adjusted against salary income.

Restrictions to be kept in mind while making inter-head adjustment of loss

Following restrictions should be kept in mind before making inter-head adjustment:

1) Before making inter-head adjustment, the taxpayer has to first make intra-head adjustment.

2) Loss from speculative business cannot be set off against any other income. However, non-speculative business loss can be set off against income from speculative business.

3) Loss under head “Capital gains” cannot be set off against income under other heads of income.

4) No loss can be set off against income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature.

5) Loss from the business of owning and maintaining race horses cannot be set off against any other income.

6) Loss from business specified under section 35AD cannot be set off against any other income (section 35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing and building housing projects, etc.)

7) Loss from business and profession cannot be set off against income chargeable to tax under the head “Salaries”.

8) Loss under the head “house property” shall be allowed to be set-off against any other head of income only to the extent of Rs. 2,00,000 for any assessment year.

9) However, unabsorbed loss shall be allowed to be carried forward for set-off in subsequent years as per the existing provisions of section 71B. (Provisions relating to carry forward of loss from house property is discussed later.)

Carry forward of unadjusted loss for adjustment in next year

Many times it may happen that after making intra-head and inter-head adjustments, still the loss remains unadjusted. Such unadjusted loss can be carried forward to next year for adjustment against the income of subsequent years. Separate provisions have been framed under the Income-tax Law for carry forward of loss under different heads of income.

Provisions under the Income-tax law in relation to carry forward and set off of business loss other than loss from speculative business

If loss of any business/profession (other than speculative business) cannot be fully adjusted in the year in which it is incurred, then the unadjusted loss can be carried forward for making adjustment in the next year. In the subsequent year(s) such loss can be adjusted only against income charged to tax under the head “Profits and gains of business or profession”

Loss under the head “Profits and gains of business or profession” can be carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed under section 139(1).

Such loss can be carried forward for eight years immediately succeeding the year in which the loss is incurred.

Above provisions are not applicable in case of unabsorbed depreciation (provisions relating to unabsorbed depreciation are discussed later)

Loss from business specified under section 35AD cannot be set off against any other income except income from specified business (section 35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing and building a housing projects, etc.). Such loss can be carried forward for adjustment against income from specified business for any number of years.

Loss from business specified under section 35AD can be carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return as prescribed under section 139(1).

Loss from the business of owning and maintaining race horses cannot be set off against any income other than income from the business of owning and maintaining race horses. Such loss can be carried forward only for a period of 4 years.

If loss of any speculative business cannot be fully adjusted in the year in which it is incurred, then the unadjusted loss can be carried forward for making adjustment in the next year. In the subsequent year(s) such loss can be adjusted only against income from speculative business (may be same or any other speculative business).

Loss from speculative business can be carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed under section 139(1).

Such loss can be carried forward for four years immediately succeeding the year in which the loss is incurred.

Above provisions are not applicable in case of unabsorbed depreciation of speculative business (provisions relating to unabsorbed depreciation are discussed later).

Provisions under the Income-tax Law in relation to carry forward and set off of house property loss

If loss under the head “Income from house property” cannot be fully adjusted in the year in which such loss is incurred, then unadjusted loss can be carried forward to next year.

In the subsequent years(s) such loss can be adjusted only against income chargeable to tax under the head “Income from house property”.

Such loss can be carried forward for eight years immediately succeeding the year in which the loss is incurred.

Loss under the head “Income from house property” can be carried forward even if the return of income/loss of the year in which loss is incurred is not furnished on or before the due date of furnishing the return, as prescribed under section 139(1).

Provisions under the Income-tax law in relation to carry forward and set off of capital loss

If loss under the head “Capital gains” incurred during a year cannot be adjusted in the same year, then unadjusted capital loss can be carried forward to next year.

In the subsequent year(s), such loss can be adjusted only against income chargeable to tax under the head “Capital gains”, however, long-term capital loss can be adjusted only against long-term capital gains. Short-term capital loss can be adjusted against long-term capital gains as well as short-term capital gains.

Such loss can be carried forward for eight years immediately succeeding the year in which the loss is incurred.

Such loss can be can carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed under section 139(1).

Meaning of unabsorbed depreciation, unabsorbed capital expenditure on scientific research and unabsorbed capital expenditure on promoting family planning amongst the employees

Apart from several other deductions, while computing income chargeable to tax under the head “Profits and gains of business or profession” a person is allowed to claim deduction on account for depreciation, capital expenditure incurred by him on scientific research and capital expenditure incurred by a company for promoting family planning amongst its employees.

If the income of the year in which these expenses are incurred falls short of these expenses, then the unabsorbed expenses can be carried forward to next year in the form of unabsorbed depreciation or unabsorbed capital expenditure on scientific research or unabsorbed capital expenditure on promoting family planning amongst the employees.

Illustration for better understanding

Business income (computed as per the provisions of Income-tax Law) of Mr. Kiran before allowing deduction on account of depreciation amounted to Rs. 84,000. Depreciation as per the provisions of section 32 amounted to Rs. 1,00,000. What will be the amount of unabsorbed depreciation in this case?

It can be observed that business income before claiming deduction under section 32 on account of depreciation is Rs. 84,000 and depreciation allowable as per section 32 is Rs. 1,00,000, hence, after claiming deduction on account of depreciation of Rs. 1,00,000, there will be a loss of Rs. 16,000.

This loss is on account of depreciation and, hence, loss of Rs 16,000 will be termed as unabsorbed depreciation.

Provisions under the Income-tax Law relating to set off of unabsorbed depreciation, unabsorbed capital expenditure on scientific research and unabsorbed capital expenditure on promoting family planning amongst the employees

Depreciation is first deducted from the income chargeable to tax under the head “Profits and gains of business or profession”. If such depreciation could not be fully adjusted against such income chargeable to tax in that previous year, the unabsorbed portion shall be added to the amount of depreciation for the following year and shall be deemed to be the part of depreciation for that year(similar treatment would be given to other allowances as mentioned above). However, in the case of set off, following order of priority is to be followed:

1) First adjustments are to be made for current scientific research expenditure, family planning expenditure and current depreciation.

2) Second adjustment is to be made for brought forward business loss.

3) Third adjustments are to be made for unabsorbed depreciation, unabsorbed capital expenditure on scientific research or on family planning.

Carry forward of loss in case of change in the constitution of business

Generally, the person incurring the loss is only entitled to carry forward the loss to be adjusted in subsequent year(s). However, in certain cases of reconstitution of the business like amalgamation, demerger, conversion of proprietary firm into company or conversion of partnership firm into company, etc., the reconstituted entity is entitled to carry forward the unadjusted loss of predecessor entity (provided that conditions specified in this regard are satisfied).

Provisions relating to carry forward of loss in case of retirement of a partner from a partnership firm

Restriction of section 78 is applicable only in case of loss and is not applicable in case of adjustment of unabsorbed depreciation, unabsorbed capital expenditure on scientific research or family planning expenditure.

Special provisions relating to carry forward and set-off of losses in case of change in shareholding of certain companies

Section 79 of the Income-tax Act, 1961 provides for carry forward and set-off of losses where a change in shareholding has taken place in a previous year in case of following companies:-

1) In case of a company, being a company in which the public are not substantially interested but not being an eligible start-up as referred to in section 80-IAC, no loss incurred in any year prior to the previous year in which change in shareholding has taken place shall be carried forward and set off against the income of the previous year, unless on the last day of the previous year, the shares of the company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred

2) In case of a company, being a company in which the public are not substantially interested and an eligible start-up as referred to in section 80-IAC, the loss incurred in any year prior to the previous year in which change in shareholding has taken place, shall be allowed to be carried forward and set off only if all the shareholders of the company who held shares carrying voting power on the last day of the previous year in which the loss was incurred, continue to hold shares on the last of the current year. Further, the loss should have been incurred during the period of 10 years beginning from the year in which the company is incorporated.

However, to facilitate ease of doing business in case of an eligible start-up, the Finance (no.2) Act, 2019 has amended section 79 to provide that loss incurred, by the closely held eligible start-up, shall be allowed to be carried forward and set off against the income of the previous year on satisfaction of either of the two conditions specified above, i.e., continuity of 51% shareholding or continuity of 100% of original shareholders. [w.e.f. Assessment Year 2020-21]

However, the provisions of section 79 shall not apply in following cases. In other words, there shall be no restriction on carry forward and set-off of losses if-

a) the change in shareholding takes place consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making such gift; or

b) the assessee is a subsidiary of a foreign company and the foreign holding company is amalgamated or merged with another foreign company subject to condition that 51% shareholders of the amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the resulting foreign company.

c) the change in shareholding take place in the previous year pursuant to approved resolution plan under the Insolvency and Bankruptcy Code, 2016 after affording a reasonable opportunity of being heard to the jurisdictional Principal CIT or CIT.

d) A company, and its subsidiary and the subsidiary of such subsidiary, where:

National Company Law Tribunal (NCLT), on a petition moved by the Central Govt., has suspended the board of directors of such company and has appointed new directors.

Change in shareholding has taken place in a previous year pursuant to a resolution plan approved by the NCLT.

e) Change in the shareholding has taken place during the previous year on account of relocation referred to in the Explanation to clauses (viiac) and (viiad) of section 47.

Change in shareholding due to strategic disinvestment

With effect from Assessment Year 2022-23, The Finance Act, 2022 has introduced one more situation wherein the provisions of section 79 shall not apply. It has been provided that the section 79 shall not apply to an erstwhile Public Sector Company (PSU), subject to condition that the ultimate holding company of such erstwhile PSU, immediately after completion of the strategic disinvestment, continues to hold, directly or through its subsidiary or subsidiaries, at least 51% of the voting power of such PSU in aggregate.

However, this relaxation shall cease to apply from the previous year in which the ultimate holding company ceases to hold, directly or through its subsidiary or subsidiaries, 51% of the voting power of the erstwhile public sector company. If the relaxation ceases to apply in any previous year, the provisions of section 79 shall apply for such previous year and subsequent previous years.

The erstwhile public sector company shall have the same meaning as assigned to it in clause (ii) of the Explanation to clause (d) of section 72A(1).

No set-off of loss against undisclosed income discovered during search

The Finance Act, 2022 has inserted a new section 79A to the Income-tax Act to restrict set off of losses consequent to search, requisition and survey. It has been provided that in case the total income of any previous year of an assessee includes any undisclosed income detected as a result of:

(a) Search initiated under section 132; or

(b) A requisition made under section 132A; or

(c) A survey conducted under section 133A other than under section 133A(2A).

Then, no set-off of any loss, whether brought forward or otherwise, or unabsorbed depreciation, shall be allowed against such undisclosed income while computing the total income of the assessee for such previous year.

Meaning of undisclosed income

For this provision, the ‘undisclosed income’ means:

(a) Any income of the previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132 or a requisition under section 132A or a survey under section 133A other than under section 133A(2A), which has:

- not been recorded on or before the date of search or requisition or survey in the books of account or other documents maintained in the normal course relating to such previous year; or
- not been disclosed to the Commissioner before the date of search or requisition or survey, as the case may be.

Any income of the previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the ordinary course relating to the previous year which is found to be false and which would not have been found to be so, had the search not been initiated or the survey not been conducted or the requisition not been made.

The provisions of section 79A is effective from Assessment Year 2022-23.

MCQ ON SET OFF AND CARRY FORWARD OF LOSS UNDER THE INCOME-TAX LAW

Q1. If income from a particular source is exempt from tax, then loss from such source cannot be set off against any other income which is chargeable to tax.

(a) True (b) False

Correct answer : (a)

Justification of correct answer :

If income from a particular source is exempt from tax, then loss from such source cannot be set off against any other income which is chargeable to tax.

Thus, the statement given in the question is true and hence, option (a) is the correct option.

Q2. The process of adjustment of loss from a source under a particular head of income against income from other source under the same head of income is called _________.

(a) Inter-head adjustment (b) Intra-head adjustment

Correct answer : (b)

Justification of correct answer:

The process of adjustment of loss from a source under a particular head of income against income from other source under the same head of income is called intra-head adjustment. Thus, option (b) is the correct option.

Q3. While making intra-head adjustment of loss, short-term capital loss cannot be set off against long-term capital gain.

(a) True (b) False

Correct answer : (b)

Justification of correct answer :

While making intra-head adjustment of loss, short-term capital loss can be set off against short-term capital gain as well as against long-term capital gain.

Thus, the statement given in the question is false and hence, option (b) is the correct option.

Q4. While making intra-head adjustment, loss from the business of owning and maintaining race horses can be set off against _________ only.

(a) Income from winnings from lotteries

(b) Income from crossword puzzles

(d) Income from card game

Correct answer : (c)

Justification of correct answer :

Loss from the business of owning and maintaining race horses cannot be set off against any income other than income from the business of owning and maintaining race horses.

Thus, option (c) is the correct option.

Q5. While making inter-head adjustment of loss, loss from business and profession cannot be set off against income chargeable to tax under the head “Salaries”.

(a) True (b) False

Correct answer : (a)

Justification of correct answer :

While making inter-head adjustment of loss, loss from business and profession (including unabsorbed depreciation) cannot be set off against income chargeable to tax under the head “Salaries”.

Thus, the statement given in the question is true and hence, option (a) is the correct option.

Q6. Loss under the head “Profits and gains of business or profession” can be carried forward even if the return of income/loss of the year in which loss is incurred is not furnished on or before the due date of furnishing the return, as prescribed under section 139(1).

(a) True (b) False

Correct answer : (b)

Justification of correct answer :

Thus, the statement given in the question is false and hence, option (b) is the correct option.

Q7. However, if loss under the head “Income from house property” cannot be fully adjusted in the year in which such loss is incurred, then unadjusted loss can be carried forward for _________ years immediately succeeding the year in which the loss is incurred.

(a) 2 (b) 5

Correct answer : (c)

Justification of correct answer :

With effect from the assessment year 2018-19, loss under the head “house property” shall be allowed to be set-off against any other head of income only to the extent of Rs. 2,00,000 for any assessment year.

If loss under the head “Income from house property” cannot be fully adjusted in the year in which such loss is incurred, then unadjusted loss can be carried forward for 8 years immediately succeeding the year in which the loss is incurred.

Thus, option (c) is the correct option.

Comment on incorrect answer : Option (c) is the correct option since it gives the correct number of years, all the other options, viz., option (a), (b) and (d) giving incorrect number of years are not correct.

Q8. Restriction of section 78 is applicable only in case of loss and is not applicable in case of adjustment of unabsorbed depreciation, unabsorbed capital expenditure on scientific research or family planning expenditure.

(a) True (b) False

Correct answer : (a)

Justification of correct answer :

Section 78 contains provisions relating to carry forward and set off of loss in case of change in constitution of a partnership firm due to death or retirement of a partner (i.e. when a partner goes out of firm by retirement or death). In such a case, the share of loss attributable to the outgoing partner cannot be carried forward by the firm. Restriction of section 78 is applicable only in case of loss and is not applicable in case of adjustment of unabsorbed depreciation, unabsorbed capital expenditure on scientific research or family planning expenditure.

Thus, the statement given in the question is true and hence, option (a) is the correct option.

Q9. In case of a Company, being a company in which public are not substantially interested but not being an eligible start-up as referred to in section 80-IAC, if the person beneficially holding _________ of the voting power as on the last day (i.e. 31st March) of the year in which the loss was incurred and on the last day (i.e. 31st March) of the year in which the company wants to set off the brought forward loss are different, then the company cannot set off such brought forward loss.

(a) 20% (b) 25%

Correct answer : (d)

Justification of correct answer :

In case of a company in which public are not substantially interested (i.e., closely held company), if the person beneficially holding 51% of the voting power as on the last day (i.e. 31st March) of the year in which the loss was incurred and on the last day (i.e. 31st March) of the year in which the company wants to set off the brought forward loss are different, then the company cannot set off such brought forward loss.

Thus, option (d) is the correct option.

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Set-off and Carry Forward of Losses

Rules for Set-off of Losses

Intra-Head Adjustment

Inter-Head Adjustment of Losses

Carry Forward of Losses

Loss Under the Head “House Property”

Loss under the Head of PGBP

Set-off and Carry-forward of Losses in Amalgamation and Demerger

Set-off and Carry-forward of Losses in Amalgamation of Banks, Government Companies, and Cooperative Banks

Restriction on Losses of Closely Held Companies

No Set-off of Loss from Undisclosed Income

Loss under the Head Capital Gains

Losses from certain specified sources falling under the head “Income from other sources”

Set-off and Carry Forward of Losses

Rules for Set-off of Losses

Intra-Head Adjustment

Inter-Head Adjustment of Losses

Carry Forward of Losses

Loss Under the Head “House Property”

Loss under the Head of PGBP

Set-off and Carry-forward of Losses in Amalgamation and Demerger

Set-off and Carry-forward of Losses in Amalgamation of Banks, Government Companies, and Cooperative Banks

Restriction on Losses of Closely Held Companies

No Set-off of Loss from Undisclosed Income

Loss under the Head Capital Gains

Losses from certain specified sources falling under the head “Income from other sources”

Extract of Relevant Sections of Income-tax Act, 1961

Section – 70 – Set off, or carry forward and set off

Section – 71 – Set off of loss from one head against income from another.

Section – 71B – Carry forward and set off of loss from house property.

Section – 72 – Carry forward and set off of business losses.

Section – 72A – Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc. 72A.

Section – 72AA – Carry forward and set off of accumulated loss and unabsorbed depreciation allowance in scheme of amalgamation in certain cases.

Section – 72AB – Provisions relating to carry forward and set-off of accumulated loss and unabsorbed depreciation allowance in business reorganisation of co­operative banks.

Section – 73 – Losses in speculation business.

Section – 73A – Carry forward and set off of losses by specified business.

Section – 74 – Losses under the head “Capital gains”.

Tax Tutorials – Set off and carry forward of losses under the Income-tax Law​

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Section – 72AB – Provisions relating to carry forward and set-off of accumulated loss and unabsorbed depreciation allowance in business reorganisation of cooperative banks.

Tax Tutorials – Set off and carry forward of losses under the Income-tax Law