Set off and carry forward of loss from a non-speculative business (as set, 1961 Act, AY 2017-18)

A loss from a business other than a speculation business is dealt with in three stages: first against other income of the same year under the same head, then against other heads of the same year, and only then carried forward.

Set off in the same year

1. Within the head (intra-head). Where any source under a head other than Capital gains ends the year in loss, the loss may be set off against income from another source under the same head (section 70(1)). A loss from one non-speculative business can thus be set off against the profit of another business or a profession.
2. Against other heads (inter-head). A loss still left under the head Profits and gains of business or profession may be set off against income under any other head of the same assessment year, including capital gains, short-term or long-term (section 71(1) and (2)).
3. Salary is excluded. A loss under the business head cannot be set off against income under the head Salaries (section 71(2A)).

Carry forward to later years

Any part of the business loss not absorbed in the same year is carried forward to the next assessment year (section 72(1)). In that later year:

• it can be set off only against the income of a business or profession that he carries on in that year (section 72(1)(i)), not against salary, house property, capital gains or other sources;
• it need not be the same business in which the loss arose, but some business or profession must be carried on in the year of set off;
• any balance still not set off is carried forward again (section 72(1)(ii)), but not for more than eight assessment years after the year in which the loss was first computed (section 72(3)).

Conditions for carrying forward

The loss must have been determined on a return of loss filed within the time allowed by section 139(3); a loss shown in a late return cannot be carried forward under section 72(1) (section 80). Only the assessee who suffered the loss can carry it forward. The loss of the current year is set off first, before brought-forward losses.

Order of set off

Where there is also unabsorbed depreciation, the brought-forward business loss is set off first and the unabsorbed depreciation afterwards (section 72(2)). Unabsorbed depreciation, unlike the loss, has no time limit: it is added to the next year's depreciation allowance and treated as part of it, year after year (section 32(2)).

Illustration

A trader has, for assessment year 2017-18, a loss of ₹3,00,000 from his cloth business, a profit of ₹1,00,000 from his grocery business, salary of ₹2,00,000 and rent income (computed) of ₹50,000. The grocery profit absorbs ₹1,00,000 (section 70); house property income absorbs ₹50,000 (section 71); the salary cannot be used (section 71(2A)). The balance of ₹1,50,000 is carried forward for up to eight assessment years, against business profits only, provided the return is filed on time.