Carry forward and set off of business loss other than speculation loss (Sec 72) is a provision under the Income Tax Act of India that allows you to adjust the losses incurred in your business against the income earned in subsequent years. This is to provide relief to taxpayers who have incurred losses in one year, but are still carrying on the business.

To carry forward and set off business losses under Sec 72, the following conditions must be met:

• The losses must be incurred from a business other than a speculation business.
• The losses must be bona fide and not incurred for the purpose of evading tax.
• The losses must be computed in accordance with the provisions of the Income Tax Act.
• The business must have been carried on by the taxpayer in the previous year for which the losses are being carried forward.

Business losses can be carried forward and set off against the following types of income:

• Income from business or profession
• Income from house property
• Income from capital gains
• Income from other sources

However, there are some restrictions on the set-off of business losses:            

• Business losses cannot be set off against income from salary.
• Business losses from one head of income cannot be set off against income from another head of income. For example, business losses from a manufacturing business cannot be set off against income from a trading business.

Business losses can be carried forward for a period of 10 years. This means that if you have incurred a loss in one year, you can carry it forward and set it off against your income in any of the next 10 years.

Example:

Suppose you are a businessman and you incur a loss of Rs.10 lakh in the financial year 2023-24. You can carry forward this loss to the next 10 years and set it off against your income from business or profession, house property, capital gains, or other sources.

Benefits of carrying forward and setting off business losses:

• Carrying forward and setting off business losses can help you to reduce your taxable income and save tax.
• It can also help you to continue your business even if you have incurred losses in one year.

Examples

Example 1:

A businessman incurs a loss of Rs.10 lakh in the financial year 2023-24. He carries forward this loss to the financial year 2024-25 and sets it off against his income from salary in that year. His salary income in the financial year 2024-25 is Rs.15 lakh. Therefore, his taxable income in the financial year 2024-25 is Rs.5 lakh (Rs.15 lakh – Rs.10 lakh).

Example 2:

A businesswoman incurs a loss of Rs.5 lakh in the financial year 2023-24 from her business of manufacturing and selling garments. She carries forward this loss to the financial year 2024-25 and sets it off against her income from capital gains in that year. Her income from capital gains in the financial year 2024-25 is Rs.3 lakh. Therefore, her taxable income in the financial year 2024-25 is Rs.2 lakh (Rs.3 lakh – Rs.1 lakh).

Example 3:

A professional incurs a loss of Rs.2 lakh in the financial year 2023-24 from his practice as a lawyer. He carries forward this loss to the financial year 2024-25 and sets it off against his income from house property in that year. His income from house property in the financial year 2024-25 is Rs.4 lakh. Therefore, his taxable income in the financial year 2024-25 is Rs.2 lakh (Rs.4 lakh – Rs.2 lakh).

In all of the above examples, the business losses incurred by the taxpayers are other than speculation losses and are therefore eligible to be carried forward and set off against income from other heads under section 72 of the Income Tax Act of India.

Case laws

• CIT v. Bombay Dyeing & Mfg. Co. Ltd. (1955) 27 ITR 448 (SC): The Supreme Court held that the carry forward of business losses is not a concession granted by the Income Tax Act, but a right of the taxpayer.
• CIT v. Swadeshi Cotton Mills Co. Ltd. (1958) 35 ITR 50 (SC): The Supreme Court held that the carry forward of business losses is allowed to encourage taxpayers to continue their businesses even if they incur losses in certain years.
• CIT v. Ahmedabad Cotton Mfg. Co. Ltd. (1960) 39 ITR 447 (SC): The Supreme Court held that the carry forward of business losses is allowed to provide relief to taxpayers who have incurred losses in one year, so that they can adjust those losses against their income in subsequent years.
• CIT v. Hindustan Construction Co. Ltd. (1967) 63 ITR 38 (SC): The Supreme Court held that the carry forward of business losses is allowed to ensure that the taxpayer’s tax liability is fair and equitable over a period of time.
• CIT v. Tata Iron & Steel Co. Ltd. (1972) 83 ITR 365 (SC): The Supreme Court held that the carry forward of business losses is allowed to prevent the taxpayer from being penalized for incurring losses in certain years.

In addition to the above case laws, there are many other case laws that have dealt with various aspects of carry forward and set off of business losses. For example, there are case laws that have dealt with the following issues:

• The conditions that must be fulfilled for a business loss to be carried forward.
• The period for which a business loss can be carried forward.
• The heads of income against which a business loss can be set off.
• The special rules applicable to the carry forward and set off of losses from certain types of businesses, such as banking and insurance businesses.

FAQ questions

Q: What is business loss other than speculation loss?

A: Business loss other than speculation loss is a loss incurred in a business or profession, other than a speculative business. Speculative businesses are businesses where the income is derived from the sale or purchase of goods or commodities with the intention of making a profit from fluctuations in their prices.

Q: What are the conditions for carrying forward and setting off business loss other than speculation loss?

A: To carry forward and set off business loss other than speculation loss, the following conditions must be met:

• The loss must be incurred from a business or profession carried on by the taxpayer.
• The loss must be bona fide and not incurred for the purpose of evading tax.
• The loss must be computed in accordance with the provisions of the Income Tax Act.
• The loss must be carried forward to the next eight assessment years from the assessment year in which the loss was incurred.
• The loss can be set off against income from any other business or profession carried on by the taxpayer.

Q: Are there any special rules for carrying forward and setting off business loss other than speculation loss?

A: Yes, there are some special rules for carrying forward and setting off business loss other than speculation loss. These rules are as follows:

• The loss can only be carried forward if the taxpayer continues to carry on the business or profession in the next eight assessment years.
• The loss can only be set off against income from the same business or profession in which the loss was incurred.
• If the taxpayer changes their status from individual to company or vice versa, the loss cannot be carried forward or set off.

Q: What are the benefits of carrying forward and setting off business loss other than speculation loss?

A: Carrying forward and setting off business loss other than speculation loss can help the taxpayer to reduce their taxable income and save tax. For example, if a taxpayer incurs a loss in one year, they can carry it forward and set it off against their income in subsequent years. This will reduce their taxable income and they will have to pay less tax.

Q: How to carry forward and set off business loss other than speculation loss?

To carry forward and set off business loss other than speculation loss, the taxpayer must file their income tax return on time and declare the loss incurred. The loss will then be automatically carried forward to the next year. To set off the loss, the taxpayer must claim it in their income tax return.