Brought Forward Losses Must Be Set Off in the Immediately Succeeding Year/Years

Under the Income Tax Act, brought forward losses must be set off against eligible income in the immediately succeeding years, subject to specific conditions. Here’s a structured breakdown:

1. Legal Requirement for Set-Off

• Section 72(1)(Business Losses) & Section 74 (Capital Losses) mandate that carried-forward losses must be adjusted at the first opportunity in subsequent years.
• No voluntary deferralis permitted—taxpayers cannot choose to skip set-off in a profitable year to carry losses further.

Exception:

• If there is no eligible incomein a particular year, losses continue to be carried forward within their respective time limits.

2. Order of Set-Off for Brought Forward Losses

When multiple losses are carried forward, the order of adjustment is strictly prescribed:

1. First, adjust current-year depreciation(if any).
2. Then, set off unabsorbed business losses(Section 72).
3. Next, adjust unabsorbed depreciation(Section 32(2)).
4. Finally, capital losses(STCL before LTCL, per Section 74).

Example:

• Brought forward business loss: ₹5 lakh
• Current-year business profit: ₹4 lakh
• Mandatory set-off: Full ₹4 lakh adjusted → Remaining loss: ₹1 lakh (carried forward).

3. Consequences of Not Setting Off Losses

• Legal violation: The Income Tax Department may disallow carry-forwardif losses are not adjusted when eligible income exists.
• Loss lapse: If not utilized within the permitted time frame (e.g., 8 years for business losses), the benefit is permanently lost.
• Case Law Support:
• CIT vs. Mother India Refrigeration Industries (1985): Courts have upheld that losses must be set offwhen possible and cannot be arbitrarily deferred.

4. Exceptions Where Set-Off is Not Required

1. No eligible income: If the taxpayer has no profits under the relevant head (e.g., no business income to absorb business losses).
2. Specific restrictions:

• • Speculative losses (Section 73) can onlybe set off against speculative profits.
  • Race horse losses (Section 74A) require matching income from the same activity.

5. Practical Implications

A. For Businesses

• Plan cash flowsto ensure losses are absorbed when profits arise.
• Maintain recordsof brought-forward losses and their utilization.

B. For Capital Gains

• STCL must be used before LTCL.
• Example:
  • Brought forward STCL: ₹2 lakh
  • Current-year LTCG: ₹3 lakh
  • Cannotskip STCL—must first set off ₹2 lakh STCL (if STCG is unavailable), then remaining ₹1 lakh LTCG is taxable.

6. Comparison Across Loss Types

7. Key Takeaways

✅ Mandatory utilization: Brought forward losses must be set off when eligible income exists.

✅ Chronological order: Oldest losses are adjusted first (FIFO method).

⚠️ No cherry-picking: Taxpayers cannot selectively carry forward losses while ignoring available profits.

📅 Time-bound: Unused losses lapse after expiry (4–8 years, depending on type).