TREATMENT OF LOSSES

1.1 Set-off of losses 56-58

While computing income of a person under a head of income, if the total deductions allowed to a
person under the head exceed the total amounts chargeable to the person under that head, then the
said person is said to have sustained a loss under the said head of income.
The income tax law includes comprehensive provisions which stipulate the mechanism for adjustment
of the loss under a head against the income under other heads of income and against the income for
the ensuing years. Sections 56 to 58 of the Ordinance deal with this issue and the said sections are
discussed below:

Set-off of losses (Sec 56)

If a person sustains a loss under any head of income in a tax year, the same can be set-off
against the income from any other head of income except for “income under the heads ‘salary’ ’. For
example, a business loss can be set-off against income under the head “Income from other source” or
any other head of income. However, the following are exception to the said rule:
(i) Loss in speculation business cannot be set-off against any other income.
(ii) Capital loss cannot be set-off against any other income.
(iii) Loss from any head of income falling under final tax regime.
(iv) Loss in a case where the income would have been an exempt income e.g. loss of agriculture
income cannot be set-off against any taxable income.
No loss except loss under the head “Income from Business” (including income from speculation
business) and “Capital gain” can be carried forward.
If a person sustains loss under the head “Income from Business” in addition to loss under any
other head, the loss under the head “Income from Business” shall be set-off last.

Carry forward of business losses (Sec 57)

If business loss (other than depreciation, amortization and speculation loss) sustained in a tax
year cannot be fully set-off in that year with income under any other head, it can be carried forward to
subsequent tax years.
In subsequent years, this loss can only be set-off against the person’s income under the head
“Income from Business”.
No loss shall be carried forward to more than six tax years immediately succeeding the tax year
in which the loss was first computed. If a person has a business loss carried forward for more than
one tax years, the loss of earliest tax year shall be set-off first.
Where a loss, referred above relating to a tax year commencing on or after the First day, of July,
2020 is sustained by a resident company engaged in the hotel business in Pakistan the said loss shall
be carried forward for a period of eight years.
The loss attributable to deductions allowed under depreciation, initial depreciation, first year
allowance, accelerated depreciation and amortisation that has not been set off against income, shall
be set off against 50% of the person's balance income chargeable under the head "income from
business" in the following tax year, after setting off loss under the head “income from business” and
so on until completely set off. Such loss shall be set off against 100% of the said balance income if
the taxable income for the year is less than Rs. 10 million.
While computing person’s taxable income, the deductions available for depreciation, initial
depreciation, first year allowance, accelerated depreciation and amortisation shall be taken into
account last.
Carry forward of speculation business losses (Sec 58)
If a person sustains a loss in a tax year from any speculation business (as defined in section 19),
he can set off such loss only against profits of any other speculation business carried on by him
during the same tax year.
Carry forward of capital losses (Sec 59)
A capital loss sustained by a person during a tax year cannot be set-off against income of that
person under any other head of income, for that tax year.
The amount of capital loss which cannot be set-off shall be carried forward up to six tax years
immediately succeeding the tax year in which the loss was sustained.
In the subsequent years too, capital loss can be set-off against capital gain only. It means that
capital loss cannot be adjusted against income under any other head.
If a person has a capital loss carried forward for more than one tax year, the loss of earliest tax
year shall be set-off first

Limitations on set off and carry forward of losses (Sec 59A)

An AOP whose profits are chargeable to tax under Income Tax Ordinance, 2001 shall be entitled
to a set off or carry forward and set-off any loss of AOP against the income of AOP in the manner
explained above.
Any members of an AOP shall not be entitled to set off or carried forward and set off loss of AOP
against his income.
Any person who has succeeded in the business of another person otherwise than by inheritance,
shall not be entitled to set off or carry forward and set off loss of predecessor.
Subject to sub-section (4) of section 57, sub-section (12) of section 22 and sub-section (6),
where in computing the taxable income for any tax year, full effect cannot be given to the loss relating
to deductions of depreciation, initial depreciation, first year allowance, accelerated depreciation and
amortisation allowed owing to there being no profits or gains chargeable for that year or such profits
or gains as mentioned in sub-section (4) of section 57, being less than the said loss, the loss or part of
the loss, as the case may be, shall be set off against 50% of the person’s income chargeable under
the head “income from business” for the following year or if there is no “income from business” for that
year, be set off against 50% of the person’s income chargeable under the head “income from
business” for the next following year and so on for succeeding years. Business loss, speculation loss
and capital loss cannot be carried forward and set off unless these are determined by an order made
or treated as made under sections 120, 121 or 122 of the Income Tax Ordinance, 2001.