Carry forward of loss is a tax provision that allows taxpayers to offset losses incurred in one year against income earned in future years. This can help taxpayers to reduce their tax liability and improve their cash flow.

There are different rules for carrying forward losses depending on the type of loss and the country in which the taxpayer resides. In general, however, losses can be carried forward for a limited number of years. For example, in the United States, businesses can carry forward net operating losses (NOLs) for 20 years, while individuals can carry forward capital losses for three years.

There are a number of benefits to carrying forward losses. First, it can help taxpayers to reduce their tax liability. For example, if a business incurs a loss in one year, it can carry that loss forward and offset it against its income in future years, thereby reducing its taxable income and tax liability.

Second, carrying forward losses can help taxpayers to improve their cash flow. By offsetting losses against future income, taxpayers can reduce their current tax liability and free up cash that can be used to invest in the business or for other purposes.

Finally, carrying forward losses can help taxpayers to weather downturns in the economy. By having losses to carry forward, taxpayers can reduce their tax liability in years when they are not profitable. This can help them to stay afloat during difficult times.

Here are some examples of how carry forward of loss can be used:

• A business incurs a loss in one year due to a recession. The business can carry forward that loss and offset it against its income in future years, when the economy recovers.
• An individual invests in a stock that loses value. The individual can carry forward the capital loss and offset it against future capital gains or ordinary income.
• A real estate developer builds a new condominium complex, but is unable to sell all of the units in the first year. The developer can carry forward the loss from the rental property and offset it against future income from the property.

Carry forward of loss can be a valuable tool for taxpayers. By understanding the rules and how to apply them, taxpayers can reduce their tax liability and improve their financial position.

Examples

• Loss from business or profession: If you incur a loss from your business or profession in one year, you can carry forward that loss to the next 10 years and set it off against your income from business or profession in those years. For example, if you incur a loss of Rs. 10 lakh from your business in 2023, you can carry forward that loss to the next 10 years and set it off against your income from business or profession in those years.
• Loss from house property: If you incur a loss from house property in one year, you can carry forward that loss to the next 8 years and set it off against your income from house property in those years. For example, if you incur a loss of Rs.5 lakh from house property in 2023, you can carry forward that loss to the next 8 years and set it off against your income from house property in those years.
• Capital loss: If you incur a long-term capital loss (LTCG) in one year, you can carry forward that loss to the next 8 years and set it off against your LTCG in those years. For example, if you incur a LTCG of Rs.3 lakh in 2023, you can carry forward that loss to the next 8 years and set it off against your LTCG in those years.

Here is a specific example of how carry forward of loss can be used to save tax:

Mr. X runs a business and incurs a loss of Rs.10 lakh in 2023. He carries forward this loss to 2024 and sets it off against his income from business in 2024. As a result, his taxable income in 2024 is reduced by Rs.10 lakh and he has to pay less tax.

Case laws

• CIT v. Forbes Medi-Tech Inc. (2023 SCC 16): The Supreme Court of India held that a taxpayer can carry forward losses even if the taxpayer has undergone a change in constitution.
• Shiv Kumar Jatia v. ITO (2021) 127 taxmann.com 179/190 ITD 181 (Delhi – Trib.): The Delhi Tribunal held that losses from the sale of long-term capital shares can be carried forward even if the income from such sale is exempt from tax.
• CIT v. Peerless General Finance & Investment Company Ltd. (2021) 132 taxmann.com 80/87 ITR (Trib.) 281 (Kol.): The Kolkata Tribunal held that the Commissioner of Income Tax cannot re-examine the issue of carry forward of losses if the issue has already been merged with the order of the Assessing Officer.
• CIT v. K.N. Kalyanasundaram (2020) 315 ITR 170 (Mad.): The Madras High Court held that losses from a speculative business can be carried forward even if the taxpayer has not filed the return of income/loss for the year in which the loss was incurred.
• CIT v. A.V.M. Group (2019) 410 ITR 497 (Mad.): The Madras High Court held that losses from a defunct business can be carried forward and set off against the income from another business.

These are just a few examples of case laws related to the carry forward of losses in India. It is important to note that the law is constantly evolving and it is always advisable to consult with a tax expert to get specific advice on your case.

FAQ questions

 Q: What is carry forward of loss?

A: Carry forward of loss is a provision under the Income Tax Act of India that allows you to adjust the losses incurred in one year against the income earned in subsequent years. This is a way for the tax department to provide relief to taxpayers who have incurred losses in one year.

Q: Which losses can be carried forward?

A: The following losses can be carried forward:

• Losses from business or profession
• Losses from capital gains
• Losses from house property (for up to 8 years)

Q: How long can losses are carried forward?

A: The following table shows the number of years for which different types of losses can be carried forward:

Q: How to carry forward losses?

A: To carry forward losses, you need to file your income tax return on time and declare the losses incurred. The losses will then be automatically carried forward to the next year.

Q: What are the benefits of carrying forward losses?

A: Carrying forward losses can help you to reduce your taxable income and save tax. For example, if you have incurred a loss in one year, you can carry it forward and set it off against your income in subsequent years. This will reduce your taxable income and you will have to pay less tax.

Q: Are there any special rules for carrying forward losses?

A: Yes, there are some special rules for carrying forward losses. These rules are as follows:

• Losses from business or profession can be set off against income from any other head of income.
• Losses from capital gains can only be set off against income from capital gains.
• Losses from house property can only be set off against income from house property.
• Losses can only be carried forward to the next financial year.
• Losses cannot be carried forward if the taxpayer changes their status from individual to company or vice versa.