Do You Need a Tax Audit to Carry Forward Losses?
Some specified individuals and businesses are required to get audited under the Income Tax Act. All the financial records of the business are analysed and inspected during a tax audit. The auditor identifies if there are any mismatches during the analysis of the books of account. This is done to maintain transparency and ensure the business is complying with the law. The tax audit is applicable if the business’s annual turnover or gross receipts cross a specified limit. However, many taxpayers wonder whether a tax audit is necessary to carry forward losses.
Losses from different sources, including business or profession, capital loss from shares and properties, etc., can be set off and carried forward under the Income Tax Act, 1961. This means that taxpayers can use losses to reduce their tax liability. To set off losses, you can adjust the losses against the profit or income of that year. However, after making all adjustments, there can still be some unadjusted loss, which can be carried forward to future years to set off losses against the income of those years.
Here is the Set-off and Carry Forward of Losses table for your understanding:
| S.No | Loss Type | Set off Against Which Profit | Carry Forward Time Period | Continuation of Business Necessary? | Is it necessary to submit return of loss on time |
| 1 | House property loss | Income under head “Income from house property | 8 years | NA | No |
| 2 | Speculation loss | Speculation profits | 4 years | No | Yes |
| 3 | Non-speculation business loss | No | No | ||
| 3.1 | For unabsorbed depreciation, capital expenditure on scientific research and family planning | Any income (other than salary AY 2005-06) | No time-limit | No | No |
| 3.2 | Loss from specified business u/s 35AD | Income from a specified business under section 35AD | No time-limit | No | Yes (No, up to AY 2015-16 |
| 3.3 | Other business loss | Any business profit (from speculation or otherwise) | 8 years | No | Yes |
| 4 | Capital loss | No | Not necessary | ||
| 4.1 | Short-term capital loss | Any income under head “Capital gains” | 8 years | No | Yes |
| 4.2 | Long-term capital loss | LTCG (up to the AY 2002-03 any income under the head “Capital gains”) | 8 years | No | Yes |
| 5 | Loss from the activity of owning and maintaining racehorses | Income from the activity of owning and maintaining racehorses | 4 years | Yes | Yes |
Coming back to the question of whether a tax audit is required for carrying forward losses, the answer is no. You do not need to get your account audited to carry forward losses. Carry forward of loss has no connection with a tax audit. The only thing taxpayers should note is that after the original due date of the ITR ends, certain losses cannot be carried forward in a belated return.
