Tag: Set Off Loss

Section 112 of the Income-tax Act, 2025 deals with the carry forward and set-off of business losses, other than losses from speculation business and other specially governed activities. Where a business loss cannot be fully adjusted in the tax year in which it arises, the unabsorbed portion may be carried forward to subsequent tax years, subject to prescribed conditions. Such brought-forward loss can generally be adjusted against profits and gains of eligible business or profession carried on by the assessee. The provision also prescribes the period of carry forward, continuity requirements and conditions for claiming the benefit of set-off.

1. Meaning of Business Loss

A business loss arises where the allowable business expenditure and deductions exceed the taxable receipts or profits from a business or profession during a tax year. For Section 112, the provision deals with ordinary business losses and excludes speculation losses and losses governed by separate special provisions. Before carrying forward the loss, the assessee must first apply the relevant current-year set-off provisions. If the entire business loss cannot be absorbed against eligible income during that year, the remaining amount becomes an unabsorbed business loss. Subject to statutory conditions, this balance may be carried forward and adjusted against eligible business or professional income in subsequent years.

2. Carry Forward of Business Loss

Where an eligible business loss cannot be wholly set off during the tax year in which it arises, the remaining amount may be carried forward under Section 112. The carried-forward loss retains its character as an ordinary business loss and may be considered for adjustment in subsequent tax years. Carry forward is subject to compliance with the conditions prescribed under the Act, including applicable requirements relating to determination and reporting of the loss. The benefit ensures that a genuine business loss is not permanently disregarded merely because sufficient taxable income is unavailable in the year of loss. The unabsorbed amount is therefore available for future set-off.

3. Set-off in Subsequent Tax Years

A business loss carried forward under Section 112 can generally be set off against profits and gains of business or profession assessable in a subsequent tax year, subject to the conditions prescribed by the Act. It cannot ordinarily be adjusted against income chargeable under heads such as salary, house property, capital gains or income from other sources once it has been carried forward. The business generating the loss need not necessarily continue in every situation if the statutory requirements otherwise permit the set-off. However, the assessee claiming the loss must satisfy the relevant conditions. The adjustment reduces taxable business income of subsequent tax years.

4. Period of Carry Forward

An eligible ordinary business loss may generally be carried forward for eight tax years immediately succeeding the tax year for which the loss was first computed. During this period, the loss may be adjusted against eligible business or professional income in accordance with Section 112. Where only part of the brought-forward loss can be absorbed in a particular year, the remaining amount may continue to be carried forward within the original prescribed period. The eight-year period is counted separately for each year’s loss. After expiry of the permitted period, any unabsorbed balance ordinarily lapses and cannot be carried forward for further set-off.

5. Filing of Return within Prescribed Time

For carrying forward an ordinary business loss, compliance with the return-of-income provisions is important. The loss should be determined in pursuance of a return furnished in accordance with the applicable statutory requirements and within the prescribed time, where timely filing is required for carry forward. Failure to comply may result in loss of the benefit of carrying forward the business loss, even though current-year set-off may be governed separately. Therefore, an assessee having a business loss should correctly disclose the loss and file the relevant return within the statutory period. Proper reporting enables the loss to be carried forward and claimed in subsequent years.

Illustration

Suppose Mr. A has a business loss of ₹6,00,000 in Tax Year 2026–27. After permissible current-year adjustment of ₹1,50,000, ₹4,50,000 remains unabsorbed.

In the following year, Mr. A earns business profit of ₹3,00,000: