CHAPTER VII — SET OFF, OR CARRY FORWARD AND SET OFF OF LOSSES

Section 108 — Set off of Losses under Same Head of Income (Intra-head)

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Set off of losses under same head of income.

108. (1) Unless provided otherwise in this Act, for any tax year, if net result of computation from any source under any head of income (other than Capital Gains) is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head for that year.

(2) For Capital Gains: short-term capital loss can be set off against any capital gain (STCG or LTCG); long-term capital loss can be set off only against long-term capital gain.

(3) Loss in speculation business shall be set off only against profits from another speculation business.

(4) Loss in specified business under section 46 (formerly s. 35AD) shall be set off only against profits from another specified business.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Sections 70 of the 1961 Act — Set off of loss from one source against income from another source

Section 70 — Set off of loss from one source under same head against another source under same head, with carve-outs: (a) STCL — only against any capital gain; (b) LTCL — only against LTCG; (c) speculation loss — only against speculation profit; (d) specified business loss — only against specified business profit.

BLOCK 3 : COMMENTARY

Section 108 of the new Act re-states section 70 of the 1961 Act. The intra-head, inter-source set-off rule with the four exceptions is preserved.

Capital gains — sub-section (2). The asymmetry between STCL and LTCL is preserved: STCL can absorb either STCG or LTCG (within capital gains head), but LTCL can absorb only LTCG. This was litigated extensively in the 1990s — the Supreme Court's decision in CIT v. Manmohan Das (1966) 59 ITR 699 (SC) and the line of decisions on set-off priority — applies.

Speculation business — sub-section (3). "Speculation business" is defined in section 66 of new Act (formerly s. 43(5)) — transactions in commodities / shares without delivery. The compartmentalisation of speculation losses is intentional anti-avoidance: speculative losses cannot dilute regular business profits. The carve-out for hedging transactions (and for derivatives transactions on recognised stock exchanges, treated as non-speculative under the proviso to s. 43(5)) is preserved through the new s. 66 definitions.

Specified business — sub-section (4). Section 46 of the new Act (formerly s. 35AD) — capital expenditure on cold-chain, warehousing, hospital, hotel etc. — provides 100% deduction. The corresponding losses can only be set off against profits from another specified business. This compartmentalisation prevents the 100%-deduction-induced loss from sheltering ordinary business income.

Practical takeaways. (i) Maintain ledger-level identification of source within each head: each property under House Property; each business venture under PGBP; each specified-business undertaking under PGBP. (ii) For F&O traders: post the Supreme Court decision in CIT v. Vegetable Products (1973) 88 ITR 192 (SC) and the proviso to s. 43(5) read with FA 2014 amendment — F&O on recognised stock exchanges is non-speculative; intra-day stock trading in cash market remains speculative. Track carefully. (iii) For specified business under s. 46: keep separate books / segment reports.

Section 109 — Set off of Loss from One Head against Income under another Head (Inter-head)

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Set off of loss from one head against income from another.

109. (1) Where the net result for any tax year, after giving effect to section 108, is a loss under any head, such loss may be set off against income under any other head for that year, subject to sub-sections (2)-(5).

(2) Loss under House Property — can be set off against any other head, subject to a cap of Rs 2 lakh (FA 2017 amendment, preserved).

(3) Loss from Capital Gains — cannot be set off against income under any other head.

(4) Loss from Speculation Business / Specified Business — cannot be set off against any other head.

(5) Loss from "Profits and gains of business or profession" — cannot be set off against income under the head "Salaries".

(6) Loss from owning and maintaining race horses — cannot be set off against any other head.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Section 71 of the 1961 Act — Set off of loss from one head against income from another

Section 71 — Inter-head set-off rules with carve-outs preserved as in the 2025 Act.

BLOCK 3 : COMMENTARY

Section 109 re-states section 71 of the 1961 Act. The inter-head set-off rule is the second tier of the hierarchy — operates only after intra-head set-off under s. 108 has been exhausted.

House Property loss cap of Rs 2 lakh — sub-section (2). Inserted by FA 2017 to curb the 'second-home letting at low rent' shelter strategy. The unset off House Property loss (above Rs 2 lakh) carries forward for 8 years under section 110. Practical impact: HNIs with multiple let-out properties and high interest expenses must compute carefully — only Rs 2 lakh of net House Property loss can absorb other income in the same year; the excess waits for the next year's House Property income.

PGBP loss not against Salaries — sub-section (5). Inserted to prevent salaried employees from manufactured-loss devices (e.g., genuine business start-up loss combined with salaried income). Salary remains taxable in full; the PGBP loss carries forward.

Capital Gains loss isolated — sub-section (3). Capital losses (whether STCL or LTCL) cannot be set off against any other head. They remain confined to the capital gains head and carry forward for 8 years.

Practical takeaways. (i) Under the new tax regime (s. 202 of the new Act, formerly s. 115BAC) — many deductions are unavailable, and certain losses (House Property in particular) cannot be carried over from prior years. Choose the regime carefully. (ii) For first-year start-up losses: register as a business; expect the loss to be claimed against next year's income; do not 'mix' with salary even where same individual is owner-employee.

Section 110 — Carry Forward and Set Off of Loss from House Property

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Carry forward and set off of loss from house property.

110. (1) Where the loss under House Property cannot wholly be set off in any tax year, the unabsorbed loss shall be carried forward for set off in the following 8 tax years.

(2) The carry-forward loss shall be set off only against income under House Property in any subsequent year.

(3) Loss to be carried forward only if the return is filed within the time prescribed under section 263(1) of the new Act (formerly s. 139(1)).

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Section 71B of the 1961 Act

Section 71B — House Property loss carry-forward up to 8 years; against House Property income only; subject to timely return under s. 139(1).

BLOCK 3 : COMMENTARY

Section 110 of the new Act re-states section 71B of the 1961 Act. The 8-year carry-forward of House Property loss against future House Property income is preserved.

Timing — sub-section (3). Carry-forward is subject to filing the return within the original due date (s. 263(1) of new Act, formerly s. 139(1)). Belated returns under s. 263(4) (formerly s. 139(4)) do not qualify the loss for carry-forward (with the limited exception under s. 113 for House Property loss — but that exception itself is now codified within s. 110).

Sections 111 to 114 — Carry Forward / PGBP / Capital Gains / Other

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Carry forward and set off of business loss / PGBP loss / specified provisions.

S. 111 — Carry forward and set off of business loss (PGBP, including speculation): 8-year carry-forward; only against PGBP. Speculation loss: 4-year carry-forward; only against speculation profits. Specified business (s. 46): indefinite carry-forward; only against specified business profits.

S. 112 — Carry forward and set off of capital loss: 8-year carry-forward; STCL against any capital gain; LTCL only against LTCG.

S. 113 — Carry forward and set off of loss in case of certain companies (closely-held): set-off and carry-forward denied where there has been change in beneficial shareholding such that beneficial holders of less than 51% of voting power as on the last day of the year in which loss was incurred no longer hold ≥ 51% on the last day of the relevant tax year. Carve-outs for amalgamation, demerger, eligible startups (within 7 years of incorporation; FA 2017 expansion preserved), and certain restructurings.

S. 114 — Carry forward and set off of losses of certain other entities (firms, AOPs, etc.) and special rules for amalgamation / demerger (formerly old s. 72A / 72AA / 72AB).

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Sections 72, 73, 73A, 74, 74A, 78, 79, 80 of the 1961 Act

Section 72 — Carry forward of business loss (8 years). Section 73 — Speculation business (4 years). Section 73A — Specified business (indefinite). Section 74 — Capital gains. Section 74A — Race horses. Section 78 — Carry forward by partner of dissolved firm. Section 79 — Closely-held company change-in-shareholding rule. Section 80 — Loss carry-forward conditional on timely return.

BLOCK 3 : COMMENTARY

Sections 111-114 of the new Act consolidate the carry-forward regime into four sections. The principal periods of carry-forward are preserved verbatim:

Business loss — 8 years; Speculation loss — 4 years; Specified business loss (s. 46) — indefinite; STCL / LTCL — 8 years; House Property loss — 8 years (s. 110); Race-horse owning/maintenance loss — 4 years; Unabsorbed depreciation — indefinite (under s. 33 — see Volume IV commentary).

Section 113 — change-in-shareholding rule. The most consequential of these four sections in M&A practice. A closely-held company suffers loss-of-loss on a beneficial shareholding change of 49% or more. Carve-outs preserved: (a) amalgamation / demerger of the loss company itself; (b) family-succession-type transfers; (c) transfers due to merger of the holding-company; (d) eligible startups (within 7 years of incorporation, all original beneficial shareholders continue to hold shares — FA 2017 / FA 2023 expansions preserved).

Continuity of jurisprudence. CIT v. Italindia Cotton Co. (P) Ltd. (1988) 174 ITR 160 (SC) — change-in-shareholding test; Yum! Restaurants (Marketing) Ltd. v. CIT (2009) 311 ITR 9 (Del.) — 51% benchmark applies on year-end basis. CIT v. Goyal Pvt Family Specific Trust (1988) 171 ITR 698 (Bom.) — partnership / firm carry-forward issues. All continue to apply.

Section 114 — amalgamation / demerger carry-forward. Formerly old ss. 72A and 72AA — special rules permitting the amalgamated / resulting / demerged company to inherit the loss / unabsorbed depreciation of the amalgamating / demerged company, subject to conditions (industrial undertaking; ship; hotel; banking; activity continued for at least 5 years; minimum 50% utilisation). The 5-year continuation rule and the FA 2021 amendments to ease eligibility for PSU / banking-amalgamations are preserved.

Timely return rule. Section 80 of the old Act — loss carry-forward only with return filed within s. 139(1) original due date — is integrated within sections 110-114 of the new Act through cross-reference to s. 263(1). The exception for House Property loss (carry-forward even with belated return) is preserved.

Practical takeaways. (i) For closely-held companies considering change in beneficial holding: model the loss-loss exposure under s. 113. Eligible-startup carve-out (FA 2017 / 2023) is highly valuable for newly-incorporated start-ups undergoing PE/VC funding rounds. (ii) For amalgamations: structure to comply with s. 114 conditions for losses to flow to amalgamated entity — minimum 50% utilisation, 5-year continuation, industrial-undertaking nature. (iii) For unabsorbed depreciation — track separately from business loss; CIT v. Govind Nagar Sugar Ltd. (2011) 334 ITR 13 (Del.) governs the priority of set-off.

Chapter VII — At a Glance

Practitioner notes

• Eligible startup s. 113 carve-out: original beneficial shareholders continuing as on last day of loss year is enough; window is 7 years from incorporation.
• Amalgamation under s. 114: ensure 5-year continuation of the business / 50% utilisation requirement.
• New tax regime (s. 202 of new Act): certain losses cannot be set off / carry forward — choose regime carefully each year.
• Unabsorbed depreciation: separate from PGBP loss — indefinite carry-forward under s. 33; can be set off against any head.
• Belated return under s. 263(4): forfeits PGBP / Capital Gains / Speculation / Specified business loss carry-forward (House Property exception).