Section 112 — Carry forward and set off of business loss. Successor to s.72 of the 1961 Act.
Section 112 is in Chapter VII — Set Off or Carry Forward and Set Off of Losses, which runs from section 108 to section 121.
Sub-section (1) applies where, for any tax year, a loss computed under the head "Profits and gains of business or profession" — not being a loss sustained in a speculation business — cannot be wholly set off against income under any other head as per section 109. So much of the loss as is not set off, or the whole loss, is carried forward to the following tax year, and clause (i) allows it to be set off against the profits and gains, if any, of any business or profession carried on by the assessee in that year; clause (ii) then carries any still unabsorbed balance forward to the following tax year, and so on.
Sub-section (2) caps the carry forward at eight tax years immediately succeeding the tax year for which the loss was first computed. Sub-section (3) sets the order of set-off where an allowance or part of it under section 33(11) or 45(7) is also to be carried forward: effect is to be given first to this section.
A business does not earn evenly, and taxing profitable years in full while ignoring loss years would tax something other than income over the life of the business. The section lets an unabsorbed business loss travel forward against later business profits, but limits the journey to eight years so that stale losses do not sit indefinitely against unrelated future income. Sub-section (3) settles the queue between this loss and the allowances under sections 33(11) and 45(7), which matters because the two have different shelf lives.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Maximum period for carrying forward a business loss | Eight tax years | Counted as the tax years immediately succeeding the tax year for which the loss was first computed | Sub-section (2) |
Once the loss is carried forward it changes character: under clause (1)(i) it can only be set off against the profits and gains of a business or profession, not against income under other heads, even though in the year it arose it was first offered against other heads through section 109. The set-off in later years is not confined to the same business — the words are "any business or profession carried on by him for that tax year" — so a loss from one line of business can be absorbed by another. The eight-year clock in sub-section (2) runs from the tax year for which the loss was first computed, so it is measured from origin and not reset by intervening years of no profit. A speculation business loss is outside the section altogether. Where an allowance under section 33(11) or 45(7) is also waiting, sub-section (3) requires this section's loss to be given effect first, which conserves the allowance that has the longer or unlimited life.
A firm computes a business loss of forty lakh rupees for a tax year and has other-head income of ten lakh rupees, against which section 109 absorbs ten lakh. The remaining thirty lakh rupees is carried forward. In the next tax year the firm has business profits of eighteen lakh rupees and house property income of six lakh rupees; only the eighteen lakh of business profits can absorb the brought forward loss under clause (1)(i), leaving twelve lakh rupees to travel on. If the twelve lakh is still unabsorbed at the end of the eighth tax year immediately succeeding the year in which the loss was first computed, sub-section (2) stops it there.
You meet this in the loss schedule of a return of income, where brought forward business losses are listed year by year with the tax year of origin, and in the assessment or intimation that adjusts or denies that set-off. It also decides what an appellate order about an earlier year's loss is worth in later years.
be set off against the profits and gains, if any, of any business or profession carried on by him for that tax year
No loss shall be carried forward under this section for more than eight tax years immediately succeeding the tax year for which the loss was first computed.
Where any allowance of part thereof under section 33(11) or 45(7) is to be carried forward, effect shall first be given to the provision of this section.
See the full 1961 to 2025 concordance.
See the circulars index.
See the notifications index.