Income Tax 2025

Appearance

Carry forward and set off of business loss ​

112(1) ​

The unabsorbed business loss (other than loss from speculation business) for any tax year shall be carried forward to the subsequent tax year and shall be set off only against the profits and gains of business or profession, carried on by him and assessable for that tax year, if any, computed for such subsequent tax year, and so on.

112(2) ​

The unabsorbed business loss referred to in sub-section (1), shall be carried forward to the following tax year, not being more than eight tax years immediately succeeding the tax year in which such loss was first computed.

112(3) ​

The unabsorbed business loss referred to in sub-section (1) shall first be allowed to be set off before allowing set off of any carried forward allowance under section 33(11) or 45(7).

112(4) ​

In this section, “unabsorbed business loss” means, loss computed under the head “Profits and gains of business or profession” (other than loss from speculation business) for the tax year, which has not been, or is not wholly, set off against income from any other head, under section 109 for the said tax year.

Explanation

Section Summary: ​

This section governs how unabsorbed business losses (excluding losses from speculative businesses) can be carried forward and set off against future business income. It specifies the conditions and time limits for carrying forward such losses and their priority in being set off against other allowances.

Key Changes: ​

  1. Time Limit for Carry Forward: The unabsorbed business loss can now be carried forward for up to eight tax years immediately following the year in which the loss was first computed. This is a specific addition to clarify the time frame for utilizing such losses.
  2. Priority of Set Off: The section explicitly states that unabsorbed business losses must be set off before any carried forward allowances under sections 33(11) or 45(7). This establishes a clear hierarchy in the utilization of losses and allowances.
  3. Exclusion of Speculation Losses: The section reiterates that losses from speculative businesses are not covered under this provision, aligning with existing tax principles.

Practical Implications: ​

  1. For Taxpayers: Taxpayers with business losses can now carry forward these losses for up to eight years, but only to set them off against future business income. This provides a longer window to recover from financial setbacks.
  2. For Businesses: Businesses must ensure proper documentation and tracking of unabsorbed losses to utilize them effectively within the eight-year limit.
  3. Compliance: Taxpayers must file their returns on time to claim the carry-forward benefit, as late filing may result in the loss of this provision.

Critical Concepts: ​

  1. Unabsorbed Business Loss: This refers to the loss incurred under the head "Profits and gains of business or profession" that could not be fully set off against other income in the same year.
  2. Set Off Hierarchy: Unabsorbed business losses take precedence over other carried forward allowances, such as depreciation or capital gains exemptions.
  3. Speculation Business Losses: Losses from speculative activities (e.g., trading in derivatives) are treated differently and are not eligible for carry-forward under this section.

Compliance Steps: ​

  1. Document Losses: Maintain detailed records of business losses incurred during the tax year.
  2. File Returns Timely: Ensure timely filing of income tax returns to claim the carry-forward benefit.
  3. Track Utilization: Monitor the utilization of carried-forward losses in subsequent years to ensure they are set off within the eight-year limit.
  4. Separate Speculation Losses: Clearly segregate losses from speculative businesses, as they are not eligible for carry-forward under this section.

Examples: ​

  1. Scenario 1: A business incurs a loss of ₹5 lakh in FY 2023-24. This loss is carried forward and set off against business profits of ₹6 lakh in FY 2024-25. The remaining ₹1 lakh profit is taxable.
  2. Scenario 2: A business incurs a loss of ₹10 lakh in FY 2023-24. It carries forward the loss but does not earn any business profits in the next eight years. The loss expires and cannot be utilized after FY 2031-32.
  3. Scenario 3: A business has both unabsorbed business losses of ₹3 lakh and carried forward depreciation of ₹2 lakh. The ₹3 lakh loss is set off first against current business income, and only then is the depreciation allowance considered.

This section ensures that businesses have a structured mechanism to recover from losses while maintaining clarity on the time limits and priority of set-offs.