Can partners set off the firm's loss against their own income, and how long can the firm carry it forward?

A loss made by a partnership firm belongs to the firm. The partners cannot deduct their share from their own salary, rent or other business income. The firm can use the loss against its own other income in the same year, within limits, and carry what is left forward against its business income for up to six years.

What does the law say?

The loss stays in the AOP. Section 59A(3) says that in the case of an association of persons, any loss shall be set off, or carried forward and set off, only against the income of the association. Section 59A(4)(a) adds that nothing in sections 56 and 57, or the other set off and carry forward provisions, entitles a member of an association of persons to set off a loss of the association, or carry it forward and set it off, against the member’s own income.

This matches the general scheme in section 92(1), which taxes an association of persons separately from its members.

Set off in the same year. Section 56(1) lets a person set off a loss under one head of income against income under any other head for the same year, except income under the head “Salary”. A proviso, added by the Finance Act, 2025, says a business loss cannot be adjusted against income from property for the tax year. Section 56(3) says that where there is a business loss and a loss under another head, the business loss is set off last.

Carry forward. Section 57(1) says a business loss that cannot be wholly set off under section 56 is carried forward to the following tax year and set off against income under the head “Income from Business”. Section 57(2) continues this year by year, but no loss can be carried forward to more than six tax years immediately succeeding the year in which it was first computed. Section 57(3) uses the earliest year’s loss first.

Section 56(2) says a loss under any other head that cannot be set off in the year is not carried forward, except as that Part of the Ordinance provides.

How does it work in practice?

The firm computes its business income or loss for the year. If there is a loss, it first looks for other income of the firm under another head (not property income) for the same year. Any balance is carried forward and can only be used against the firm’s future business income.

Section 59A(7) adds a condition: a loss is carried forward and set off only if it has been assessed or determined under one of the orders the sub-section lists. A loss the firm has simply worked out for itself, without such an assessment or determination, does not qualify.

Depreciation and similar allowances. Section 57(4) treats the part of a loss that comes from depreciation, amortisation and certain other allowances differently. That part is set off against 50% of the balance business income of the following year, or 100% of it if taxable income for the year is less than Rs. 10 million, and so on until fully used.

Worked example (illustrative figures)

Shah & Co., a partnership trading cloth in Faisalabad, has an assessed business loss of Rs. 3,000,000 in tax year 2027. It also earns Rs. 800,000 of rent from a godown it owns. None of the loss comes from depreciation or similar allowances.

1. Tax year 2027: the proviso to section 56(1) bars setting the business loss against the Rs. 800,000 of property income. The full Rs. 3,000,000 is carried forward.
2. Tax year 2028: business income is Rs. 1,800,000. Set off Rs. 1,800,000 of the loss. Taxable business income is nil. Balance carried forward: Rs. 3,000,000 minus Rs. 1,800,000 = Rs. 1,200,000.
3. Tax year 2029: business income is Rs. 2,000,000. Set off the remaining Rs. 1,200,000. Taxable business income: Rs. 2,000,000 minus Rs. 1,200,000 = Rs. 800,000.
4. Latest year the 2027 loss could have been used: tax year 2033, the sixth year after 2027.

Neither partner can deduct any part of the Rs. 3,000,000 against personal income in any of these years.

What if …?

What if a partner has large personal income in the loss year? It makes no difference. Section 59A(4)(a) bars the member from using the AOP’s loss. The partner’s own income is taxed on its own terms.

What if the business is taken over by a new firm? Section 59A(4)(b) says a person who succeeds another person carrying on a business, otherwise than by inheritance, cannot carry forward and set off the predecessor’s loss. The section does not say whether a change of partners in the same firm is a succession for this purpose, so the text leaves that question open.

What if the firm is subject to minimum tax? A loss reduces the firm’s income, but minimum tax on turnover can still apply. That is covered on a separate page.

Common mistakes

• Passing the loss through to partners. Section 59A(4)(a) prevents it.
• Setting a business loss against rent. The proviso to section 56(1) bars it for the tax year.
• Counting seven years instead of six. The limit in section 57(2) is six tax years immediately after the year the loss was first computed.
• Using a later loss before an earlier one. Section 57(3) requires the earliest year’s loss first.

What to check in the official text

Read section 59A(3), (4) and (7), section 56 with its proviso, and section 57(1) to (4). Sub-sections (2A) to (2C) of section 57 give longer periods to certain banks, hotel companies and one airline; none applies to an ordinary firm. Speculation business losses and capital losses have their own rules in sections the Ordinance places next to section 57, not covered here.