Having profit and loss in the business are two sides of a coin. Of course, losses are hard to digest. However, the Income Tax law in India does provide taxpayers with some sort of benefits of incurring losses too.

Under the Income-tax Act, the Income is taxable under the five different heads:

-Income from salaries

-Income from house property

-Income from business or profession

-Income from capital gains

-Income from other sources

Therefore, an individual can have income under more than one head. There are prescribed provisions and rules under the Income Tax Act to set-off loss arising from one head against other heads of income. In addition to this, the process of setting off of losses and carry forward can be divided into the following steps:

Intra head adjustment (adjustment of loss against the income of same head) 

Where in any assessment year the net result in respect of any source is a loss, the taxpayer shall be entitled to set off the amount of such loss against his income from any other source under the same head. This adjustment also referred to as intra head adjustment.

Inter head adjustment (adjustment of loss against the income of other head)

As discussed above, any loss from one source of income is to be set off against any gain from another source within the same head. Any unadjusted loss (remaining loss) can then be set off against the income from any other head. This adjustment also referred to as Inter-head adjustment

Carry forward of a loss

If the losses from any head of the income could not be set off under the same head or different heads in the same assessment year, then such amount of losses are allowed to be carried forward to be claimed as set off from the income of the subsequent assessment years.

Provisions under section 72 of the Income Tax Act (Carry forward and set off of Business Losses other than Speculation Loss)

Where a taxpayer incurs loss under the head PGBP (profits and gains of business or profession) other than the loss from speculation & specified business and the same could not be set off in the same assessment year, then such amount of loss can be carried forward to the following assessment years and it shall be set off against the profit and gains of business or profession. However, such set-off of losses are subject to the following conditions:

1. Loss under the head “Profit and Gains from Business & Profession” can be carried forward for 8 years

The loss under the head “Profit and Gains from Business” (losses other lation loss and loss from specified business) cannot be carried forward for more than eight assessment years. Therefore, loss of every assessment year is a separate loss and no loss shall be carried forward for more than 8 assessment years immediately succeeding the assessment year for which the loss was first computed.

2. Loss return is required to be submitted in the specified time

The losses cannot be carried forward unless the income tax return (for the year in which the loss is incurred) is submitted within the due date as specified under section 139(1) of the Income Tax Act

3. Loss from any business can be set off against only the Business Income

A loss incurred under the head PGBP (Profits and gains of business or profession) can be set off against profits of any business in the subsequent year. For this purpose, the profit would include profits derived from a business activity but assessable under the head “Income from other sources”.

For example, where equity shares are held by a taxpayer as a part of his trading assets (closing stock), the dividend on such shares from a foreign company would form part of business income and, consequently, entitled to claim set-off of business loss brought forward from earlier years against a dividend of the current year.

4. Loss from the business can be set off against any other Business Income

There is no compulsion that business loss of any year should be set off against income from the same business in the subsequent years. In other words, loss of from Business A can be set off against the profit of business A or some other business in subsequent years.

5. Set-off of losses can be claimed by the person who has incurred loss

The loss from business can be carried forward and set off against the income of the assessee who incurred the loss.

However, there are some following exceptions:

  • Inheritance
  • Amalgamation
  • A succession of Proprietary Concern or a Firm by a Company
  • A succession of an Unlisted Public Company or Private Company by a Limited Liability Partnership
  • Demerger

Also Read:-

S. No. Provisions of Set of and Carry Forward of Losses under Income Tax Act, 1961
1 Clubbing of Your Income with Income of your Spouse
2 Clubbing of income from assets transferred to Son’s Wife
3 Clubbing of income from the asset transferred to Spouse
4 Clubbing of Income on Revocable Transfer of Asset
5 Clubbing of remuneration income of Spouse from a Concern in which other Spouse has Substantial Interest
6 Set Off & Carry Forward of Loss under the head House Property
7 Clubbing of income of a Minor Child with Income of parent
8 Clubbing of Income from Self-acquired Property converted to Joint Family Property & subsequent Partition
9 Clubbing of Income from assets transferred to a person for benefit of spouse
10 Clubbing of Income from Assets Transferred to a Person for the Benefit of Son’s Wife
11 Carry forward & set off of Business Losses other than Speculation Loss
12 Set off and Carry Forward of Capital Loss
13 Set-off and carry forward of Speculative Business Loss
14 Set-off & carry forward of Loss from owning & maintaining racehorses
15 Set off and carry forward of losses of Specified Business | Section 73A

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Company: Taxguru Consultancy / Taxguru Edu
Location: Mumbai, Maharashtra, IN
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