This Blog is written by Mr. M. Basir Dawer, Associate Taxation and Corporate Services.

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Set off and Carry Forward of Losses

While computing income of a person under a head of income, if the sum of deductions allowed to a person under the head exceed the sum of amounts chargeable to the person under that head, then the person is said to have suffered a “loss” under that head of income.

The Income Tax Ordinance, 2001 provides us guidance for setting off losses against incomes of other heads and carry forward of losses.

Set-off losses:

According to Sec-56 of Income Tax Ordinance 2001, If a person sustains a loss under any head of income in a tax year, the same can be set-off against the income from any other head of income except for “income under the heads ‘salary’ or ‘income from property’.

However the following areexception to the said rule:

  • Loss of speculation business cannot be set-off against any other income.
  • Capital loss cannot be set-off against any other income.
  • Loss from any head of income falling under presumptive tax regime.
  • Loss in a case where the income would have been an exempt income.

No loss except loss under the head “Income from Business” (including income from speculation business) and “Capital gain” can be carried forward. If a person sustains loss under the head “Income from Business” in addition to loss under any other head, the loss under the head “Income from Business” shall be set-off last.

Carry forward of business losses:

According to Sec.57 of income Tax Ordinance 2001 :

  • If business loss (other than speculation loss) sustained in a tax year cannot be fully set-off in that year with income under any other head, it can be carried forward to subsequent tax years.
  • In subsequent years, this loss can only be set-off against the person’s income under the head “Income from Business”.
  • No loss shall be carried forward to more than six tax years immediately succeeding the tax year in which the loss was first computed.
  • If the loss, which is carried forward, includes depreciation, initial depreciation, first year allowance, accelerated depreciation and amortisation allowed under respective sections, such amounts shall be added to the deductions under said sections, for the following tax year(s) and shall be carried forward till they are completely set-off.
  • While computing person’s taxable income, the deductions available for depreciation, initial depreciation, first year allowance, accelerated depreciation and amortisation shall be taken into account last.
  • No loss shall be carried forward for more than six tax years immediately succeeding the tax year in which the loss was first computed.
  • If a person has a business loss carried forward for more than one tax years, the loss of earliest tax year shall be set-off first.

M. Basir Dawer