Carry Forward and Set Off of Losses with FAQs

In Indian tax law, if income from a source is exempt, losses from that source cannot be adjusted against other taxable incomes. For instance, agricultural income, being exempt, does not allow the offset of agricultural losses against taxable income. Intra-head adjustment allows taxpayers to offset losses within the same category of income, such as from one business against another business’s profits. However, there are specific restrictions: speculative business losses can only offset other speculative income, and losses from house property are limited to a set-off of Rs. 2 lakh per annum. Losses must first be adjusted within their category (intra-head) before being adjusted against other categories (inter-head). Losses not fully adjusted in the current year can be carried forward to future years under specific rules. Business losses, other than speculative losses, can be carried forward for eight years and set off against future business income. Speculative losses can be carried forward for four years and offset only against speculative income. House property and capital gains losses can also be carried forward, with particular restrictions on the nature of the income against which they can be set off. Special provisions apply to carry-forward losses in cases of business reconstitution or change in company ownership.

Q1. If income from any source is exempt, then can loss from such source be adjusted against any other taxable income?

Ans: 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.

Q2. What is the meaning of intra-head adjustment?

Ans: 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.

Q3. What are the restrictions to be kept in mind while making intra-head adjustment of loss?

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

• 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.
• 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.
• 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.
• 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.

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.).

Q4. What is the meaning of inter-head adjustment?

Ans: 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:

• Before making inter-head adjustment, the taxpayer has to first make intra-head adjustment.
• 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.
• Loss under head “Capital gains” cannot be set off against income under other heads of income.
• 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.
• Loss from the business of owning and maintaining race horses cannot be set off against any other income.
• 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.)
• Loss from business and profession cannot be set off against income chargeable to tax under the head “Salaries”.

Q5. If the income of the year in which loss is incurred falls short, and taxpayer is unable to adjust entire loss, then can the taxpayer carry forward the unadjusted loss for adjustment in next year?

Ans: 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 subsequent year(s)’ income. Separate provisions have been framed under the Income-tax Law for carry forward of loss under different heads of income (refer next FAQ for more provisions in this regard).

Q6. What are the provisions framed under the Income-tax law in relation to carry forward and set off of business loss other than loss from speculative business?

Ans: The set-off of loss from house property against income from any other source is restricted to Rs. 2 lakh per annum.

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 Specified business under section 35AD cannot be carried forward unless it has been determined in pursuance of return filed in accordance with the provisions of Section 139(3).

• 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.

Q7. What are the provisions framed under the Income-tax law in relation to carry forward and set off of loss from speculative business?

Ans: 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).

Q8. What are the provisions framed under the Income-tax Law in relation to carry forward and set off of house property loss?

Ans: 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.

The set-off of loss from house property against income from any other source is restricted to Rs. 2 lakh per annum.

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).

Q9. What are the provisions framed under the Income-tax law in relation to carry forward and set off of capital loss?

Ans: 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).

Q10. What is the meaning of unabsorbed depreciation, unabsorbed capital expenditure on scientific research and unabsorbed capital expenditure on promoting family planning amongst the employees?

Ans: 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.

Q11. What are the provisions framed 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?

Ans: 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:

• First adjustments are to be made for current scientific research expenditure, family planning expenditure and current depreciation.
• Second adjustment is to be made for brought forward business loss.

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

Q12. In case of change in the constitution of business, can the loss be carried forward by the reconstituted entity?

Ans: 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).

Q13. Are there any special provisions in case of carry forward of loss in case of a partnership firm if any partner of the firm retires?

Ans: 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.

Q14. Are there any special provisions in case of carry forward and set off of loss in case of a company in which public are not substantially interested?

Ans: As per section 79 of the Income-tax Act, where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year 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 fifty-one per cent of the voting power were beneficially held by person who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred.

However, the above condition is not applicable in case of an eligible start up reffered under section 80-IAC in case of such start up, loss can be carried forward and set off against the income of the previous year, if all shareholders of such company (who held shares carrying voting power on the last day of the year or years in which loss was incurred) continue to hold the shares on last day of such previous year.

Restriction of section 79 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.

Further, the provisions of section 79 are not applicable in case of change in share holding on account of death of shareholder or on account of transfer of shares by way of gift to any relative of the shareholder or change in shareholding in case of an Indian company which is a subsidiary of foreign company, when such foreign company is amalgamated/demerged with another foreign company and 51% or more shareholders of the amalgamating/demerged foreign company continues to be the shareholders of the amalgamated/resulting foreign company and where any change in shareholding in the company takes place pursuant to a resolution plan approved under the IBC.

With an objective to facilitate resolution of distressed companies, the Finance (No. 2) Act, 2019 extend the benefit of section 79 to the following companies, and their subsidiary and the subsidiary of such subsidiary, where:

(a) When NCLT, on a petition moved by the Central Govt., has suspended the board of directors and has appointed new directors.

(b) When change in shareholding has taken place in a previous year pursuant to a resolution plan approved by the Tribunal.

Note:

(1) W.e.f., Assessment Year 2022-23, section 79 shall not apply in case there 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.

(2) W.e.f. Assessment Year 2022-23, section 79 shall not apply to an erstwhile Public Sector Company (PSU), subject to the 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).

(Republished with Amendment, Source -Income Tax Website)