Section 114 — Set off and carry forward of losses computed in respect of specified business. Successor to s.73A of the 1961 Act.
Section 114 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) confines the set off of a loss computed in respect of a specified business referred to in section 46: such a loss shall be set off only against profits and gains of another specified business.
Sub-section (2) deals with what is left. Where for any tax year the loss cannot be wholly set off under sub-section (1), so much of it as is not set off, or the whole loss as the case may be, is carried forward to the following tax year, and under clause (i) is set off against the profits and gains of any specified business carried on by the assessee for that year; under clause (ii), if it still cannot be wholly set off, the unabsorbed amount is carried forward to the following tax year and so on.
Specified businesses under section 46 attract their own deduction regime, and a loss thrown up by that regime would, if freely set off, shelter ordinary income that never bore the corresponding conditions. The section rings the loss in: it may only ever meet the profits of the same category of business. The open-ended words "and so on" in clause (ii) preserve the loss indefinitely, which is the counterpart of the restriction — the loss is confined but not extinguished by time.
The word "only" in sub-section (1) does the work: the loss cannot be set off against ordinary business profits, against any other head, or against income of any kind other than the profits and gains of another specified business, in the year it arises or in any later year. Sub-section (2) sets no outer limit of years — the loss goes to the following tax year, then "to the following tax year and so on" — so an assessee with no other specified business simply carries it forward until a specified business throws up a profit. Sub-section (2)(i) speaks of any specified business carried on by the assessee in the carry-forward year, so it need not be the same specified business that generated the loss, and it need not be one that existed when the loss arose.
A firm carries on two specified businesses referred to in section 46. In a tax year the first shows a loss of Rs 4 crore and the second a profit of Rs 1.5 crore, while the firm's ordinary trading business shows a profit of Rs 6 crore. Only Rs 1.5 crore of the loss is set off, against the second specified business; the trading profit of Rs 6 crore is untouched by sub-section (1). The remaining Rs 2.5 crore is carried forward under sub-section (2) and waits, with no year limit stated in the section, until a specified business shows a profit.
In the loss schedule of a return and in the carried-forward loss figures an assessment order records. It surfaces as an adjustment where a specified business loss has been set off against ordinary business income in the return.
shall be set off only against profits and gains of another specified business
the amount of loss not so set off shall be carried forward to the following tax year and so on
See the full 1961 to 2025 concordance.