Chapter 7:

Set off or carry forward

Section 70: Set off under the same head (Inter–source set off)
General Rule: Losses from one source of income can be set off against income from another source under
the same head of income.

Exceptions to the above rule:

Ü Short term capital loss can be adjusted against STCG or LTCG.
Ü Long term capital loss can be adjusted only against LTCG, not against STCG.

Other exceptions:
Ü Loss from speculation business can be set off only against speculation business gain.
Ü Loss from activity of owning and maintaining race horse – Set off from similar business income.
Ü Loss from specified business u/s 35AD – Can be set off only against 35AD business income.
Ü Loss from exempt source cannot be set off against profits from taxable source.
Ü Loss from winning income (lottery, etc.) – Cannot be set off at all. Not even against lottery winning.

Section 71: Set off of loss under one head with income of other head (Inter–head set off)
General Rule:
Any loss (except CG loss) can be set off against income under any other head (incl. CG)

Exception:
Ü PGBP loss cannot be set off against salary income
Ü Loss under the head CG cannot be set off against any other head of income.
Ü Loss under head HP can be set off against any other head to the extent of Rs. 2 lakhs only. The
unabsorbed loss over and above can be c/f and set off.
Ü Loss that cannot be set off inter-source (i.e., refer sec 70), cannot be set off inter-head.

Note: Where losses are c/f, inter-head adjustment is not allowed (except UAD, etc.)

Section 71B: Carry forward and set off of loss from HP

Loss under head HP can be c/f for 8 AYs immediately succeeding the AY in which loss was computed and can
be set off against income from the head HP.

Note:
1. Loss under head HP can be c/f even if ROI is filed after due date u/s 139(1)
2. Loss under HP cannot be set off against any other head if tax payable u/s 115BAC.

Section 72: Carry forward and set off of business losses

Loss under head PGBP (except loss from speculative business) can be c/f for 8 AYs immediately succeeding
the AY in which loss was computed and can be set off against income from head PGBP only.

Exception:
Ü UAD, unabsorbed capex on scientific research and capex on family planning – C/F indefinitely.
Ü Speculative business loss can be c/f for 4 AYs & set off against same income. [Sec 73]

Note: Loss can be c/f even if the business has been discontinued.

Set off or carry forward 7.1

 Section 72A: C/F and set off of business losses and UAD in case of amalgamation and demerger: 8

Amalgamation:

Applicability Applies to amalgamation of:

Ü Company owning industrial undertaking, ship or hotel with other company,
Ü Banking company with specified bank,
Ü Public sector companies with other public sector companies (PSC)
Ü Erstwhile public sector company (now not a PSC because of strategic
disinvestment) with any other company, if share purchase agreement restricted
immediate amalgamation and such amalgamation is done within 5 years from end of
PY in which such restriction ends.

Strategic disinvestment means sales of shares by CG/SG/PSC and reducing SH to

below 51% and transfer of control to buyer.
Treatment of Ü Loss & UAD of amalgamating co. – Deemed loss/UAD of amalgamated co. in year of
loss and amalgamation.
depreciation Ü In case of erstwhile public sector co., consider loss and UAD only till date of
strategic disinvestment.

Note – Such loss can be c/f by amalgamated co. for Fresh 8 AYs.
Conditions to By Amalgamating co.:
be fulfilled Ü It is engaged in business from which such loss or UAD arose for >= 3 years.
Ü It holds at least 3/4th of book value of fixed asset held by it 2 years prior to date
of amalgamation.

By Amalgamated co.:
Ü It holds 3/4th of book value of fixed asset – For 5 years from amalgamation,
Ü It continues business of amalgamating co. for at least 5 years,
Ü Follow other prescribed condition (Such as – Achieve production of 50% of
installed capacity before end of 4 years and maintain such minimum production till
end of 5 years from date of amalgamation)
Consequences Ü Unutilised loss or UAD – Lapse
of non- Ü Utilised loss or UAD – Deemed income in hands of amalgamated co. in year of
fulfilment failure to comply.

Demerger: Treatment of losses and UAD in case of demerger:

Nature of undertaking transferred Treatment

If loss and UAD of demerged co. are directly Loss and UAD to be c/f and set off in
related to undertakings transferred to resulting co. hands of resulting co.
Where such loss/UAD is not directly related to the Apportion such loss/UAD between demerged
undertaking transferred and resulting co. based on proportion of asset
retained vs. transferred.

7.2 Set off or carry forward

CIT v. KBD Sugars and Distilleries Ltd. [2023] (SC)

Question Can a resulting entity set off and c/f losses of dysfunctional unit of demerged entity?
Analysis As per section 2(19AA), demerger means transfer (as per Companies Act) by the
demerged company of one or more undertaking to any resulting co. and that the
transfer of undertaking is on a going concern basis.

Held that – “Going concern basis” only means that transfer should be based on a 'going
concern', and it does not mean that the undertaking being transferred should be a
'going concern' as on the date of transfer.

It only means that undertaking being demerged should stand transferred in a manner
similar to the manner in which a 'going concern' is transferred

Held that if a unit were running and profitable, the same would not be available for
demerger. Hence, assessee was entitled to set off the b/f losses u/s 72A(4).

Reorganisation:

Type Applicability Treatment Condition

Firm/Proprietary Succession as per Accumulated loss and If sec 47 conditions
Concern to Company section 47 (xiii/xiv) UAD of predecessor not met, set off
Company to LLP Succession as per deemed as that of deemed income of
section 47 (xiiib) successor in PY of re- successor, taxable in
organisation. non-compliance year.

Note:
Sec 72A only covers accumulated losses and UAD. Therefore, speculation loss, if any, shall lapse in the
hands of amalgamating co. only and shall not be c/f or set off by amalgamated co.

Sec 72AA: Carry forward and set off in amalgamation in certain cases
Ü Notwithstanding anything contained in Sec 72A,
Ü In case of following amalgamation:
Amalgamating Amalgamated co. Scheme sanctioned by CG:
co.
Banking co. Other banking institution Under Banking Regulation Act
Banking co. Other banking institution Amalgamation within 5y of strategic disinvestment
Corresponding Other corresponding new Under Banking Companies Act
new bank bank
Government co. Other Government co. Under General Insurance Business Act
Ü Accumulated losses and UAD of amalgamating co. shall be deemed to be loss/UAD of amalgamated co.
for the PY in which amalgamation took place.

Notes
1. Such loss can be c/f by amalgamated co. for Fresh 8 AYs.
2. U/s 72AA, additional conditions as required u/s 72A, are not required to be fulfilled.

Set off or carry forward 7.3

 Sec 72AB: C/f and set off in business reorganisation of co-operative banks

Applicability Applies to amalgamation of co-operative banks.

Treatment of Accumulated loss and UAD of predecessor co-op bank shall be allowed to be c/f and
loss and UAD set off by the successor co-op bank, as if amalgamation had not taken place.
Conditions to By predecessor co-op bank:
be fulfilled Ü It has engaged in banking business for 3 years or more.
Ü It holds at least 3/4th of book value of fixed asset as on date of such
reorganisation, continuously for 2 years prior to date of amalgamation.

By successor co-op bank:

Ü Such co. holds 3/4th of book value of fixed asset – For 5 years from re-org,
Ü It continues business of predecessor co-op bank for at least 5 years,
Ü Follow other prescribed condition to ensure revival of business.
Consequences Ü Unutilised loss or UAD – Lapse
of non- Ü Utilised loss or UAD – Deemed income in hands of amalgamated co. in year of
fulfilment failure to comply.

Demerger: Treatment of losses and UAD in case of demerger:

Nature of undertaking transferred Treatment

If loss and UAD of demerged co-op bank are Loss and UAD to be c/f and set off in hands of
directly related to undertakings transferred resulting co-op bank.
Where such loss/UAD is not directly related Apportion such loss/UAD between demerged and
to the undertaking transferred resulting co-op bank based on proportion of asset
retained vs. transferred.

Note – For set off and c/f of loss and UAD – Period commencing from beginning of PY and end on date
immediately preceding date of business re-org and period commencing from such date to end of PY shall be
deemed to be two different PY.

Note – In case of sec 72AB, such losses can be c/f and set off for balance AYs (not fresh 8 AYs).

Section 73: Losses in speculation business 11

(1) Loss from speculation business can be set off only against profits of speculation business.
(2) Such losses can be c/f and set off against profits of speculation business for upto 4 AYs immediately
succeeding the AY in which loss was first computed.

Explanation:
Where any part of business of co. consists of purchase and sale of shares of other companies, such co. shall
be deemed to be carrying on speculation business to such extent of purchase/sale.
Exception: Companies:
1. Where income majorly consists of interest on securities, HP income, CG income or IFOS
2. Principal business of trading of shares.

7.4 Set off or carry forward

Section 73A : Carry forward and set off of losses by specified business
Loss from specified business u/s 35AD can be set off only against income from such specified business.
Such losses can be c/f indefinitely.

Note:
1. Normal business loss can however, be set off against profits of specified business and profits of
speculation business.
2. Deduction u/s 35AD shall be disallowed where Assessee pays taxes at special rates u/s 115BAA or
115BAB or 115BAC, etc.

Section 74: Losses under the head CG

Losses under the head CG shall be c/f for 8 AYs and shall be set off as follows:
Ü STCL can be set off against LTCG or STCG in following AYs
Ü LTCL can be set off only against LTCG.

Section 74A: Losses from activity of owning and maintaining race horse
Losses from activity of owning and maintaining race horses can be set off only against same income and c/f
and set off for upto 4AYs.

“Amount of loss in activity of owning and maintaining race horse” means:

Situation Definition of Loss in Race Horse Activity
No stake money (i.e., Amount of expenditure (excluding capital expenditure) spent wholly and
prize money) income exclusively on maintaining race horses.
With stake money Excess of expenditure (excluding capital expenditure) over income from
income stake money, spent wholly and exclusively on maintaining race horses.
Note:
1. Sec 74A only deals with set off and c/f of losses from the activity of owning & maintaining race
horses. Losses from activity of owning and maintaining other animals will be dealt u/s 72.
2. To claim set off of this loss, it is necessary that such business is being continued.

Section 78: C/f and set off of loss in case of change in constitution of firm or succession 7 10 12
(1) In case of change in constitution of firm:
Ü Nothing in this chapter will entitle such firm
Ü To c/f and set off
Ü So much of loss/UAD proportionate to share of retired/deceased partner as exceeds his profit
share, in respect of the PY.

(2) In case of succession:

Ü Where any person carrying B/P is succeeded by other person,
Ü Otherwise through inheritance,
Ü Nothing in this chapter shall entitle the successor to c/f and set off the losses/UAD.

Note :
1. In case of succession through inheritance, such losses can be c/f and set off.
2. Sec 78(1) applies only in case of retirement or death. Not in any other case of change.

Set off or carry forward 7.5

 Crux of this section
Only the person, who has incurred the losses, and no one else, would be entitled to carry forward the
same and set it off.

Relevant case law:

Pramod Issue – Can loss suffered by partnership firm, which is dissolved be c/f and set off by
Mittal vs. proprietor firm of individual partner who took over the business, considering this as
CIT succession by inheritance?
Held that:
Ü Partnership firm and sole proprietor are 2 separate and distinct unit.
Ü Taking over of business of partnership firm by a partner is not succession by inher.
Ü Losses cannot be c/f and set off.
CIT v. If business is succeeded by inheritance, the legal heirs are entitled to benefit of c/f
Madhukant of loss of predecessor. Even if the legal heirs constitute themselves as a partnership
M. Mehta firm, benefit of c/f and set off of loss of predecessor would be available to the firm.

Section 79: C/F and set off in case of certain companies: 13

(1) Change in shareholding in case of closely held company
Ü Notwithstanding anything in this chapter,
Ü Where a change in shareholding has taken place during PY,
Ü In case of a closely held company,
Ü Losses/UAD shall be c/f and set off only if:
Ü On the last day of such PY, at least 51% of VP were beneficially held by person who beneficially
held at least 51% of VP on last day of PY in which loss was incurred

Exception: In case of eligible startup u/s 80-IAC, losses/UAD can be set off if:
Ü ALL shareholder who held shares as on last day of PY in which loss was incurred continue to be
SH in the PY in which such loss is being set off, and
Ü Such loss was incurred in the first 10 years from incorporation.

(2) Nothing u/ss (1) shall apply in following cases:

Ü Where such change is upon death of SH or on account of gift to any relative
Ü Change in SH of Indian co. which is subsidiary of foreign co. – As a result of amalgamation or
demerger of such foreign co. Provided that – 51% SH of amalgamating or demerged foreign co.
continues to be SH in amalgamated or resulting foreign co.
Ü Where such change is pursuant to resolution plan approved under IBC.
Ü To a company, its subsidiary and step-subsidiary, where:
w Tribunal, on application u/s 241 by CG, has suspended BoD and appointed new directors,
w Change in SH takes place pursuant to resolution plan approved u/s 242 of Co. Act, 2013.
Ü Where such change is on account of relocation referred u/s 47(viiac) or (viiad)
Ü To erstwhile public sector co. provided that ultimate holding co. immediately after strategic
disinvestment, continues to hold at least 51% of VP in such co. in aggregate (directly/indirectly)
If this condition is not complied with – provision of subsection (1) shall apply.

Note – Sec 79 applies only to losses and not in case of UAD.

7.6 Set off or carry forward

Section 79A: No set off of losses consequent to search, requisition and survey 14
Ü Notwithstanding anything contained in this Act,
Ü Where consequent upon search (u/s 132) or requisition (u/s 132A) or survey (u/s 133A),
Ü Total income includes undisclosed income,
Ü No set off of any loss or UAD shall be allowed against such undisclosed income.

Meaning of undisclosed income:

Type of Undisclosed Income Definition
Items Found in Income represented by MBJV or book entries found during a search,
Search/Requisition/Survey etc. not recorded or disclosed before such search, etc.
False Expense Entries Income indicated by false expense entries in books/documents,
identified only due to the search, survey, or requisition.

Section 80: Submission of loss returns:

Ü Notwithstanding anything in this chapter,
Ü Loss which has not been determined in RoI filed u/s 139(3) [i.e, Loss return]
Ü Shall not be c/f and set off under:
Sec Provision
72(1) Normal business loss
73(2) Speculation business loss
73A(2) Loss from specified business u/s 35AD
74(1) Loss under head CG
74A(3) Loss from activity of owning and maintaining race horse.

Note:
1. HP loss (Sec 71B) & UAD [Sec (32(2)] can be c/f & set off even if loss return is not filed.
2. C/f of loss is not possible if return is filed after due date (except income from HP). However, set off
in current year is possible if return is filed after due date.

Order of set off against PGBP income:

CY depreciation u/s 32(1)

CY capex on scientific research and capex on family planning

(to the extent allowed)

B/F PGBP loss

UAD u/s 32(2)

Unabsorbed capex on scientific research [Sec 35(4)] and

Unabsorbed capex on family planning [Sec 36(1)(ix)]

Set off or carry forward 7.7

 Summary of this chapter:

Type of loss Set off in CY C/F for how Set off in ROI? Special point
many AY? future against? (Such as 115BAC)
Salary No loss in this head
HP Any head (upto Rs. 2 8 AYs HP head only No *Under 115BAC,
lakhs if set off can be set off only
against other head)* against HP head.
Normal PGBP Any head except 8 AYs PGBP head only Yes
loss salary
3 Unabsorbed Any head except Indefinitely Any head No Additional dep.,
expenditure salary (except salary) capex on SR and
FP cannot be c/f if
opted for 115BAC.
Speculation Only speculation gain 4 AYs Only Yes
business loss speculation gain
Specified Only specified Indefinitely Only specified Yes
business loss business gain business gain
STCL LTCG/STCG 8 AYs LTCG/STCG Yes
LTCL LTCG only 8 AYs LTCG only Yes
IFOS No loss in this head
Owning and Same income only 4 AYs Same income Yes Mandatory to
maintaining race only continue same
horse business to set off

Note – Normal business loss can be set off against speculation business gain or specified business gain as
well. But speculation or specified business loss cannot be set off against normal gain.

Start where you are. Use what

you have. Do what you can.

7.8 Set off or carry forward