Concept Of Person, Assessee, Deemed Assessee, And Set Off & Carry Forward of Losses In Indian Taxation Law

Abstract

Taxation has always been central to the functioning of the modern State, serving as the financial lifeline that sustains governance. In India, this role is primarily fulfilled by the Income Tax Act, 19611, a statute that not only outlines what constitutes taxable income but also clarifies who bears the responsibility of paying taxes and how equitable adjustments are made in cases of financial loss.  

The cornerstones of this legal framework are the concepts of a “person” (as defined in section 2(31)), an “assessee” (as defined in section 2(7)), and the category of “deemed assessee”—a legal creation designed to ensure tax obligations are not avoided by technicalities such as death, minority, or absence of the income-earner. Alongside these foundational categories are the provisions on set-off and carry forward of losses, which allow taxpayers to balance out profits and losses across different income sources and assessment years. These mechanisms ensure fairness by taxing real, net income rather than imposing tax burdens in disregard of genuine financial setbacks. 

This paper provides an extensive doctrinal study of these subjects. It investigates statutory definitions, draws upon leading judicial pronouncements, and places Indian provisions in conversation with global practices such as those in the United States and the United Kingdom. The research highlights that while India’s statutory framework is thorough and conceptually sound, its complexity often breeds disputes and litigation. The study concludes with proposals to simplify definitions, modernize provisions on loss adjustments, and align Indian law with global best practices. 

Keywords: Person, Assessee, Deemed Assessee, Set-off, Carry Forward of Losses, Tax Jurisprudence, Income Tax Act 1961 

1.INTRODUCTION 

The legal structure of taxation in India is not merely about raising revenue; it reflects a carefully crafted system that balances equity, certainty, and administrative efficiency. The Income Tax Act, 1961 stands as the backbone of this system. While at first glance it may appear that the Act is simply concerned with defining taxable income and prescribing tax rates, its architecture is far more nuanced. It seeks to answer two essential questions: 

• Who is liable to pay tax? 
• How should the tax liability be calculated, particularly in situations of losses or special circumstances? 

The definition of a “person” provides the first step in answering the “who.” It extends far beyond natural persons to cover legal entities such as companies, firms, associations of persons, local authorities, and even artificial juridical persons like deities or statutory corporations. This wide net ensures that all income-generating units, regardless of form, are potential subjects of taxation. The concept of an “assessee” then narrows the focus, identifying those persons against whom tax proceedings are initiated or who are directly liable for tax payment. This may include ordinary assessees (who earn income themselves), representatives (who hold or manage income on behalf of others), or even those deemed to be in default for failing in tax collection duties such as TDS. 

The third cornerstone is the concept of a “deemed assessee.” Through statutory fiction, liability can be shifted onto individuals such as legal heirs, guardians, trustees, or executors. This ensures that tax obligations cannot be sidestepped due to death, incapacity, or absence of the taxpayer. The rationale is one of continuity and fairness—the State’s claim survives beyond individual contingencies. 

Complementing these definitional provisions are the set-off and carry forward rules for losses. These provisions recognize the economic reality that profits and losses fluctuate. Without them, taxpayers who suffer losses in one year but profits in another would be unfairly taxed on gross income rather than net economic gain. By allowing intra-head adjustments (losses set against income within the same head), inter-head adjustments (across different heads of income), and inter-year adjustments (carry forward to future years), the Act ensures fairness and encourages business risk-taking. 

Judicial interpretation has played a central role in clarifying these provisions. Landmark judgments such as CIT v. Smt. Sodra Devi (1957), CIT v. Indira Balkrishna (1960), and ITO v. Ch. Atchaiah (1996) have expanded the scope and application of these concepts. Likewise, in the domain of losses, rulings such as CIT v. Harprasad & Co. (1975) and CIT v. Manmohan Das (1966) have shaped how set-off and carry forward provisions operate. 

This paper therefore attempts a comprehensive analysis, bringing together statutory language, judicial decisions, and comparative insights to present a full picture of how these principles function and how they may be reformed. 

2. RESEARCH OBJECTIVE

The key objectives of this research are: 

1.To critically interpret the statutory definition of “person” in section 2(31) and examine its inclusiveness. 

2.To study the legal scope of “assessee” under section 2(7), along with its different subcategories. 

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3.To explore the concept of “deemed assessee”, its rationale, and the role of statutory fictions in taxation. 

4.To evaluate the statutory scheme for set-off and carry forward of losses and examine its effectiveness. 

5.To analyze the contribution of judicial interpretations in shaping these provisions. 6.To compare Indian provisions with those of foreign tax regimes and highlight differences. 7.To propose reforms and suggestions for improving efficiency, reducing litigation, and aligning with global practices. 

3. RESEARCH QUESTIONS

The study seeks to address the following questions: 

1.What is the scope of the term “person”, and why is it defined so inclusively? 2.How does an “assessee” differ from a “person,” and what categories exist within this term? 3.Why has the legislature created the fiction of a “deemed assessee”? 

4.How are losses adjusted through set-off and carry forward provisions, and what restrictions exist? 

5.In what ways have Indian courts interpreted these rules? 

6.How do Indian provisions compare with those in other jurisdictions such as the US and UK? 7.What potential reforms could ensure simplification and fairness? 

4. RESEARCH METHODOLOGY

The research follows a doctrinal and analytical method. 

Primary Sources: 

1.The Income Tax Act, 1961 

2.Relevant Finance Acts2 

3.CBDT Circulars and Notifications 

4.Judgments of the Supreme Court, High Courts, and the Income Tax Appellate Tribunal (ITAT) Secondary Sources: 

1.Standard commentaries (Kanga & Palkhivala, Sampath Iyengar, Chaturvedi & Pithisaria) 2.Law journal articles and case studies 

3.Reports of expert committees (e.g., Direct Tax Code Committee) 

4.OECD papers and comparative legal studies 

2 Finance Act, 2023 

This methodology ensures a balance between statutory interpretation, jurisprudential reasoning, and comparative context. 

5. LIMITATION OF STUDY

Like any doctrinal research, this study has its boundaries: 

1.It is confined to provisions of the Income Tax Act, 1961 and does not extend to international treaties such as DTAA or BEPS issues. 

2.Computational details of tax liabilities are excluded; the focus is on concepts and jurisprudence. 

3.Comparative analysis with foreign jurisdictions is illustrative rather than exhaustive. 4.The research is based on developments up to September 2025. 

6. CONCEPT OF PERSON IN TAXATION LAW

6.1 The Concept of “Person” 

Section 2(31) of the Act defines “person” in an inclusive manner. This ensures that taxation is not restricted to obvious human individuals but extends to all entities capable of earning or holding income. Each category deserves individual treatment. 

6.1.1 Individuals 

An individual is the most basic unit of taxation. Tax applies to natural persons, regardless of gender or capacity. The Supreme Court in CIT v. Smt. Sodra Devi (1957) 3 emphasized that the term “individual” is gender-neutral, confirming that both men and women are liable. Minors are taxed through guardians, reflecting the representative principle. 

6.1.2 Hindu Undivided Family (HUF) 

Unique to Indian law, a HUF is a distinct taxable unit under Hindu personal law traditions. It consists of coparceners descended from a common ancestor. The inclusion of daughters as coparceners after the 2005 amendment to the Hindu Succession Act reflects social reform. In Surjit Lal Chhabda v. CIT (1975)4, the Supreme Court observed that mere existence of a family does not constitute a HUF for taxation—there must be property capable of joint enjoyment. 

6.1.3 Companies 

Companies are defined under section 2(17), including both Indian and foreign companies, as well as bodies declared as companies by the CBDT. They are separate legal persons, with their own tax rates, often higher than individuals. 

6.1.4 Firms 

Although not juristic persons under general law, firms are taxed as separate entities under section 2(23). The Supreme Court in CIT v. Kanpur Coal Syndicate (1964)5 held that firms and partners can be separately assessed, underscoring the wide reach of taxation. 

6.1.5 Association of Persons (AOP) and Body of Individuals (BOI) 

This category is often litigated. An AOP is formed when two or more persons voluntarily combine for a common purpose. The ruling in CIT v. Indira Balkrishna (1960)6 clarified that a mere co-ownership of property does not amount to an AOP; there must be unity of purpose and intention to earn income jointly. 

The distinction lies in composition: an AOP can include artificial persons like companies, while BOI is restricted to natural persons. 

6.1.6 Local Authorities 

Municipalities, Panchayats, and similar statutory bodies fall under this category. Their income is taxable unless specifically exempted by section 10(20). Over time, exemptions have been narrowed to prevent misuse. 

6.1.7 Artificial Juridical Persons 

This residual category ensures that all income-earning entities, even those not otherwise covered, fall under the tax net. Examples include deities (Yogendra Nath Naskar v. CIT, 1969)7, universities, statutory corporations, or clubs. 

By drafting the definition inclusively, the legislature ensures no income escapes taxation merely due to the novelty of the entity. 

7. The Concept of “Assessee”

While the term “person” defines potential subjects of taxation, the word “assessee” identifies those against whom tax proceedings are actually initiated. Section 2(7) defines assessee to include any person liable to pay tax or in respect of whom proceedings have been taken. 

1.Ordinary Assessee: One who is directly liable on their own income. 

2.Representative Assessee: One who manages or holds income on behalf of another—such as a guardian of a minor, a trustee, or an agent of a non-resident. 

3.Assessee-in-Default: A person who fails to comply with obligations like deducting or remitting tax at source. 

In CIT v. Kanpur Coal Syndicate (1964)8, the Supreme Court held that even if no tax is payable, proceedings may still designate someone as an assessee. This interpretation underscores the breadth of the term. 

8. DEEMED ASSESSEE

The Act introduces the concept of a “deemed assessee”, which is essentially a legal creation to ensure that liability to pay taxes is not avoided due to contingencies like death, incapacity, or residence abroad of the person who earned the income. It reflects the philosophy that the right to collect tax survives beyond individual circumstances. 

8.1 Legislative Framework 

The provisions relating to deemed assessees are largely concentrated in sections 159–168 of the Act. Major categories include: 

1.Legal Representatives of Deceased Persons (Sec. 159): 

The legal heirs of a deceased taxpayer are deemed assessees in respect of the income earned by the deceased. 

However, their liability is limited to the extent of the estate inherited. This principle was affirmed in CIT v. Amarchand N. Shroff (1963)9. 

2.Representative Assessees (Sec. 160–163): 

Guardians of minors, agents of non-residents, and trustees fall within this scope. 

For instance, if a non-resident earns income from India, the Indian agent is liable as a deemed assessee. 

3.Executors of Estates (Sec. 168): 

Executors of wills are treated as assessees in their representative capacity until the estate is fully distributed. 

4.Other Situations: 

Partners of firms, managers of properties, or trustees of charitable institutions may be taxed as deemed assessees under specific provisions. 

8.2 Judicial Perspective 

In ITO v. Ch. Atchaiah (1996)10, the Supreme Court reiterated that the law must tax the right person but can employ statutory fictions to ensure effective collection. 

In Kamlabai v. CIT (1960)11, the Court clarified that a guardian can be held responsible only for the minor’s income, not beyond. 

In CIT v. Rani Ratlam (1984)12, trustees were taxed as deemed assessees in respect of income from trust property. 

8.3 Purpose and Justification 

The creation of deemed assessee provisions is justified on three main grounds: 

1.Continuity of Liability: The death or incapacity of a taxpayer does not extinguish tax obligations. 

2.Administrative Convenience: The State can hold agents or representatives accountable rather than chasing non-residents or inaccessible persons. 

3.Fairness: Liability is restricted to the estate or asset under management, ensuring proportionality. 

9. Set-off of Losses

One of the most equitable features of income taxation is the recognition that losses must be accounted for in determining taxable income. Without this, taxation would become one-sided and punitive. 

9.1 Intra-head Adjustments (Sec. 70) 

Taxpayers can offset losses from one source of income against gains from another source within the same head. 

Example: A trader suffering losses in one commodity can set them against profits in another line of business. 

Restrictions: 

1.Speculative losses may only be adjusted against speculative gains. 

2.Long-term capital losses can only be offset against long-term capital gains. 

9.2 Inter-head Adjustments (Sec. 71) 

1.If after intra-head adjustment there are still unabsorbed losses, these may be set off against income from a different head. 

2.For instance, losses from house property may be set off against salary income (up to 2 lakh ₹ annually). 

Limitations: 

1.Business losses cannot be offset against salary income. 

2.Losses from speculative activities, gambling, or lotteries cannot be set off against any other income. 

9.3 Case Law Guidance 

1.CIT v. Harprasad & Co. (1975)13: A capital loss cannot be recognized if the corresponding capital gain is not taxable. 

2.Pioneer Consolidated Co. v. CIT (1976)14: Losses from illegal businesses can still be set off, as tax law taxes income irrespective of legality. 

9.4 Administrative Directions 

CBDT circulars frequently clarify the scope of speculative transactions, derivatives, and restrictions to prevent abuse of set-off provisions. 

10.Carry Forward of Losses 

Losses that cannot be fully absorbed in the current assessment year are allowed to be carried forward to subsequent years, subject to statutory limitations. 

10.1 Types of Losses and Their Treatment 

1.Business Losses (Sec. 72): 

Can be carried forward for eight years. 

May only be set off against business income. 

2.Speculative Losses (Sec. 73): 

May be carried forward for four years. 

Can only be set off against speculative profits. 

3.Capital Losses (Sec. 74): 

Short-term losses may be set off against both short-term and long-term gains. Long-term losses may be adjusted only against long-term gains. 

These can be carried forward indefinitely until fully absorbed. 

4.Unabsorbed Depreciation (Sec. 32(2)): 

May be carried forward indefinitely. 

It enjoys priority over other types of carried forward losses. 

10.2 Conditions for Carry Forward 

The taxpayer must file the return of income within the due date specified under section 139(3). 

Losses can generally be carried forward only by the same assessee who incurred them, except in cases of inheritance. 

Carried forward losses must be claimed year after year; they do not automatically apply unless specifically claimed. 

10.3 Judicial Clarifications 

CIT v. Manmohan Das (1966)15: Even if the return is filed late, the Assessing Officer must determine the quantum of loss. 

Prithvi Insurance Co. Ltd. v. CIT (1967)16: Unabsorbed depreciation has wider flexibility than business losses. 

10.4 Policy Rationale 

The carry-forward provisions serve multiple purposes: 

1.They ensure that only net economic profits are taxed. 

2.They encourage entrepreneurship and risk-taking. 

3.They align taxation with the principle of fairness across business cycles. 

11. Comparative Study

11.1 United States 

Under the US Internal Revenue Code, Net Operating Losses (NOLs) can be carried forward indefinitely (after reforms in 2017). 

However, the offset is capped at 80% of taxable income in any given year. 

11.2 United Kingdom 

1.Losses may also be carried forward indefinitely. 

2.UK law further allows group relief, whereby companies within the same group can share losses. 

11.3 OECD Principles 

1.OECD guidance encourages allowing loss relief to avoid distortions in business decisions. 

2.At the same time, anti-abuse provisions are recommended, such as continuity of ownership tests and restrictions on loss trafficking. 

11.4 Indian Position 

1.India’s framework is more restrictive—business losses lapse after eight years. 10

2.Group relief is absent, which can disadvantage conglomerates operating multiple subsidiaries. 

Suggestions and Conclusion 

1.Clarity in Definitions: Simplify and consolidate definitions of “person” and “assessee” to reduce overlaps. 

2.Explicit Guidance on Deemed Assessee: The CBDT should issue detailed rules to reduce interpretative disputes. 

3.Extension of Carry Forward Period: Remove or extend the 8-year cap on business losses, in line with global practice. 

4.Introduction of Group Relief: Permit companies in a corporate group to offset losses against one another. 

5.Automation: Develop digital mechanisms to auto-track carried forward losses across years. 

6.Flexibility in Set-off Rules: Expand scope for intra-head adjustments, particularly for diversified business operations. 

7.Legislative Incorporation of Judicial Principles: Codify key judgments into statutory provisions to enhance certainty. 

Conclusion 

The framework of the Income Tax Act, 1961 reflects a deliberate and well-thought-out approach to taxation. By defining “person” broadly, identifying “assessees,” and extending liability to “deemed assessees,” the law ensures that the tax net is comprehensive. At the same time, provisions for set-off and carry forward of losses recognize the reality of economic fluctuations, ensuring fairness by taxing only net income. 

Judicial interpretation has been instrumental in refining these concepts, often balancing the interests of the taxpayer and the State. However, persistent complexity and litigation highlight the need for reforms. Aligning Indian law with international best practices—such as indefinite carry-forward of business losses and group relief—would modernize the system, reduce disputes, and enhance economic efficiency.  

In short, these provisions are not merely technical rules but embody fundamental values of equity, certainty, and efficiency. The challenge for India lies in simplifying the law while preserving its breadth, thereby ensuring a taxation system that is both just and robust.