Section 120 · Losses
Section 120 of the Income-tax Act, 2025 — No Set-off of Losses Against Undisclosed Income (Search, Requisition, Survey)
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter VII
📜 What the law says — Section 120, Income-tax Act 2025
120. (1) Irrespective of anything contained in any other provision of this Act,
any loss, whether brought forward or otherwise or unabsorbed depreciation,
shall not be allowed to be set off against any undisclosed income which is included
in the total income of any tax year, consequent to a search conducted under section
247 or a requisition under section 248 or a survey conducted under section 253, not
being a survey under section 253(4).
(2) For the purposes of this section, the expression “undisclosed income” for any
tax year shall have the meaning as referred to in section 301.
Submission of return for losses.
In plain language
What Section 120 actually says
Section 120 of the Income-tax Act, 2025 lays down a strict rule: no loss — whether brought forward from earlier years or of the current year — and no unabsorbed depreciation can be set off against "undisclosed income" that gets added to your total income because of a search (Section 247), a requisition (Section 248) or a survey (Section 253) conducted by the Income-tax Department. In plain words, if the tax officers unearth hidden income during a raid or survey, you are not allowed to soften the blow by adjusting your old business losses or depreciation against it. You pay tax on that hidden income in full, standalone.
Important clarification on the section number. The heading you may have searched — "Losses in case of change in constitution or succession" — is the old Section 78 of the Income-tax Act, 1961. In the new 2025 Act that subject matter has moved to Section 119 (Carry forward and set-off of losses not permissible in certain cases). The actual Section 120 of the 2025 Act deals with undisclosed income, and its direct predecessor is Section 79A of the 1961 Act (inserted by the Finance Act, 2021). We explain the real Section 120 below and point you to Section 119 for firm/succession losses.
Who it applies to
- Every category of taxpayer — individuals, HUFs, firms, LLPs and companies. There is no exemption based on status.
- It bites only when there is undisclosed income discovered through the specific enforcement actions listed (search, requisition, survey). A routine scrutiny addition that is not "undisclosed income" is not automatically covered.
- It applies with a non-obstante ("notwithstanding anything else in this Act") force, so it overrides the normal set-off and carry-forward rules of Chapter on losses.
Key conditions and scope
- Trigger: undisclosed income included in total income of any tax year consequent to a search u/s 247, requisition u/s 248, or survey u/s 253 (a TDS/TCS verification survey under Section 253(4) is generally outside this).
- What is blocked: set-off of (a) brought-forward business/other losses, (b) current-year losses, and (c) unabsorbed depreciation — against that undisclosed income.
- "Undisclosed income" takes its meaning from Section 301 of the 2025 Act — broadly money, bullion, jewellery, other valuable articles, or entries in books that are not disclosed / are found to be false.
- No monetary threshold: even ₹1 of undisclosed income found in a search cannot be reduced by losses.
How it interacts with other sections
- Section 119 restricts carry-forward of losses on change of firm constitution, succession, and change in company shareholding — a different anti-abuse rule.
- Undisclosed income is usually taxed at the special high rate (the 2025 Act successor to Section 115BBE — a flat 60% plus surcharge and cess, effectively about 78%), and no deduction or set-off is allowed against it. Section 120 reinforces this by separately barring loss set-off.
- Penalty provisions for undisclosed income (successor to Sections 271AAB/270A) can apply on top.
Practical implications
- Keep books, cash and stock reconciled — surprise additions during a survey cannot be neutralised with losses.
- Voluntarily disclosed income in a normal return is not "undisclosed income," so this bar does not apply to it.
- Because the tax outgo on undisclosed income is punitive and cannot be reduced by losses, the effective cost of concealment is very high.
💡 Example
Worked example 1 — losses cannot cushion a raid finding. Mr. Arun runs a trading firm. He has ₹40 lakh of brought-forward business losses. During a search under Section 247, the Department finds ₹30 lakh of unaccounted cash treated as undisclosed income under Section 301. Normally he might hope to set the ₹40 lakh losses against the ₹30 lakh. Section 120 blocks this. The ₹30 lakh is taxed at the special rate (60% + surcharge + cess ≈ 78%), i.e. roughly ₹23.4 lakh, with zero set-off. His ₹40 lakh losses still carry forward to be used only against normal business profits later.
Worked example 2 — comparison. Suppose the same ₹30 lakh had instead been genuine, disclosed business profit for the year. Then his ₹40 lakh brought-forward loss could be set off, wiping out the ₹30 lakh and leaving ₹10 lakh loss to carry forward — tax payable nil. The contrast shows exactly what Section 120 takes away: it is the difference between ₹0 tax (disclosed) and ~₹23.4 lakh tax (undisclosed).
A relatable story. Priya, a jeweller, kept two sets of records and stored ₹18 lakh of jewellery off the books. She assumed her accumulated shop losses would "absorb" any addition if she was ever caught. A survey under Section 253 uncovered the stock. Her accountant explained that Section 120 forbids using those losses against the ₹18 lakh — so she paid tax at the punitive rate plus penalty, while her losses sat idle. The lesson she learned: losses are a shield only for honestly declared income.
| Aspect | Section 120, IT Act 2025 (undisclosed income) | Section 119, IT Act 2025 (change/succession) |
|---|
| Subject | No set-off of losses/depreciation against undisclosed income | Carry-forward not permitted on change of firm constitution, succession, shareholding change |
| 1961 Act equivalent | Section 79A | Sections 78 & 79 |
| Trigger | Search (s.247), requisition (s.248), survey (s.253) | Retired/deceased partner, succession (non-inheritance), 51% shareholding change |
| Losses blocked | Brought-forward + current-year losses + unabsorbed depreciation | Share of loss of outgoing partner / predecessor / prior shareholders |
| Definition source | "Undisclosed income" — Section 301 | Firm/company/succession concepts within the Act |
| Override | Non-obstante — overrides normal set-off rules | Applies within the losses chapter |
| Typical tax on the income | Special rate ~60% + surcharge + cess (~78%) | Normal slab/company rates |
Related sections
Section 119 — Carry forward and set-off of losses not permissible in certain cases (firm constitution, succession, shareholding change) Section 301 — Meaning of undisclosed income (search/survey framework) Section 247 — Search and seizure Section 248 — Powers to requisition books, documents and assets Section 253 — Power of survey Section 112 — Carry forward and set-off of business losses (general rule)
Frequently asked questions
Does Section 120 of the 2025 Act deal with losses on change in a firm's constitution or succession?
No. That subject is now in Section 119 of the Income-tax Act, 2025 (the old Section 78 of the 1961 Act). Section 120 deals with barring set-off of losses against undisclosed income found in a search, requisition or survey.
Which section of the old 1961 Act corresponds to Section 120 of the 2025 Act?
Section 79A of the Income-tax Act, 1961, which was inserted by the Finance Act, 2021, is the direct predecessor of Section 120.
Can I set off my brought-forward business losses against income found during a tax raid?
No. Section 120 specifically prohibits setting off any brought-forward loss, current-year loss or unabsorbed depreciation against undisclosed income detected in a search, requisition or survey.
Is there a minimum amount of undisclosed income before Section 120 applies?
No. There is no monetary threshold. The bar on set-off applies to the entire undisclosed income, however small, once it is added consequent to the specified enforcement actions.
What is treated as 'undisclosed income' for this section?
It takes its meaning from Section 301 of the 2025 Act — broadly unaccounted money, bullion, jewellery, other valuable assets, or false/undisclosed entries in the books uncovered during search or survey.
At what rate is such undisclosed income taxed?
It is generally taxed at the special punitive rate (the 2025 Act successor to Section 115BBE — a flat 60% plus surcharge and cess, roughly 78%), with no deductions and, per Section 120, no loss set-off allowed.
Does a TDS/TCS verification survey trigger Section 120?
A survey conducted only to verify TDS/TCS compliance (under Section 253(4)) is generally kept outside the scope; the bar mainly targets undisclosed income found in a search, requisition, or a general survey under Section 253.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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