Under Indian Income Tax Laws, a taxpayer is allowed to carry forward business losses to set them off against future income, thereby reducing their tax liability. This provision acts as a relief mechanism for businesses that face financial downturns in a particular assessment year. Such losses can be adjusted against the profits of subsequent years, ensuring continuity and easing the financial burden. However, this benefit is available only if the taxpayer files the income tax return within the due date prescribed under Section 139(1) of the Income Tax Act, 1961.
As per Section 72 of the Income Tax Act, 1961, losses under the head “Profits and Gains of Business or Profession” (except speculative business) can be carried forward for a period of eight assessment years immediately succeeding the year in which the loss was incurred. Furthermore, the carried-forward business loss can only be set off against business income in future years (not against income under other heads). In the case of a business reorganization, such as amalgamation or demerger, Section 72A provides that losses can be carried forward and set off by the successor entity, subject to specific conditions laid down in the law.
To remember the rules for carry forward of business losses, use the mnemonic “FILE-72-8”:
F – File return on time (Section 139(1))
I – Income from business only (loss can be set off only against business income)
L – Loss to be carried forward (not lapsed if conditions are met)
E – Eight years limit
72 – Section number that governs the provision.
