No Loss Set-Off Against Undisclosed Income After a Search: Section 120, Income Tax Act 2025

Section 120 of the Income-tax Act, 2025 says that no loss and no unabsorbed depreciation can be set off against undisclosed income that is added to total income because of a search (section 247), a requisition (section 248) or most surveys (section 253). It applies to brought forward losses and to other losses alike. The section is short, but it decides whether a taxpayer found with unrecorded cash or stock can use old losses to reduce the tax bill. The answer is no.

This guide explains what the section covers, what "undisclosed income" means, which surveys are outside it, and how the numbers play out. Every provision quoted comes from the Act as amended by the Finance Act, 2026. Last reviewed against that text on 10 November 2026.

What does section 120 of the Income-tax Act, 2025 say?

Section 120(1) opens with "irrespective of anything contained in any other provision of this Act". That wording overrides the ordinary set-off rules. It then says that any loss, "whether brought forward or otherwise", and unabsorbed depreciation, shall not be allowed to be set off against any undisclosed income that is included in the total income of a tax year, consequent to:

• a search conducted under section 247;
• a requisition under section 248; or
• a survey conducted under section 253, but not a survey under section 253(4).

Section 120(2) adds that "undisclosed income" has the meaning given in section 301.

What is "undisclosed income" under section 301?

Section 301(e) says undisclosed income includes any of the following that represents, wholly or partly, income or property that has not been or would not have been disclosed for the purposes of the Act:

• money, bullion, jewellery, a virtual digital asset or any other valuable article or thing;
• any expenditure, or any income based on an entry in the books of account or other documents or transactions.

It also includes any expense, exemption, deduction or allowance claimed under the Act that is found to be incorrect. All of this is counted "in respect of the block period".

What is the block period?

Section 301(a) defines the block period as two pieces added together:

• the six tax years before the tax year in which the search was initiated or the requisition was made; and
• the period from 1 April of the tax year in which the search was initiated or requisition made, up to the date the last of the authorisations was executed.

For a search, the last authorisation is treated as executed when the last panchnama is drawn for any person in whose case a warrant of authorisation was issued, whether or not anything was seized (section 301(d)(i)). For a requisition, it is the day the Authorised Officer actually receives the books, documents or assets (section 301(d)(ii)).

Does section 120 apply to every survey?

No. Section 120 applies to a survey under section 253 other than one under section 253(4). Section 253(4) lets an income-tax authority enter a business or other place to verify that tax has been deducted or collected at source as required by Chapter XIX-B. A TDS compliance visit of that kind does not trigger section 120. A general survey under the rest of section 253, which leads to undisclosed income being added to total income, does.

Action	Provision	Section 120 applies?
Search and seizure	Section 247	Yes
Requisition of books, documents or assets	Section 248	Yes
Survey under section 253 (general)	Section 253	Yes
Survey to verify TDS/TCS compliance	Section 253(4)	No

What does this mean in rupees? Two worked examples

Both examples use tax year 2026-27, are built only to show how the bar works, and use round figures. Tax rates are left out because section 120 does not deal with rates.

Example 1: brought forward loss and unabsorbed depreciation. Ravi runs a trading business. A search is conducted in tax year 2026-27 and Rs 15,00,000 of unrecorded cash is held to represent undisclosed income. He has a brought forward business loss of Rs 8,00,000 and unabsorbed depreciation of Rs 2,00,000.

Step	Without section 120 (hypothetical)	With section 120
Undisclosed income	Rs 15,00,000	Rs 15,00,000
Less brought forward loss	Rs 8,00,000	Not allowed
Less unabsorbed depreciation	Rs 2,00,000	Not allowed
Undisclosed income left to tax	Rs 5,00,000	Rs 15,00,000

The Rs 10,00,000 of loss and depreciation cannot reduce the Rs 15,00,000. How those losses are treated against other income of Ravi is governed by the other provisions of the Act, not by section 120.

Example 2: loss of the same year. Meena's regular books for tax year 2026-27 show a business loss of Rs 3,00,000. During a search, unrecorded sales of Rs 9,00,000 are found and added as undisclosed income. Section 120 covers "any loss, whether brought forward or otherwise", so the current-year loss is no exception.

Item	Amount
Undisclosed income added	Rs 9,00,000
Current-year business loss set off against it	Rs 0 (barred)
Undisclosed income included in total income	Rs 9,00,000

How does this look in real life?

Ravi's jewellery. Ravi carries forward a large loss from a failed venture. During a search, officers find gold jewellery that does not match any entry in his books. It is treated as undisclosed income under section 301(e). Ravi cannot say "I have losses, so set them against this". Section 120 closes that route.

Meena's TDS visit. An income-tax authority visits Meena's shop only to verify tax deduction at source under section 253(4). Nothing is removed, and the visit is limited to verification. Section 120 does not apply to that visit.

Suresh's requisition. Suresh's books were taken into custody under another law and the approving authority acts under section 248. Undisclosed income found in those books and added to total income falls under section 120 in the same way as in a search.

What are the common mistakes?

• Assuming old losses always help. They do not reduce undisclosed income that arises from a search, requisition or covered survey.
• Treating every survey alike. The carve-out is only for surveys under section 253(4).
• Forgetting unabsorbed depreciation. Section 120(1) names it alongside losses.
• Ignoring the block period. Undisclosed income is measured over six earlier tax years plus the stub period, not only the current year.
• Reading the bar as covering all income. It covers undisclosed income only. Disclosed income is dealt with under the ordinary provisions.

Quick reference

Question	Answer	Source
What is barred?	Set-off of any loss or unabsorbed depreciation	Section 120(1)
Against what?	Undisclosed income in total income	Section 120(1), 301(e)
Triggers	Search, requisition, survey (not s. 253(4))	Sections 247, 248, 253
Block period	Six preceding tax years plus 1 April to last authorisation	Section 301(a)

Where is this in the Act?

• Section 120: no set-off of losses against undisclosed income.
• Section 247: search and seizure. Section 248: powers to requisition. Section 253: powers of survey, including section 253(4).
• Section 301: block period, search, requisition, last of the authorisations and undisclosed income.

For related reading, see our guides on block assessment after a search, search and seizure, survey powers and limits and set-off and carry forward of losses.

How can CA firms track this across clients?

When a client is searched, the first questions are which years fall in the block period and which losses the client was counting on. Finexo's practice management software keeps client records, notices and deadlines in one place so the team can see the exposure quickly. It does not compute assessments or file responses for you.

This article explains the Income-tax Act, 2025 (as amended by the Finance Act, 2026). It is general information, not tax advice. Confirm the position for a specific case with a qualified chartered accountant.