‘Set-Off & Carry Forward’ of Business Losses (Section 72)

Where the loss under the head 'profits and gains of business or profession' other than loss from speculation business and loss from specified business, could not be set off in the same assessment year because either the assessee had no income under any other head or the income was less than the loss, such loss which could not be set off in the same assessment year, can be carried forward to the following assessment years and it shall be set off against the profit and gains of business or profession subject to the following conditions :

(I) Business losses can be adjusted only against business income:

The loss can be carry forward to the subsequent assessment year and set off only against business income of the subsequent year. It may be observed that in the same assessment year, loss from a business can be adjusted against income from any other head of income except salary. However, when the loss is to be carried forward to the subsequent year, it can be adjusted only against business income. Business income may be from the same business in which the loss was incurred, or may be any other business.

(II) Business in respect of which a loss is incurred may or may not be continued:

The business loss can be carried forward and set off in the subsequent assessment year(s) even if the business in respect of which the loss was originally computed is not carried on by him in the previous year in which such loss is sought to be carried forward and set off.

(III) Losses can be set off only by the assessee who has incurred loss [Section 78(2)]:

Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, nothing in this Chapter (relating to set off and carry forward of loss) shall entitle any person other than the person incurring the loss to have it carried forward and set off against his income. In other words, the brought forward business losses can be set off only by the same assessee. The assessee, who has suffered the loss and in whose hands the loss has been assessed, is the person who can carry forward the loss and set off the same against his business income of the subsequent year.

The following are the exceptions:

1. Inheritance: Where a business carried on by one person, is acquired by another person through inheritance. For example: X is carrying on a business and there are losses to the extent of Rs. 5,00,000 which can be carried forward and set off against the income of the subsequent years. X dies and his son S inherits his business. The losses incurred by X can be set off by his son S against the income from a business activity carried on by S. However such loss can be carried forward by the son for the balance number of years for which the father could have carried forward the loss. However, the unabsorbed depreciation cannot be carried forward by the legal heir as inheritance is not covered under section 32(2).

2. Amalgamation: Business losses and unabsorbed depreciation of an amalgamating company can be set off against the income of the amalgamated company if the amalgamation is within the meaning of section 72A/72AA of the Income-tax Act. If the amalgamation is not of the nature specified in section 72A/72AA, the business loss and unabsorbed depreciation of the amalgamating company cannot be carried forward by the amalgamated company. Similarly, business losses and unabsorbed depreciation of an amalgamating co-operative bank can be set off against the income of successor co-operative bank i.e. the amalgamated co-operative bank, if the amalgamation is within the meaning of section 72AB.

3. Succession of proprietary concern or a firm by a company: Where there has been reorganisation of business whereby a proprietary concern or a firm is succeeded by a company and certain conditions mentioned in section 47(xiii) or (xiv) are fulfilled, the accumulated business loss and the unabsorbed depreciation of the predecessor proprietary concern/firm shall be deemed to be the loss or allowance for depreciation of the successor company for the previous year in which business reorganisation was effected and carry forward provisions shall be applicable to the successor company.

4. Succession of a private company or unlisted public company by a limited liability partnership: Where there has been reorganization of business whereby a private company or unlisted public company is succeeded by a limited liability partnership and certain conditions mentioned in section 47(xiiib) are fulfilled, the accumulated business loss and unabsorbed depreciation of the predecessor company for the previous year shall be deemed to be loss or allowance for depreciation of the LLP for the previous year in which business reorganization was effected and carry forward provision shall be applicable to successor LLP.

5. Demerger: Loss of the demerged company can be carried forward by the resulting company subject to fulfilment of certain conditions which the Central Government may for this purpose notify, to ensure that the demerger is for genuine business purposes. Similarly, certain losses of the demerged co-operative bank can be carried forward by the resulting cooperative bank in certain cases.

(IV) Period of carry forward:

Each year's loss is a separate loss and no loss shall be carried forward for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. Therefore, a loss of previous year 2017-18 i.e. assessment year 2018-19 can be carried forward till assessment year 2026-27. Besides the above, the following can also be carried forward indefinitely although these are not business losses as per Income-tax law :

1. unabsorbed depreciation;

2. unabsorbed capital expenditure on scientific research;

3. unabsorbed expenditure on family planning.

(V) Order of set off :

Unabsorbed depreciation, unabsorbed capital expenditure on scientific research and unabsorbed expenditure on family planning are not parts of business losses and they can also be carried forward. However, as per section 72(2), the business loss should be set off before setting off unabsorbed depreciation, etc. Such carried forward business loss will be set off against business head only after the current year's depreciation, current capital expenditure on scientific research and expenditure on family planning have been claimed. Therefore, the order of set off will be as under:

1. current year depreciation [Section 32(1)];

2. current year capital expenditure on scientific research and current year expenditure on family planning to the extent allowed;

3. brought forward business or profession losses [Section 72(1)];

4. unabsorbed depreciation [Section 32(2)];

5. unabsorbed capital expenditure on scientific research [Section 35(4)];

6. unabsorbed expenditure on family planning [Section 36(1)(ix)].

(VI) Return of loss:

The return of loss must have been furnished before due date prescribed u/s 139(1), otherwise the loss cannot be carried forward.