The Income Tax Act, 1961, allows taxpayers to adjust losses against income from other sources to reduce taxable income. The process is divided into two steps:

1. Intra-Head Adjustment (Same Head of Income) – Section 70

Losses under one source of income can be set off against income from another source under the same head of income.

✅ Examples:

• Loss from business A can be set off against profit from business B.
• Loss from one house property can be set off against income from another house property.
• Short-term capital loss (STCL) can be set off against short-term or long-term capital gains.

🚫 Exceptions:

• Speculation loss can be set off only against speculation income.
• Long-term capital loss (LTCL) can be set off only against long-term capital gains.
• Loss from owning race horses can be set off only against income from race horses.

2. Inter-Head Adjustment (Different Heads of Income) – Section 71

If a loss remains after intra-head adjustment, it can be set off against income from another head in the same financial year.

✅ Examples:

• Business loss can be set off against salary, house property, or capital gains.
• House property loss can be set off against salary, business, or other income (up to ₹2 lakh per year).

🚫 Restrictions:

• Speculation losses cannot be set off against any other head of income.
• Capital losses can only be set off against capital gains.
• Loss from race horses cannot be set off against other incomes.
• Business losses cannot be set off against salary income.

3. Carry Forward of Losses (If Not Fully Adjusted)

If a loss cannot be fully set off in the current year, it can be carried forward for set periods and adjusted in future years as per income tax provisions.

📌 Important Rules:
✅ The income tax return must be filed on time to carry forward losses.
✅ Losses can be set off only as per rules defined in the Act.

This helps taxpayers optimize tax liability and minimize tax burden legally.

When a company undergoes an amalgamation or merger, the ability to carry forward its business losses and unabsorbed depreciation is not automatic. Instead, these benefits can be preserved only if certain conditions—designed to ensure continuity—are met. Here’s a simple breakdown:

Key Points:

1. Continuity of Business and Shareholding:

   • Mandatory Conditions:
     For the losses and depreciation of the amalgamating or merging company to be carried forward by the resulting entity, there must be a continuity of business. This typically means that the merged entity continues the same business as that of the transferor.
   • Shareholding Criterion:
     A significant condition is that there must be a continuity in shareholding. In many cases, at least 50% of the loss-making company’s share capital (or voting power) should be preserved in the merged entity. If this “continuity of shareholding” condition is not met, the benefits of carry forward are disallowed.

2. Applicable Provisions:

   • The general rules for carrying forward business losses and unabsorbed depreciation are set out in Section 72 of the Income Tax Act, 1961.
   • Specific restrictions in the context of amalgamations/mergers have been clarified through judicial decisions and CBDT notifications. These emphasize that without the requisite continuity conditions, the losses and depreciation cannot be transferred to the amalgamated or merged entity.

3. Practical Implications:

   • If Conditions Are Met:
     The merged entity can set off these losses and unabsorbed depreciation against its future business income, thus reducing its taxable income.
   • If Conditions Are Not Met:
     The losses and depreciation of the transferor company will be lost, and the amalgamated entity cannot claim them.