UNIVERSITY INSTITUTE OF LEGAL STUDIES,

CHANDIGARH
PRINCIPLES OF TAXATION LAW

SET OFF AND CARRY FORWARD PROCESS

SUBMITTED TO: - SUBMITTED BY: -

Prof. Meenal Garg Himanshu Singla

ROLL NO: 117/19

B.A. LLB. (10TH SEM)

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 ACKNOWLEDGEMENT

I would like to give my special thanks to our Director Prof. (Dr.) Shruti Bedi for
providing me with the opportunity to learn and grow through this internship
programme.
Secondly, I would like to extend my gratitude to our mentor Prof. Meenal Garg
for
constantly supporting and guiding me throughout the programme and solving all
my
queries.

Himanshu Singla (117/19)

B.A.LL.B. (Hons.)
10th Semester

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 CONTENTS

Contents
INTRODUCTION..................................................................................................................................................4
SET OFF...............................................................................................................................................................5
Inter source adjustment [Section 70].............................................................................................................5
Inter head adjustment [Section 71]................................................................................................................6
CARRY FORWARD OF LOSSES.............................................................................................................................8
CARRY FORWARD & SET-OFF OF LOSS FROM HOUSE PROPERTY [SECTION 71B]..........................................9
CARRY FORWARD AND SET-OFF OF BUSINESS LOSSES [SECTIONS 72]..........................................................9
CARRY FORWARD AND SET OFF OF LOSSES & DEPRECIATION IN CASE OF AMALGAMATION, CONVERSION,
MERGER & DEMERGER, (SEC 72A, 72AA, 72AB):-........................................................................................10
LOSSES FROM NON-SPECULATIVE BUSINESS...............................................................................................13
LOSSES IN SPECULATION BUSINESS [SECTION 73].......................................................................................14
LOSSES OF BUSINESS SPECIFIED U/S 35AD (SECTION 73A)..........................................................................15
LOSSES UNDER THE HEAD ‘CAPITAL GAINS’ [SECTION 74]..........................................................................15
LOSSES FROM OWNING AND MAINTAINING RACE-HORSES [SECTION -74A OF THE INCOME TAX ACT,
1961]:........................................................................................................................................................... 16
LOSS OF PARTNERSHIP FIRMS [SECTION 75 OF THE INCOME TAX ACT, 1961]:...........................................16
SECTION 78: CARRY FORWARD AND SET OFF OF LOSSES IN CASE OF CHANGE IN THE CONSTITUTION OF
FIRM OR ON SUCCESSION:-..........................................................................................................................16
SPECIAL PROVISIONS FOR SET OFF & CARRY FORWARD OF LOSSES IN CASE OF CERTAIN COMPANIES(SEC.
79).................................................................................................................................................................17
SUBMISSION OF RETURN OF LOSSES [SECTION 80] ....................................................................................17
PROVISIONS AT A GLANCE................................................................................................................................18
CONCLUSION....................................................................................................................................................19
BIBLIOGRAPHY..................................................................................................................................................20

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INTRODUCTION
It is very true that studying the history of a particular subject enables us to have a better
understanding of the same. Understanding the historical events and trends not only adds to our
knowledge base but also helps us develop a greater appreciation for recent events. The history of
taxes dates back to Ancient Egypt dynasty. It was way back in 3000-2800 BC, under the old
kingdom of Egypt that the first widespread history of taxation was recorded. Further, it was the
development of State from communities that gave rise to the necessity of taxes and hence a tax
system was invented.

It is said that the present tax system is based on the ancient system- the theory of maximum
social welfare. We have surely come a long way from the times of Manu. The way of carrying
out business has evolved. But the key concept of ‘maximum social welfare’ remains deeply
embedded.

Profit and loss are two different sides in the business coin. As exciting as it can be to earn profits,
incurring losses are equally difficult to digest. The Income Tax Department is known for its
heavy collection of taxes. But the lesser-known fact is that they also provide relief when one
person incurs a loss. This article tries to break through the harsh perception of the Income Tax
Department and acquaint the readers about the contrary side; where they provide provisions of
set-off and carry-forward for the assessee under certain terms and conditions.

The public finance domain of Economics deals with principles/cannons of taxations. There are
various models of Taxation but in the developing economies progressive system of taxation has
been advocated which means a person having larger income should contribute more to the public
exchequer in comparison to the person having lesser income.

While dealing with the subject, it has been envisaged that if a person has profits/income he
should pay taxes if he has profit and losses simultaneously he should pay tax on net profit after
deducting the losses and if he has resultant loss or only loss he is not required to pay taxes.
However, due to the complexity and need it has been thought of to incorporate the provisions
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relating to set off and carry forward of losses. Additional complexity has been created and the
losses have been restricted to be set off due to greediness of the legislators and tax
administrators.

The set off and carry forward of losses can be sub divided into two broad categories:1-
1. Set off of losses.
2. Carry forward and Set off of losses.

Specific provisions have been made in the Income-tax Act, 1961 for the set-off and carry forward
of losses. In simple words, “Set-off” means adjustment of losses against the profits from another
source/head of income in the same assessment year. If losses cannot be set-off in the same year
due to inadequacy of eligible profits, then such losses are carried forward to the next assessment
year for adjustment against the eligible profits of that year. The maximum period for which
different losses can be carried forward for set-off has been provided in the Act.

SET OFF
Set off of losses means adjusting the losses of current year or previous year against the profit or
income of the current year. If loss of the one year is not set off against the income of the same
year than that loss can be carried forward to the subsequent years for set off against income of
those years.

Inter source adjustment [Section 70]2

Under this section, the losses incurred by the assessee in respect of one source shall be set-off
against income from any other source under the same head of income, since the income under
each head is to be computed by grouping together the net result of the activities of all the sources
covered by that head. In simpler terms, loss from one source of income can be adjusted against
income from another source, both the sources being under the same head. But inter-source set-off
is not permissible in the following cases:
a. Long Term Capital Loss : long-term capital loss can be set-off only against long- term capital
gain. Short-term capital loss is allowed to be set off against both short- term capital gain and

1
SET OFF AND CARRY FORWARD OF LOSSES available at
https://www.tnkpsc.com/image/setoffandcarryforwardoflosses1.pdf ( last visited on March 29,2024)
2
THE INCOME TAX ACT, 1961
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long-term capital gain.
b. Speculation loss – A loss in speculation business can be set-off only against the profits of any
other speculation business and not against any other business or professional income. However,
losses from other business can be adjusted against profits from speculation business.
c. Loss from owning and maintaining race horses- Like speculative business loss, loss from
owning and maintaining race horses can also be set off only against the profit from owning and
maintaining race horses.
d. Specified Business Loss under Section 35AD- Losses from specified businesses can be set off
only against profits from such specified businesses only but the losses from other businesses can
be set off against profits from specified businesses. It must be noted that loss from an exempt
source cannot be set-off against profits from a taxable source of income. For example, long-term
capital loss on sale of shares sold through a recognized stock exchange cannot be set-off against
long-term capital gains on sale of land.

Inter head adjustment [Section 71]

This is another way of setting off of losses. If it is not possible for an assessee to set off the losses
under Intercourse adjustment, he/she can use this adjustment to set off the losses. Under this
adjustment, an assessee has the option of setting off the losses of one head against the profits of
another head in a particular financial year. Loss under one head of income can be adjusted or set
off against income under another head. However, the following points should be considered:
a. Where the net result of the computation under any head of income (other than ‘Capital
Gains’) is a loss, the assessee can set-off such loss against his income assessable for that
assessment year under any other head, including ‘Capital Gains’.
b. Where the net result of the computation under the head “Profits and gains of
business or profession” is a loss, such loss cannot be set off against income under the head
“Salaries”.
c. Where the net result of computation under the head ‘Capital Gaings’ is a loss, such capital loss
cannot be set-off against income under any other head.
d. Speculation loss and loss from the activity of owning and maintaining race horses cannot be
set off against income under any other head.

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CARRY FORWARD OF LOSSES
After adjusting the Intra-head set-off and inter-head set-off against the income of the same
3
AGGREGATION OF INCOME, SET OFF OR CARRY FORWARD OF LOSSES available at
https://www.studocu.com/in/document/symbiosis-international-university/taxation-law/10-setoff-and-carry-
forward/41144720 (last visited on March 29,2024)
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financial year, there could still be some losses remaining, or there is not enough income or profit
to adjust the losses in that particular financial year. Losses can be carried forward to the future
assessment years and set off against the income of those years.

Thus, if due to inadequacy or absence of income in the relevant Assessment year, loss cannot be
adjusted under section 71 then it can be carried forward by the assessee to the subsequent
Assessment year and can be adjusted against income of that year. However, all losses cannot be
carried forward. Only following losses can be carried forward by the assessee:
1. Loss under head "house property" i.e. house property loss [Section 71B].
2. Loss under head "profit or gains of business or profession"
(a) Business loss [Section 72];
(b) Speculative business loss [Section 73];
(c) Specified Business loss [Section 73A).
3. Loss under head "Capital gain" i.e. capital loss [Section 74].
4 . Loss from the activity of owning and maintaining race horses [Section 74A].

Conditions: In general, to carry forward above losses following conditions must be fulfilled by
assessee except in few cases:
(i) No loss would be carried forward unless Return of loss is filed by the assessee
[Section 80]. It should be filed on or before due date mentioned under Section 139(1)
in prescribed form and verified in prescribed manner. It must contain all other
particulars as prescribed under law. [Section 139(3)]
(ii) Loss to be carried forward, must be determined by Assessing Officer.
(iii) Delay in filing return of loss can be condoned by Assessing Officer with prior
permission of higher income tax Authorities. However, quantum of loss is important
to decide the nature of higher IT Authority Competent in giving permission to the
Assessing Officer for condoning the delay.
(iv) Maximum period for which loss can be carried forward is 8 years.
(v) Though loss can be carried forward for maximum 8 years but it must be adjusted
against the income (if any) of the subsequent Assessment year and balance is to be
carried forward further to the next subsequent Assessment year otherwise carried
forward loss to the extent of income of immediate subsequent Assessment year cannot
be carried forward further.
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CARRY FORWARD & SET-OFF OF LOSS FROM HOUSE PROPERTY [SECTION
71B] (i) Set-off and Carry Forward & Set-off of losses: In any assessment year, if there is a loss
under the head ‘Income from house property’, such loss will first be set-off against income from
any other head to the extent of` 2,00,000 during the same year. The unabsorbed loss will be
carried forward to the following assessment year to be set-off against income under the head
‘Income from house property’.
(ii) Maximum period for carry forward & set-off of losses: The loss under this head is allowed to
be carried forward upto 8 assessment years immediately succeeding the assessment year in which
the loss was first computed. For example, loss from one house property can be adjusted against
the income from another house property in the same assessment year. Any loss under the head
‘Income from house property’ can be set off against any income under any other head to the
extent of 2,00,000 in the same assessment year. However, if after such set off, there is still any
loss under the head “Income from house property”, then, the same shall be carried forward to the
next year.

CARRY FORWARD AND SET-OFF OF BUSINESS LOSSES [SECTIONS 72]

Section 72 covers the carry forward and set-off of losses arising from a business or professions if
following conditions are satisfied4:
a. The loss should have been incurred in business, profession or vocation.
b. The loss should not be in the nature of a loss in the business of speculation.
c. The loss may be carried forward and set-off against the income from business or profession
though not necessarily against the profits and gains of the same business or
profession in which the loss was incurred. However, a loss carried forward cannot, under any
circumstances, be set-off against the income from any head other than “Profits and gains of
business or profession”
d. The loss can carried forward and set off only against the profits of the assessee who incurred
the loss. That is, only the person who has incurred the loss is entitled to carry forward or set off
the same. Consequently, the successor of a business cannot carry forward or set off the losses of
his predecessor except in case of succession by inheritance.
e. A business loss can be carried forward for a maximum period of 8 assessment years

4
Carry forward of losses available at https://taxguru.in/income-tax/all-about-carry-forward-and-set-off-of-losses-
under-the-income-tax-act.html (last visited on March 29,2024)
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immediately succeeding the assessment year in which the loss was incurred.
f. As per section 80, the assessee must have filed a return of loss under section 139(3) in order to
carry forward and set off a loss. However, this condition does not apply to a loss from
house property carried forward under section 71B and unabsorbed depreciation carried
forward under section 32(2).

It was held by Calcutta High Court in CIT v Prem Chand Jute Mills 5 the business loss can be set
off against income derived from letting out of commercial assets.

The Supreme Court of India held in Western State Trading Company Limited v CIT 6 that such
carried forward business loss can be adjusted against business income of subsequent Assessment
year which may be taxable under any other heads of income. In this case assessee was having
shares as stock-in-trade. Dividend on such shares would form the part of business income though
it is taxable under Section 56(2) Le. "Income from other sources". So carried forward business
loss can be set off against dividend of subsequent Assessment year. This decision of Supreme
Court was upheld by Madras High Court in 2003 in CIT v Ram Nath Goenka.

CARRY FORWARD AND SET OFF OF LOSSES & DEPRECIATION IN CASE OF

AMALGAMATION, CONVERSION, MERGER & DEMERGER, (SEC 72A, 72AA,
72AB):-
As a matter of general principle the carry forward & set off is permitted to a person who has
incurred these losses. However, there are exceptions to this rule as under:-
1. Amalgamation of companies
2. Demerger
3. Conversion of proprietary concern/ firm into a company
4. Amalgamation of a banking company with banking institution.
5. Merger/Demerger of cooperative banks

Conditions to be satisfied:-
1. Amalgamation:-7
a. Eligible assessee:- 1. company owing industrial undertaking (see notebelow) or a ship or a
5
AIR 1978 Cal
6
(1971) 80 ITR 21 (SC)
7
DR. JOYTI RATTAN, TAXATION LAWS, 429-430 (BHARAT’S LAW HOUSE PVT LTD. 2009).
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hotel, 2. Banking company under banking regulation act, 1949 with a specified bank, 3. Public
sector airlines with other public sector airlines.
b. The amalgamating company has been engaged in the business in which the accumulated loss
occurred or depreciation remains unabsorbed for 3 years or more years.
c. The amalgamating company has held continuously as on the date of amalgamation at least
three-fourths of the book value of fixed assets held by it two years prior to the date of
amalgamation.
d. The amalgamated company continues to hold at least three-fourths of the book value of fixed
assets of the amalgamating company which it has acquired as a result of amalgamation for five
years from the effective date of amalgamation.
e. The amalgamated company continues the business of the amalgamated company for a
minimum period of 5 years.
f. Any other condition as may be prescribed.8

If the above specified conditions are not fulfilled, then that part of brought forward loss and
unabsorbed depreciation which has been set off by the amalgamated company shall be treated as
the income of the amalgamated company.

Note:- Additional conditions under Rule 9C for industrial undertaking:-

a. The amalgamated company, owning an industrial undertaking of the amalgamating company
by way of amalgamation, shall achieve the level of production of at least 50% of the installed
capacity within 4 years from the date of amalgamation and continue it till the end of 5 years from
the date of amalgamation. However, the C.G. may relax the condition of minimum level of
production or time period in suitable cases having regard to genuine efforts made by the
amalgamated company to attain the prescribed level of production and the circumstances
preventing such conditions.
b. The amalgamated company shall furnish to the A.O. a certificate in Form No. 62, duly verified
by an accountant, with reference to the books of accounts and other documents showing
particulars of production, along with return of income for the assessment year relating to the
previous year during which the precribed level of production is achieved and for subsequent
assessment years relevant to the previous year falling within 5 yrs from the date of

8
SET OFF AND CARRY FORWARD OF LOSSES, available at https://nritaxservices.com/SetOff%20and
%20Carry%20forward%20of%20Losses/M__75. (last visited on march 30, 2024)
11 | P a g e
amalgamation.

2. Demerger:-
In case of demerger, the accumulated loss and unabsorbed of the demerged company will be
allowed to be carried forward and set off in the hands of the resulting company.
Central govt. may specify conditions as it consider necessary to ensure that demerger is for
genuine business purposes.
Computation of loss/depreciation to be carried forward to the demerged company:-
If the loss/depreciation is directly relatable to the undertaking transferred to the resulting
company, them such loss/depreciation shall be allowed to be carried forward in the hands of the
resulting company.
Where however, such loss/depreciation is not directly relatable to the undertaking transferred to
the resulting company, them such loss/depreciation it will be apportioned between the demerged
and the resulting company.9

3. Loss in case of Conversion of proprietary concern/ firm into a company (Sec

72A(4)):-
Sub section (4) has been inserted with effect from the A.Y. 1999-2000which states that in case of
succession of a business where a firm is succeeded by a company fulfilling the conditions u/s 47
(xiii) or a proprietary concern is succeeded by a company fulfilling the conditions u/s 47 (xiv),
the accumulated loss and the unabsorbed depreciation of the predecessor firm or proprietary
concern as the case may be, shall be deemed to be the loss and unabsorbed depreciation for the
successor company for the previous year in which the business reorganization took place.
If the specified conditions u/s 47(xiii) and 47(xiv) are not complied with, then brought forward
loss and unabsorbed depreciation which has been set off shall be treated as the income of the
successor company chargeable to tax in the year in which such conditions are not complied with.

One of the conditions for carry forward of the loss of the firm is that theaggregate of the
shareholding in the company of the partners of the firm is not less than 50 per cent of the total
voting power in the company and their shareholdings continues to be as such for a period of 5
years from the date of the succession.

9
SETOFF AND CARRY FORWARD, https://support.taxaj.com/portal/en/kb/articles/set-off-and-carry-forwardof-
losses. (last visited on March 29, 2024).
12 | P a g e
 4. Amalgamation of a banking company with banking institution:
Section 72AA has been inserted with effect from the A.Y. 2005-06 for providing carry forward
& set off of the accumulated loss and the unabsorbed depreciation of a banking company, against
the profits pf a banking institution under a scheme of amalgamation sanctioned by the Central
Government.
Section 72AA would be applicable if the following conditions are satisfied:
1. There is an amalgamation of a “banking company” with any other “banking institution”.
Banking company for this purpose means a company which transacts the business of banking in
India. A banking institution for this purpose means any banking company and includes State
Bank of India or a scheduled bank.
2. The amalgamation is sanctioned and brought into force by the Central Government u/s 45(7)
of the Banking Regulations Act, 1949.
3. The provisions of section 2(1b)(i)/(ii)/(iii) may or may not be satisfied.
4. The provisions of section 72A may or may not be satisfied.

Accumulated loss does not include speculative business loss.

5. Accumulated loss and unabsorbed depreciation allowance in business

reorganization of cooperative banks (Sec 72AB, w.e.f. A.Y. 2008-09): -
The successor cooperative bank can set off and carry forward loss and depreciation allowance of
the predecessor cooperative bank if following conditions are satisfied:-
A. The predecessor has been engaged in the business of banking for three or more years.
B. The Predecessor has held at least ¾ of the book value of fixed assets of the predecessor
acquired through business reorganization, continuously for a minimum period of 5 years
immediately succeeding the date of business reorganization.
C. The successor continues the business of the predecessor for a minimum period of 5 years from
the date of business reorganization.
D. The successor fulfills such other conditions as may be prescribed.

LOSSES FROM NON-SPECULATIVE BUSINESS

If losses under business or profession (non-speculative business) are not fully adjusted in the
same financial year in which losses were incurred, they can be carried forward to the next 8
13 | P a g e
assessment years. Such losses can be adjusted only against income from business or profession
and can only be carried forward if the ITR is filed on or before the due date as per Section
139(1). It is not necessary that the business from which such loss is incurred should be in
continuance to carry forward losses.

LOSSES IN SPECULATION BUSINESS [SECTION 73]

The meaning of the expression ‘speculative transaction’ as defined in section 43(5) and the
treatment of income from speculation business has already been discussed under the head
“Profits and gains of business or profession”.
(i) Set-off and Carry forward & set-off of loss from speculation business: Since
speculation is deemed to be a business distinct and separate from any other business
carried on by the assessee, the losses incurred in speculation can be neither set off in
the same year against any other non-speculation income nor be carried forward and
set off against other income in the subsequent years.Therefore, if the losses sustained
by an assessee in a speculation business cannot be set-off in the same year against any
other speculation profit, they can be carried forward to subsequent years and set-off
only against income from any speculation business carried on by the assessee.
(ii) Maximum period for carry forward & set-off of losses: The loss in speculation
business can be carried forward only for a maximum period of 4 years from the end of
the relevant assessment year in respect of which the loss was computed. Loss from the
activity of trading in derivatives, however, is not to be treated as speculative loss.
(iii) When a business of a company deemed to be carrying on a speculation business: The
Explanation to this section provides that where any part of the business of a company
consists in the purchase and sale of the shares of other companies, such company shall
be deemed to be carrying on speculation business to the extent to which the business
consists of the purchase and sale of such shares.
However, this deeming provision does not apply to the following companies –
(1) A company whose gross total income consists of mainly income chargeable under the
heads “Interest on securities”, “Income from house property”, “Capital gains” and “Income
from other sources”;
(2) A company, the principal business of which is –
(i) the business of trading in shares; or
(ii) the business of banking; or
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 (iii) the granting of loans and advances.
Thus, these companies would be exempted from the operation of this Explanation.
Accordingly, if these companies carry on the business of purchase and sale of shares of other
companies, they would not be deemed to be carrying on speculation business.
Loss from illegal speculative business (i.e. business in banned items) cannot be carried
forward to the subsequent year and cannot be set off against speculative business income of
subsequent assessment year. [CIT v Kurji Jinabhai Kotecha]10
Where agent is carrying on speculative business on behalf of his principle then loss is non
speculative loss (business loss) of agent [CIT v Shahpartap Chand Nowpaji11]

LOSSES OF BUSINESS SPECIFIED U/S 35AD (SECTION 73A)

 Loss of any business specified u/s 35AD shall be allowed to be set-off against the income of
any other specified business under PGBP
 If loss of the assessment year is not set-off fully against the profit of the assessment year shall
be allowed to carry forward the loss up to the “n” numbers of year (without limit) and can be
set-off against the income from the specified business u/s 35AD.
 This means the loss of specified business cannot be set off against the income of any other
non-specified business not in current year.
 The losses can be carried forward in the following year even if the assesse has not filed the
return of losses (section 80)

LOSSES UNDER THE HEAD ‘CAPITAL GAINS’ [SECTION 74]

Carry forward & set-off of losses: Section 74 provides that where for any assessment year, the
net result under the head ‘Capital gains’ is short term capital loss or long term capital loss, the
loss
shall be carried forward to the following assessment year to be set off in the following manner:

(1) Short-term capital loss: Where the loss so carried forward is a short-term capital loss, it shall
be set off against any capital gains, short term or long term, arising in that year.
(2) Long-term capital loss: Where the loss so carried forward is a long-term capital loss, it shall
be set off only against long term capital gain arising in that year.
10
(1977) 107 ITR 101 (SC)
11
(1983) 139 ITR 149 (AP)
15 | P a g e
(3) Loss under head capital gains: Net loss under the head capital gains cannot be set off against
income under any other head.
(4) Maximum period for carry forward & set-off of loss: Any unabsorbed loss shall be carried
forward to the following assessment year up to a maximum of 8 assessment years immediately
succeeding the assessment year for which the loss was first computed.

LOSSES FROM OWNING AND MAINTAINING RACE-HORSES [SECTION -74A OF

THE INCOME TAX ACT, 1961]:
• Can be carry forward up to next 4 assessment years from the assessment year in which the loss
was incurred;
• Cannot be carried forward if the return is not filed within the original due date;
• Can only be set off against income from owning and maintaining race-horses only.

Points to note:
1. A taxpayer incurring a loss from a source, income from which is otherwise exempt from tax,
cannot set off these losses against profit from any taxable source of Income
2. Losses cannot be set off against casual income i.e. crossword puzzles, winning from lotteries,
races, card games, betting etc.12

LOSS OF PARTNERSHIP FIRMS [SECTION 75 OF THE INCOME TAX ACT, 1961]:

Before the assessment year 1993-94 special provisions are applicable to carry forward the loss of
the partnership firm but at present same rules are applicable as applicable to their assesses. For a
partnership firm, profits are to be shared by the partners and are exempt in the hands of partners
under section 10(2A). but the losses of partnership firms are not shared amongst Partners. Thus,
partnership firm can only set off and carry forward and set off its own losses and not of partners.

SECTION 78: CARRY FORWARD AND SET OFF OF LOSSES IN CASE OF CHANGE
IN THE CONSTITUTION OF FIRM OR ON SUCCESSION:-
Sec 78(1) Change in the constitution:- When a change has occurred in the constitution of a
firm, then nothing shall entitle the firm to have carry forward and set off so much of the loss
proportionate to the share of the retired or deceased partner as exceeds his share of profits, if any,

12
SET OFF AND CARRY FORWARD OF CAPITAL GAINS AND LOSSES, https://kuvera.in/blog/set-offcarry-
forward-of-capital-gains-losses/. (last visited on march 30, 2024)
16 | P a g e
of the previous year in the firm. No partner can also avail the benefit of the said loss.

Sec 78(2) Succession:- Where any person carrying on any business or profession has been
succeeded to in such capacity by another person otherwise than by inheritance, nothing in the
chapter VI shall entitle any person other than the person incurring the loss to have it carried
forward and set off against his income.

SPECIAL PROVISIONS FOR SET OFF & CARRY FORWARD OF LOSSES IN CASE
OF CERTAIN COMPANIES(SEC. 79)13:-
1. Applicable to companies in which the public is not substantially interested.
2. There has been a change in the shareholding pattern in the previous year.
3. No loss incurred prior to the previous year unless:-
a. At least 51% shares must be held by the previous beneficial owners having voting
power in the year in which the loss was incurred.
b. Nothing contained in this section applies in case of death of a shareholder or gift by a
shareholder to his relative.
c. Nothing contained in this section will apply to an Indian company which is a subsidiary
of a foreign company on account of amalgamation or demerger of the foreign company.

SUBMISSION OF RETURN OF LOSSES [SECTION 80] 14

As per section 80, business loss under section 72(1), speculation business loss under section
73(2), loss from specified business under section 73A(2), loss under the head “Capital Gains”
under section 74(1) and loss from activity of owning and maintaining race horses under section
74A(3), which has not been determined in pursuance of a return filed under section 139(3) can be
carried forward and set-off. Thus, the assessee must have filed a return of loss under section
139(3) in order to carry forward and set off of such losses.

Such a return of loss should be filed within the time allowed under section 139(1). However, this
condition does not apply to a loss from house property carried forward under section 71B and
unabsorbed depreciation carried forward under section 32(2).
13
Carry forward and set off of losses available at https://taxguru.in/income-tax/all-about-carry-forward-and-set-off-
of-losses-under-the-income-tax-act.html#google_vignette ( Last visited on March 30,2024)
14
AGGREGATION OF INCOME,SET OFF OR CARRY and FORWARD OF LOSSES available at
https://www.studocu.com/in/document/guru-gobind-singh-indraprastha-university/bba-llb/aggregation-of-income-
set-off-and-carry-forward-of-losses/44445852( Last visited on March 30,2024)
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PROVISIONS AT A GLANCE15

15
Set off and carry forward losses available at https://www.studocu.com/in/document/jain-university/mba/10-direct-
tax/30300852 ( last visited at on March 2024)
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CONCLUSION
In conclusion, the provision for carrying forward of losses under the Income Tax Act serves as a
crucial mechanism for taxpayers to mitigate the impact of losses incurred in one financial year on
their future tax liabilities. By allowing the offset of such losses against future profits, the Act
promotes fairness and equity in the taxation system, enabling businesses and individuals to
recover from financial setbacks and continue their operations without undue burden.

Furthermore, the provision incentivizes entrepreneurship, investment, and risk-taking by

providing a safety net against potential losses, thereby fostering economic growth and
innovation. It also encourages prudent financial management and strategic planning, as taxpayers
are motivated to optimize their operations to maximize profits and minimize losses.

The flexibility afforded by the carry-forward provision acknowledges the cyclical nature of
business and economic activities, providing relief to taxpayers during periods of downturn and
ensuring stability and continuity in the tax regime.

Overall, the carry-forward of losses provision embodies the principles of fairness, efficiency, and
pragmatism in the taxation system, facilitating sustainable economic development and resilience
in the face of uncertainties

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BIBLIOGRAPHY
PRIMARY SOURCES
Statute:
• THE INCOME TAX ACT, 1961.

SECONDARY SOURCES
Books:
•DR. JYOTI RATTAN, TAXATION LAWS (Bharat’s Law House, Pvt. Ltd. 2009)

Websites:
• LEGAL SERVICES INDIA, https://www.legalservicesindia.com/article/1345/CarryForward-
and-Set-off-of-Losses.html. (last visited on March 30,2024)
• TAX GURU, https://taxguru.in/income-tax/tax-planning-set-off-carry-forward-losses.html.
(last visited on March 30,2024)
• TAXAJ, https://support.taxaj.com/portal/en/kb/articles/set-off-and-carry-forward-of-losses.
(last visited on March 30,2024)
• KUVERA, https://kuvera.in/blog/set-off-carry-forward-of-capital-gains-losses/. (last visited on
March 30,2024)
•TAX2WIN,https://tax2win.in/guide/set-off-and-carry-forward-of-losses. (last visited on March
30,2024)
•NRITAXSERVICE,https://nritaxservices.com/SetOff%20and%20Carry%20forward%20of%2
0Losses/M__75. (last visited on March 30,2024)

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