1. Set-Off Rules for Current Year Losses
Intra-head adjustment (Section 70):
- Business losses can be set off against other business income of the same firm
- Example: Loss from manufacturing unit can offset profit from trading division
Inter-head adjustment (Section 71):
- Unadjusted business losses can be set off against:
- Capital gains
- Income from other sources
- Cannot be set off against partner’s salary/interest income
2. Carry Forward Provisions
Eligibility:
- Must file return by due date (usually July 31)
- Audit required if turnover exceeds ₹1 crore (₹50 lakh for professionals)
Duration:
- Business losses: 8 assessment years
- Unabsorbed depreciation: No time limit
Restrictions:
- Only against firm’s future business income
- Cannot be allocated to partners for personal set-off
3. Special Cases
Change in Firm Constitution:
- Losses remain with firm if:
- Same business continues
- Majority interest (51%) remains unchanged
- New partners cannot claim pre-admission losses
Dissolution:
- Unabsorbed losses lapse
- Cannot be transferred to successor entities
Conversion to Company/LLP:
- Section 47(xiii) allows loss carryforward if:
- All assets/liabilities get transferred
- Shareholding pattern remains same
- Business continuity for 5 years
4. Partner-Level Implications
Partner’s Share of Loss:
- Can be set off against:
- Other business income
- Capital gains
- Income from other sources
- Remaining loss lapses (cannot be carried forward)
Restrictions:
- Limited to partner’s capital contribution
- Cannot create negative income for partners
5. Compliance Requirements
- Maintain proper books of account
- File ITR-5 before due date
- Preserve documentation for 8+ years
- Disclose brought-forward losses in audit reports
Example:
ABC & Co. (Partnership Firm)
- AY 2023-24: Loss ₹20 lakh
- AY 2024-25: Profit ₹15 lakh
- Set-off: ₹15 lakh adjusted
- Carry forward: ₹5 lakh (for next 7 years)
