Set-off and carry forward of losses

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Aditya Kumar Narayan (Querist)
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06 October 2016 Hi Everybody,

I have a query in set-off and carry forward of losses. As per the provisions, we are allowed to set-off business losses (non-speculative) with capital gains. But is it compulsory to set-off or can an assessee pay the tax on capital gains and carry-forward the business loss to the subsequent year?

CA Amrita Chattopadhyay

CA Amrita Chattopadhyay (Expert)
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07 October 2016 For set off and carry forward of losses, you cannot have a break in between. Further, to avail the benefit of set off, you have to file the return on due date.

Aditya Kumar Narayan

Aditya Kumar Narayan (Querist)
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08 October 2016 Hi Mam,

All details are filed in return. Query is whether it is necessary to set off business loss with capital gains or can the business loss be carried forward so that it can be set off with business profits in the following year.

Based on my understanding of the bare provisions of the Act, it appears that the assessee is given an option.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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25 July 2025 This is a great question and often misunderstood — whether an assessee can defer set-off of business loss against capital gains and carry it forward instead, in order to adjust it against future business income.

Let’s clarify this with reference to the Income Tax Act, 1961, and actual interpretation:

✅ Short Answer:

No, you cannot defer set-off of current year business loss against available capital gains.

The Income Tax Act mandates compulsory set-off of eligible losses against eligible incomes in the same year, to the extent possible. Only the unabsorbed portion can be carried forward.
⚖️ Legal Framework:

📘 Section 70 & 71 – Set-off Rules
Section 70: Intra-head set-off (e.g., business loss with business income)
Section 71: Inter-head set-off (e.g., business loss with capital gains)
📘 Section 72 – Carry forward of business losses
“Where the loss under the head ‘Profits and gains of business or profession’ cannot be set off under Section 70 or 71, then the unabsorbed portion shall be carried forward.”
🔍 Note: The law uses the words “cannot be set off”, meaning carry forward is allowed only if set-off is not possible in the current year.

🚫 So, what's not allowed?

You cannot choose to ignore current year capital gains, pay tax on them, and carry forward the business loss to next year voluntarily.

Once you have income eligible for set-off, you must use it, unless a specific restriction applies.
🧾 CBDT View & Case Law:

While no specific CBDT circular says this directly, courts have consistently held that:

Losses must be set off in the current year to the extent possible, and only the balance is available for carry forward.
This principle ensures prevention of tax arbitrage, where one would defer losses to avoid setting off against income taxed at higher rates (e.g., LTCG taxed @ 20%).

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