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Comparison of Section 114 "Set off and carry forward of losses computed in respect of specified business." between the Income-Tax Act, 2025 (as passed) and the Income-Tax Bill, 2025 (as originally introduced)

2 September, 2025

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Section 114 Set off and carry forward of losses computed in respect of specified business.

Income-tax Act, 2025

At a Glance

Clause 114 of the Income Tax Bill, 2025 (Old Version) prescribes that losses computed from a "specified business" may be set off only against profits and gains of other specified businesses and that any unabsorbed loss may be carried forward and set off solely against future profits of specified businesses. The provision matters to taxpayers carrying on activities classified as specified businesses and to tax administration implementing set-off/carry-forward rules. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hooks: Clause 114 interacts with the Income Tax Bill, 2025 and cross-references "specified business" as referred to in section 46. The clause falls under the Part titled "SET OFF, OR CARRY FORWARD AND SET OFF OF LOSSES." The provision governs inter-year treatment of losses arising from businesses designated as "specified business." Definitions provided within the clause (sub-section (3)) include:

  • "specified business" - any specified business referred to in section 46;
  • "unabsorbed loss from the specified business" - any loss computed in respect of a specified business carried on by the assessee during the tax year which has not been, or is not wholly, set off under sub-section (1) for that tax year.

Coverage: Losses computed from specified businesses carried on by the assessee during any tax year; set-off is restricted to profits and gains of other specified businesses in the same year and, if unabsorbed, to profits and gains of specified businesses in subsequent years.

Statutory Provision Mode

Text & Scope

Clause 114 provides a two-fold rule:

  • Sub-section (1): Any loss computed from a specified business carried on by the assessee during any tax year shall be set off only against profits and gains, if any, of any other specified business for that tax year.
  • Sub-section (2): The unabsorbed loss for a tax year shall be carried forward to subsequent years and set off only against profits and gains of any specified business computed for those subsequent tax years, iteratively ("and so on").

Definitions in sub-section (3) delineate the meaning of "specified business" (via cross-reference to section 46) and "unabsorbed loss from the specified business" (as a residue not set off under sub-section (1)).

Interpretation

The clause's textual intent is to ring-fence losses arising from specified businesses so that such losses cannot be set off against non-specified business income; they are usable only against profits from other specified businesses in the same or subsequent years. The presence of a definitional sub-section suggests legislative intent to ensure internal consistency and to enable precise identification of losses that qualify for the rule. The phrase "only against" is restrictive and signals a textual limitation rather than a permissive guideline.

Exceptions/Provisos

Not stated in the document: any provisos, exemptions, or conditions permitting broader set-off (for example, against other heads of income) are not provided in Clause 114. Any exceptions must be sought elsewhere in the Bill or Act.

Illustrations

  • Example 1: Assessee A carries on Specified Business X in tax year T and incurs a loss of INR 10 lakh. In the same year, A earns profits of INR 6 lakh from Specified Business Y. Under Clause 114(1), A may set off INR 6 lakh of the loss against the profits of Y; the unabsorbed INR 4 lakh is an "unabsorbed loss from the specified business" and is carried forward per Clause 114(2) to be set off only against future profits of any specified business.
  • Example 2: Assessee B has a loss from Specified Business X in year T but has taxable income from non-specified business activities in year T. Clause 114(1) precludes setting off the specified-business loss against non-specified business profits in year T; the loss may only be set-off against profits of other specified businesses in that year or carried forward per Clause 114(2).

Interplay

The clause expressly relies on the definition of "specified business" as referred to in section 46; therefore its operation depends on the scope of section 46. No other Rules, Notifications, or Circulars are referenced in the clause excerpt. Potential interpretive dependency: precise identification of what constitutes a specified business will determine the reach of the set-off restriction and the categories of profits against which carry-forward losses may be applied.

Differences between the two provisions and practical impact

Document 1 (Section 114, Income-tax Act, 2025) and Document 2 (Clause 114 of the Income Tax Bill, 2025 (Old Version)) present substantially similar substantive restrictions on set-off and carry forward of losses from a "specified business," but they differ in form, detail and definitional clarity.

  • Definitions: Document 2 expressly defines "specified business" and "unabsorbed loss from the specified business" in a subsection (3). Document 1 omits these definitions in the text shown and instead cross-references "specified business, referred to in section 46."
    • Practical impact: The Bill's explicit definitions remove ambiguity about terminology within Clause 114 itself; reliance on cross-reference (Document 1) requires reading section 46 for precise scope.
  • Expression of set-off rule: Document 2 states losses "shall be set off only against profits and gains, if any, of any other specified business for the said tax year." Document 1 states the loss "shall be set off only against profits and gains of another specified business."
    • Practical impact: Substantively similar; Document 2 emphasises the requirement to compute profits and gains "for the said tax year" and refers explicitly to the assessee's carrying on of the business, which frames application to the assessee-year context.
  • Carry forward mechanics: Document 1 provides a two-clause iterative mechanism in sub-section (2) with subclauses (i) and (ii) describing carry forward and further set-off across years. Document 2 has a single sub-section (2) stating that "unabsorbed loss ... shall be carried forward ... and shall be set off only against the profits and gains of any specified business ... and so on."
    • Practical impact: Both impose carry forward limited to specified business profits in subsequent years; Document 1's subclauses are more granular in procedural description, whereas Document 2 is more concise.
  • Assessee-centric language: Document 2 explicitly frames losses as "computed from a specified business carried on by the assessee, during any tax year." Document 1 does not use the phrase "carried on by the assessee" in the excerpt.
    • Practical impact: The Bill version makes express that the provision applies to losses from specified businesses actually carried on by the assessee in that year, clarifying the territorial subject of the rule.
  • Terminology of residual loss: Document 2 introduces the defined term "unabsorbed loss from the specified business;" Document 1 uses plain language "so much of the loss not so set off or the whole loss ... shall be carried forward."
    • Practical impact: The defined term in Document 2 aids drafting precision and facilitates cross-references elsewhere in legislation and subordinate instruments.

Practical Implications

  • Compliance and risk: Taxpayers carrying on activities classified as specified businesses must segregate profits and losses arising from specified businesses from other income heads to ensure proper application of the restricted set-off. Failure to segregate may result in erroneous set-off and subsequent adjustments.
  • Record-keeping/evidence: The text implies recording of computation of losses "computed in respect of a specified business" and contemporaneous evidence of profits of other specified businesses in the same and subsequent years. Documentation showing that a loss arises from a specified business (as per section 46) will be necessary to justify application of this section; however, specific record formats or timeframes are not prescribed in the clause.

Key Takeaways

  • Clause 114 restricts set-off of losses from specified businesses to profits of specified businesses only.
  • Unabsorbed losses may be carried forward and set off against future profits of specified businesses only.
  • The Bill-text includes express definitions for "specified business" (by cross-reference) and "unabsorbed loss from the specified business," improving drafting precision.
  • Clause 114 is an assessee-centric rule-losses must arise from specified businesses "carried on by the assessee" in a tax year.
  • No provisos or exceptions permitting set-off against non-specified business income are present in the clause excerpt.
  • Practical compliance requires segregation of specified-business computations and retention of records demonstrating classification and computation of losses/profits.
  • Full scope and application depend on the definition and scope of "specified business" as provided in section 46.

Full Text:

Section 114 Set off and carry forward of losses computed in respect of specified business.

Topics

Acts Income Tax
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