INTRODUCTION

While one endeavours to derive income, the possibility of incurring losses cannot be ruled out.
Based on the principles of natural justice, a set-off should be available for loss incurred. The
income tax laws in India recognise this and provide for adjustment and utilisation of the losses.
However, there are conditions which have been introduced to prevent misuse of such provisions.

To the common taxpayer, income tax is a crunch into the income earned. Accordingly, awareness
of the relevant provisions pertaining to set off and carry forward of losses is essential in order to
maximize tax benefits. The relevant provisions have been summarised here:1

INTER SOURCE ADJUSTMENT - SEC.70

Where the net result of computation for any assessment year in respect of any source of income
falling under any head of income is a loss, the assesse shall be entitled to have the amount of such
loss set off against his income from any other source under the same head.

However, the following are the exceptions to the above rule:

i) Loss from speculative business;

ii) Loss from the activity of owning and maintaining race horses; and

iii) Long term capital loss.

INTER HEAD ADJUSTMENT - SEC.71

Where the net result of the computation under any head of income in respect of any assessment
year is a loss, the assesse shall be entitled to have such amount of loss set off against his income
assessable for that assessment year under any other head of income.

This rule of inter head adjustment is subject to the following exceptions:

a) Loss from speculation business;

b) Loss from the activity of owning and maintaining race horses;

c) Loss under capital gains.

d) Loss under Profits & Gains of Business or Profession against salary income Students may note
that loss under the head Profits and Gains of Business or Profession cannot be set off against
salary income. However, Setoff of business loss against any other head of income is allowed.

According to the Sec.58(4), any loss or unabsorbed depreciation allowance cannot be set off
against any income in the form of winning from lotteries, crossword puzzles, races including
horse races, card games and other games of any sort or from gambling or betting.

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Note: i) The loss and depreciation remaining unabsorbed in the case of amalgamating company
shall be deemed as the loss or depreciation of the amalgamated company for the previous year in
which the amalgamation is affected. Same analogy applies when a reorganisation of the business
is made whereby a firm or a proprietary concern is succeeded by a company as contemplated
under clause (xiii) or (xiv) of Sec.47. Similar is the case for amalgamation of banking company
with banking institution. Consequently, apart from availing the set off benefit in the year of
amalgamation or reorganisation, a fresh period of 8 years thereafter is available for carry forward
and set off of unabsorbed loss to the amalgamated or successor company. However, in the case of
demerger, the resulting company will get the benefit of carry forward and set off only for the
remaining number of years out of the total allowable 8 years.

ii) Unabsorbed depreciation of the amalgamating company/ demerging company / banking

company/ firm or proprietary concern shall be carried forward by the amalgamated company I
resulting company I banking institution/ successor company for indefinite period in accordance
with Sec.32 (2) and the same is entitled to be carried forward and setoff against any income in the
subsequent years without any time limit.

LOSS FROM HOUSE PROPERTY - SEC.71-B

Where the net result of computation for any assessment year under the head Income from house
property is a loss and such loss cannot be or is not wholly set off against income under other
heads under section 71, such loss can be carried forward for set off against income from house
property in the subsequent assessment years. Such carry forward is permissible for a period of 8
assessment years.

LOSS UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR

PROFESSION - SEC.72
In respect of unabsorbed loss under the head Profits and gains of business or profession, other
than speculation business loss, the assesse is entitled to carry forward and set off in the subsequent
years subject to the following conditions:

i) The unabsorbed business loss carried forward can be set off only against income under the head
Profits and gains of business or profession.

ii) Such carry forward is permissible up to 8 assessment years from the end of the year in which
the loss is first computed.

iii) Unabsorbed Depreciation carried forward u/s.32 (2) will be set off only after setting off of the
brought forward loss under this section.

Loss can be carried forward and set off even if the business in respect of which it was incurred
and computed has been discontinued. Students may note that unabsorbed depreciation uls.32 (2)
can also be carried forward even if the business is discontinued.2

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AMALGAMATION / DEMERGER / CONVERSION OF FIRM OR
PROPRIETARY CONCERN TO COMPANY - SEC. 72A
In the case of amalgamation of companies, the unabsorbed losses and unabsorbed depreciation of
the amalgamating company owning an industrial undertaking or a ship or a hotel or a banking
company shall be deemed to be the loss or depreciation of the amalgamated company for the
previous year in which the amalgamation was effected and such loss or depreciation shall be set
off or carried forward for a period of 8 assessment years or for an indefinite period respectively by
the amalgamated company accordingly subject to the following conditions:

1. Conditions to be satisfied by the amalgamating company:

a. The amalgamating company has been engaged in the business in which the accumulated
loss occurred or depreciation remains unabsorbed for three or more years;
b. The amalgamating company has held continuously as on the date of amalgamation atleast
3/4111 of the book value of fixed assets held by it two years prior to the date of
amalgamation.
2. Conditions to be satisfied by the amalgamated company:
a. The amalgamated company holds continuously for a minimum period of 5 years from the
date of amalgamation at least 3/4ths of the book value of fixed assets of the amalgamating
company acquired in a scheme of amalgamation;
b. The business of the amalgamating company should be continued by the amalgamated
company for a minimum period of 5 years from the date of amalgamation;
c. The amalgamated company fulfils the following additional conditions prescribed under
Rule 9C to ensure the revival of the business of the amalgamating company or to ensure
that the amalgamation is for genuine business purpose:
i) The amalgamated company shall achieve the level of production of at least 50% of the
installed capacity (capacity as on the date of amalgamation) of the said undertaking
before the end of 4 years from the date of amalgamation and continue to maintain the
said minimum level of production till the end of 5 years from the date of
amalgamation. Central Government has the power to modify this requirement on an
application made by the amalgamated company.
ii) The amalgamated company shall furnish to the Assessing Officer a certificate in Form
No.62 verified by a Chartered Accountant in this regard.

In a case where any of the above conditions are not complied with, the set off of loss or
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.

Additional points3

1. The benefit conferred under the Income Tax Law for amalgamation will apply to a banking
company only in case the amalgamation is effected with a specified bank.

Specified Bank has been defined to mean the State Bank of India or its subsidiary or a
corresponding new bank.

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Dr, Vinod Singhania, Kapil Singhania, Direct taxes law & practice, Taxmann publications Ltd., New Delhi, 40 th
edition (2008-09).
2. In the case of a demerger, the accumulated loss and unabsorbed depreciation of the demerged
company shall be allowed to be carried forward and set off in the hands of the resulting company.
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Where such loss or unabsorbed depreciation is not directly relatable to the undertakings
transferred to the resulting company, it shall be apportioned between the demerged company and
the resulting company. The basis for such apportionment shall be in the same proportion in which
the assets of the undertakings have been retained by the demerged company and transferred to the
resulting company. The Central Government may notify conditions as it considers necessary to
ensure that the demerger is for genuine business purposes. Sec72A (4).5

3. 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 depreciation of the
successor company. The other provisions relating to set off and carry forward of loss and
depreciation shall apply. Accordingly, such loss or depreciation shall be deemed as the loss or
depreciation of the successor company for the previous year in which business reorganisation is
affected. The successor company will be able to claim the benefit of carry forward of business
loss for a fresh period of 8 years commencing from the end of the year of such business
reorganisation. However, unabsorbed depreciation can be carried forward for set off for an
indefinite period Sec.72A (6)

If the abovementioned conditions re 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.

4. The term Accumulated Loss means so much of the loss of the predecessor firm or proprietary
concern or the amalgamating company or the demerged company, as the case may be, under the
head profits and gains of business or profession (other than the speculation loss) which would
have been allowed to be carried forward and set off under the provisions of section 72 if the
reorganisation of business or amalgamation or demerger had not taken place Sec. 72A (7).

5. The term Unabsorbed Depreciation means the depreciation of the predecessor firm or
proprietary concern 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
proprietary concern or the amalgamating company or the demerged company, as the case may be,
if the reorganisation of business or amalgamation or demerger had not taken place Sec. 72A
(7).

6. 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
iv) the business of providing telecommunication services, whether basic or cellular
including radio paging, domestic satellite service, network of trunking, broad
band network and internet services; or

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

AMALGAMATION OF BANKING COMPANY WITH A BANKING

INSTITUTION - SEC. 72AA
Where a banking company has amalgamated with a banking institution under a scheme sanctioned
by the Central Government u/s. 45(7) of the Banking Regulation Act, 1949, the accumulated
losses and unabsorbed depreciation of the amalgamating banking company shall be deemed to be
the loss or the unabsorbed depreciation of the banking institution with which the banking
company has been amalgamated. Accordingly, all the provisions contained in the Income-tax Act
relating to set-off and carry forward of loss and allowance for depreciation shall apply.

For the purposes of this section,

i) accumulated loss means so much of the loss of the amalgamating banking company under the
head Profits and gains of business or profession (not being a loss sustained in a speculation
business) which such amalgamating banking company, 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 same meaning assigned to it in clause (c) of section 5 of the
Banking Regulation Act, 1949;

iii) banking institution shall have the same meaning assigned to it u/s. 45(15) of the Banking
Regulation Act, 1949;

iv) unabsorbed depreciation means so much of the allowance for depreciation of the
amalgamating banking company which remains to be allowed and which would have been
allowed to such banking company if amalgamation had not taken place.

SPECULATION BUSINESS LOSS - SEC.73

1. Where there is unabsorbed speculation business loss, in the case of an assessed for any
assessment year such loss shall be carried forward to be set off in the subsequent ears against
income from any speculation business. No such loss shall be carried forward for more than 4
assessment years immediately succeeding the assessment year for which the loss was first
computed.6

2. According to the Explanation to sec.73, where any part of the business of a company consists in
the purchase and sale of shares of other companies such company shall 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.

3. Exceptions: This Explanation does not apply to -

i) a company whose gross total income consists mainly of income which is chargeable under the
heads Income from house property, Capital gains and Income from other sources; and

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Dr. Singhania Vinod, Dr. Singhania Monica, Students guide to Income Tax, Taxmann Publications (P.) Ltd., New
Delhi, 39th Edition (2008).
ii) a company the principal business of which is the business of banking or money lending.

LOSS UNDER THE HEAD CAPITAL GAINS - SEC. 74

1. In case of any Loss under the head Capital gains, the whole loss shall be carried forward to
the following assessment year, and7

(a) Any loss relates to a short-term capital asset shall be set off against income, from Capital
gains.

(b) Any loss relates to a long-term capital asset shall be set off against income from Capital
gains assessable for that assessment year in respect of any other capital asset other than a short-
term capital asset;

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

2. No loss shall be carried forward for more than (8) eight assessment years immediately
succeeding the assessment year for which the loss was first computed.

LOSS FROM THE ACTIVITY OF OWNING AND MAINTAINING RACE

HORSE - SEC. 74A
In the case of an assessed being the owner of horses maintained by him for running in horse races
the amount of loss incurred by the assesse in such activity can be carried forward and set off
against income from such activity in any subsequent year. No such loss can be carried forward
beyond 4 assessment years from the end of the assessment year in which the loss is first
computed.

Loss from the activity of owning and maintaining race horse means -

a) In a case where the assesse has no income by way of stake money, the entire expenditure
incurred (not being capital expenditure) for the purpose of maintaining such horses.

b) In a case where the assesse has income by way of stake money (prize money for winning
horse), the expenditure (not being capital expenditure) incurred for maintenance of race horses in
excess of such stake money.

SPECIAL PROVISIONS

CHANGE IN CONSTITUTION AND SUCCESSION - SEC.78

(1) Where a change has occurred in the constitution of a firm, the loss attributable to the share of a
retired or deceased partner remaining unabsorbed shall not be allowed to be carried forward by the
firm. This restriction shall not apply to unabsorbed depreciation.

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(21 Where any person carrying on business or profession has been succeeded in such capacity by
another person otherwise than by inheritance, then the successor cannot have the loss of
predecessor carried forward and set off against his income.

LOSS RETURNS - SEC. 80

a) No loss shall be carried forward under the provisions of Sec. 72, 73, 74 and 74A, which has not
been determined in pursuance of a return filed in accordance with the provisions of Sec.139(3).
However, this condition does not apply to loss from house property carried forward uls.71B and
unabsorbed depreciation carried forward u/s.32 (2).8

b) The requirements of sec.80 to file the return of income on or before the due date prescribed
ujs.139 (1) are applicable only for the carry forward of the loss suffered in that particular
assessment year. It does not impact the status of carry forward of loss of the previous years.

TABLE SHOWING SET OFF AND CARRY FORWARD OF LOSSES9

Time limit for

Whether loss can be set Whether Losses can be
Head of income under which carry forward
off within the same carried forward and set
Loss is incurred and set off of
year off in subsequent years.
losses
Under the Under any Under the Under any
same head other Head same head other Head
1. Income from Salaries NA NA NA NA NA
2. Income from House Property Yes Yes Yes No 8 years
3. Profit and gain from Business
or Professions :
a. Non-speculation Business Yes Yes Yes No 8 years
b. Speculation Business Yes No Yes No 8 years
c. Unabsorbed Depreciation Yes Yes Yes No N.A.
d. Unabsorbed Investment
or Development Yes Yes Yes Yes 8 years
allowance.
4. Capital Gain (Short-Term) Yes No Yes No 8 years
5. Capital Gain (Long -Term) Yes No Yes No 8 years
6. Income from Other Sources:
a. Lotteries, Crossword,
Puzzle, Card Games, Gambling, Yes No No No NIL
or betting of any form.
b. Loss from activity of
owning and maintaining Race Yes No Yes No 4 Years
Horses
c. Other Income Yes Yes No No NIL

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Manoharan, T.N., Direct Tax Law, Snow white publications Pvt. Ltd., 12th Edition (2007) p. 485.
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HOW DOES IT AFFECT THE TAX LIABILITY OF AN ASSESSEE?

The carry forward of losses to subsequent financial years is possible only if income tax return is
filed within the due date.

It is that time of the year again when most of us have to file our income tax returns. While doing
so, we should keep in mind that loss from a source of income can be helpful in maximizing tax
benefits.

Therefore for example, if we have loss in any transaction on our income, which could be set off or
carry forward, and the same is not done by us, the Tax Liability hence shall not decrease and the
burden will be upon the assessee to pay more tax which could have been reduced, by setting off or
carry forwarding the losses.