Set off of business loss

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

10 September 2013 Hi,

I want to know about that, Company incurred Business Loss in past 2 F.Y. and till date Income tax return is not filed by the Co.
so U/s 72 of I Tax Act, to claimed set off you should filed return before due date.
In my case return not filed till date so no set off.
Can you guide me how this Loss i should treat in books of accounts and Its Tax Impact if any future.
O

Querist : Anonymous

Querist : Anonymous (Querist)

16 September 2013 can you assist me

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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25 July 2025 ### **Understanding the Set-Off of Business Loss Under Section 72 of the Income Tax Act, 1961:**

To answer your query, let me explain the provisions under **Section 72** regarding the carry forward and set-off of **business losses** and how the **filing of income tax returns** impacts it.

#### **Key Points about Section 72**:

1. **Carry Forward of Business Loss**:

* As per **Section 72**, a **business loss** (other than a loss from speculation) can be **carried forward** to the next assessment year and **set off** against **business profits** of the subsequent years.
2. **Condition for Set-Off of Loss**:

* To claim the carry forward of the business loss and set it off against future profits, **the loss must be disclosed in the income tax return** for the year in which the loss occurred.
* **Section 139(3)** states that a taxpayer must file a **return of income** within the **due date** to be eligible to carry forward and set off any loss.
* If the return is not filed within the due date as specified under **Section 139(1)** (i.e., the due date for filing the income tax return), the loss **cannot be carried forward**.

#### **What Happens if the Return is Not Filed on Time?**

* If the return has not been filed for the past 2 financial years in which the business loss was incurred, **the company loses the benefit of carrying forward that loss** under **Section 72**. This means:

* The loss cannot be set off against future profits of the company in future years.
* The loss is essentially **forfeited** for tax purposes.

#### **How to Treat the Loss in the Books of Accounts**:

* Even if the business loss cannot be carried forward for tax purposes, it should still be reflected in the **books of accounts**.

* **Accounting Treatment**: The loss should be **recorded in the profit and loss account** as per **Indian Accounting Standards (Ind AS)** or **Generally Accepted Accounting Principles (GAAP)**.
* **Carry Forward in the Books**: Even though it cannot be set off against future profits for tax purposes, the company can **continue to carry forward** the loss in its **books** as an **asset** (typically, this is referred to as a **"tax loss asset"** or **"deferred tax asset"**).

* This **deferred tax asset** will reflect any future tax benefit that might arise if the business loss can be used in the future (e.g., the company files tax returns on time and the tax laws change to allow carry forward after late filings).

#### **Tax Impact if the Return is Filed Later**:

1. **Filing a Late Return**:

* If the company eventually files its return for those years (even though it is beyond the due date), the **loss cannot be carried forward** as per the rules of Section 72.
* However, if the return is filed late, there could be **penalties** and **interest** under **Section 234A, 234B, and 234C**.
2. **Impact of Future Filings**:

* If the business resumes operations, the company can start claiming set-off for business losses from the year it files the return.
* Future **business profits** can be adjusted against **carried-forward losses**, but this can only happen if a return is filed timely for the year in which the loss was incurred.

#### **Tax Planning for Future**:

* If the company expects to have **profits** in the upcoming years, it is crucial that **tax returns are filed on time** in the future to enable the **set-off of future business losses** against those profits.
* As a **preventive measure**, it's advisable to file tax returns for previous years, if possible, even though it might not allow you to carry forward those losses. This could potentially allow the company to claim other benefits or avoid penalties, and it will ensure the company is compliant with the tax law moving forward.

#### **Summary of Key Actions**:

1. **For Past Losses**:

* If the company did not file tax returns on time for the previous two years when the business loss occurred, the loss **cannot** be carried forward and set off in future years as per **Section 72** of the Income Tax Act.
* However, the loss **should still be reflected in the books of accounts**.

2. **For Future Losses**:

* Ensure that **future returns** are filed on time to take advantage of the carry-forward provision for business losses.
* The company should also review its **deferred tax assets** in the books for any potential future benefits.

3. **Tax Implications**:

* There will be no tax benefit from those carried-forward losses unless the tax return is filed on time in the year the loss occurred.

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### **Next Steps**:

* If possible, consider **consulting with a tax professional** to explore options for filing the overdue returns or handling the business loss in a way that aligns with the company's overall tax strategy. They can also guide you on managing the **deferred tax asset** in your books.

Let me know if you need more details or have further questions!

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