Section 72 of ITA, 1961 : Section 72: Carry Forward And Set Off Of Business Losses

Explanation using Example

Imagine a scenario where Mr. Sharma runs a manufacturing business and incurs a loss of INR 500,000 in the financial year 2021-22. His other sources of income (like salary or rental income) are not sufficient to set off this business loss. According to Section 72 of the Income-tax Act, 1961, Mr. Sharma can carry forward this loss of INR 500,000 to the next financial year, 2022-23.

In the financial year 2022-23, Mr. Sharma's business makes a profit of INR 300,000. He can set off the carried forward loss of INR 500,000 against this profit, reducing his taxable business income to zero for the year 2022-23 and still have a balance loss of INR 200,000 (500,000 - 300,000) to be carried forward to the next year.

If in the following year, 2023-24, his business profit is INR 400,000, he can set off the remaining loss of INR 200,000 against this profit, resulting in a taxable business income of INR 200,000 for the year 2023-24.

However, if Mr. Sharma does not make enough profit in the subsequent eight years to set off the entire loss, the unadjusted loss after the eighth year cannot be carried forward anymore.