Carry Forward and Set Off of Business Losses [Section 72]

Section 72 of the Income Tax Act, 1961, governs the carry forward and set-off of business losses, allowing taxpayers to adjust current-year losses against future profits. Below is a detailed breakdown of the provisions, conditions, and recent amendments:

1. Key Provisions of Section 72

A.  Eligibility for Carry Forward

• Applies to non-speculative business losses(speculative losses are covered under Section 73).
• Losses can be carried forward for 8 assessment yearsfrom the year of incurrence.
• Exceptions:
  • Specified businesses (e.g., under Section 35AD) can carry forward losses indefinitely.
  • Unabsorbed depreciation (Section 32) has no time limit.

B.  Conditions for Carry Forward

1. Timely Filing of Return:
   • The loss return must be filed by the due date under Section 139(1)(usually July 31 for individuals).
   • Late filing forfeits the right to carry forward losses (except for house property losses and unabsorbed depreciation).
2. Continuity of Business:
   • The business need notcontinue for carry-forward (post-2000 amendment).
   • However, losses can only be set off against business incomein future years.
3. Audit Requirements:
   • If turnover exceeds ₹1 crore (or ₹50 lakh for professionals), a tax audit under Section 44ABis mandatory to carry forward losses.

2. Set-Off Rules

A. Intra-Head Adjustment (Same Year)

• Business losses can be set off against:
  • Profits from any other business(non-speculative).
  • Income under any other head(except salary).

Example:

• Loss from Business A: ₹5 lakh
• Profit from Business B: ₹3 lakh
• Net taxable business income: ₹0 (₹2 lakh carried forward).

B. Inter-Head Adjustment (Same Year)

• Unadjusted losses can be set off against:
  • Salary, capital gains, or other sources (except winnings from lotteries, races, etc.).

C. Carry Forward to Future Years

• Carried-forward losses can onlybe set off against business income (not other heads).
• Order of set-off:
  1. Current year depreciation.
  2. Unabsorbed business loss.
  3. Unabsorbed depreciation .

3. Special Cases

A. Amalgamation/Demerger (Section 72A)

• Losses of the amalgamating company can be carried forward by the amalgamated entity if:
  • The amalgamation is approved by the NCLT.
  • The amalgamated company continues the business for 5 years.
• 2025 Amendment: Losses can no longer be “evergreened” (i.e., reset via mergers). The 8-year limitnow applies from the original loss year.

B. Change in Ownership

• Companies: Loss carry-forward is allowed only if 51% shareholdingremains unchanged.
• LLPs/Firms: Losses can transfer if conditions under Section 47(xiiib)are met.

C. Discontinued Business

• Losses can be carried forward only if the business is revived within 4 years.

4. Recent Changes (Budget 2025)

• Anti-Evergreening Rule: Prevents indefinite loss extension via mergers. The 8-year window is now fixed from the original loss year.
• Applicability: Effective from April 1, 2025, for mergers/reorganizations.

5. Practical Examples

Example 1: Basic Carry Forward

• AY 2024-25: Business loss = ₹10 lakh.
• AY 2025-26: Business profit = ₹6 lakh.
• Set-off: ₹6 lakh → Taxable income: ₹0.
• Remaining loss: ₹4 lakh (carried forward to AY 2026-27).

Example 2: Amalgamation

• Amalgamating Co.: Loss = ₹20 lakh (incurred in AY 2023-24).
• Amalgamated Co.: Profit = ₹15 lakh (AY 2025-26).
• Set-off: ₹15 lakh → Taxable income: ₹0.
• Remaining loss: ₹5 lakh (can be carried forward till AY 2031-32).

6. Key Takeaways

✅ 8-year limit for non-speculative losses (speculative: 4 years).

✅ Timely filing is critical (except for house property/unabsorbed depreciation).

✅ No continuity requirement for business (post-2000).

⚠️ New regime (2025): No inter-head set-off for house property losses.

📅 Amalgamation rules tightened to prevent evergreening