Carry forward and set off of losses not permissible in certain cases
119(1)
In case of change in constitution of a firm during a tax year, such firm shall not be entitled to carry forward and set off so much of the loss proportionate to the share of retired or deceased partner as reduced by his share of profit, if any, from the firm for that tax year.
119(2)
If any person carrying on any business or profession has been succeeded in such capacity by another person, otherwise than by inheritance, nothing in this Chapter shall entitle any person other than the person incurring the loss to have it carried forward and set off against his income
119(1)
In case of change in shareholding of a company, not being a company in which public are substantially interested, during any tax year, loss brought forward from any preceding tax year shall not be allowed to be set off against the income of the said tax year and subsequent tax years unless the following conditions are satisfied:––
- (a) if the beneficial owners of shares of the company carrying at least 51% of voting power, as on the last day of tax year in which loss was incurred, shall continue to be the beneficial owner of shares carrying at least 51% of voting power, as on the last day of the tax year in which such change in shareholding takes place; or
- (b) even if conditions referred to in clause (a) are not satisfied in case of a company, being an eligible start-up referred to in section 140,— (i) all shareholders of the company holding shares carrying voting power, as on the last day of tax year in which loss was incurred, continue to hold those shares as on the last day of the tax year in which such change in shareholding takes place; and (ii) such loss was incurred during the first ten years beginning from the year of incorporation of the company.
119(4)
The provisions of sub-section (3) shall not apply––
- (a) where a change in the voting power and shareholding takes place in the tax year referred to in that sub-section due to death of shareholder or transfer of shares by way of gift to any relative of the shareholder; or
- (b) where change in shareholding of Indian company, being a subsidiary of foreign company, takes place due to amalgamation or demerger of the foreign company and 51% of the shareholders of amalgamating or demerged foreign company are shareholders of amalgamated or resulting foreign company; or
- (c) where change in shareholding takes place in a tax year consequent to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 and a reasonable opportunity of being heard was afforded to the jurisdictional Principal Commissioner or Commissioner; or
- (d) to a company, its subsidiary and subsidiary of such subsidiary, if–– (i) the Board of Directors of such company were suspended by the Tribunal on an application moved by the Central Government under section 241 of the Companies Act, 2013 and new directors were appointed by the Central Government under section 242 of the said Act; and (ii) the change in shareholding of such company and its subsidiary, and subsidiary of such subsidiary has taken place consequent to a resolution plan approved by the Tribunal under section 242 of the Companies Act, 2013 and a reasonable opportunity of being heard was afforded to the jurisdictional Principal Commissioner or Commissioner; or
- (e) to a company to the extent that a change in the shareholding has taken place during the tax year on account of relocation referred to in section 70(2); or
- (f) to an erstwhile public sector company where ultimate holding company of such company, immediately after the completion of strategic disinvestment, continues to hold, directly or through its subsidiary or subsidiaries, at least 51% of the voting power of such company in aggregate.
119(5)
Irrespective of anything contained in sub-section (4), if the conditions specified in sub-section 4(f) is not complied with in any tax year after the completion of strategic disinvestment, the provisions of sub-section (3) shall apply for such tax year and subsequent tax years.
119(6)
In this section,—
- (a) a company shall be a subsidiary of another company, if such other company holds more than half in nominal value of the equity share capital of the company;
- (b) the expression “erstwhile public sector company” shall have the meaning assigned to it in section 116(3)(b);
- (c) “strategic disinvestment” shall have the meaning assigned to it in section 116(3)(c);
- (d) “Tribunal” shall have the same meaning as assigned to it in section 2(90) of the Companies Act, 2013.
Section Summary:
This section outlines restrictions on the carry forward and set-off of losses in specific scenarios, such as changes in the constitution of a firm, succession in business, or changes in shareholding of a company. The purpose is to prevent misuse of loss carry-forward provisions by ensuring continuity in ownership or control, except in certain exempted cases.
Key Changes:
- Firms: Losses proportionate to a retired or deceased partner’s share cannot be carried forward or set off unless adjusted by their share of profit for the year.
- Business Succession: Losses cannot be carried forward if a business is succeeded by another person (except by inheritance).
- Companies: Loss carry-forward is restricted unless:
- At least 51% of voting power remains with the same beneficial owners, or
- For eligible startups, all shareholders from the loss year continue to hold shares, and the loss was incurred within the first 10 years of incorporation.
- Exceptions: Certain changes in shareholding (e.g., due to death, gift, amalgamation, demerger, insolvency resolution, or strategic disinvestment) are exempt from these restrictions.
Practical Implications:
- Firms: Partners must ensure that losses are adjusted for retired or deceased partners’ shares before attempting to carry them forward.
- Businesses: Succession planning must consider the impact on loss carry-forward, especially if the business is transferred to a non-inheritor.
- Companies: Shareholders must maintain continuity in ownership (51% voting power) to retain the benefit of carried-forward losses. Startups have additional flexibility within their first 10 years.
- Exceptions: Companies undergoing restructuring, insolvency, or strategic disinvestment may still carry forward losses if they meet specific conditions.
Critical Concepts:
- Beneficial Ownership: Refers to the person(s) who ultimately own or control the shares, even if held indirectly.
- Eligible Startups: Companies recognized under Section 140, typically in their early stages of operation.
- Strategic Disinvestment: Sale of a government-owned company’s shares to private entities, often to reduce public sector involvement.
- Insolvency Resolution: A process under the Insolvency and Bankruptcy Code, 2016, to resolve a company’s financial distress.
Compliance Steps:
- Firms:
- Calculate the loss proportionate to the retired or deceased partner’s share.
- Adjust for their share of profit, if any, for the year.
- Ensure the remaining loss is carried forward only for continuing partners.
- Companies:
- Monitor changes in shareholding and voting power.
- Maintain records of beneficial ownership to demonstrate compliance with the 51% rule.
- For startups, ensure all original shareholders retain their shares if losses are to be carried forward.
- Exceptions:
- Document changes in shareholding due to exempted events (e.g., death, gift, amalgamation).
- Obtain necessary approvals or resolutions (e.g., under the Insolvency and Bankruptcy Code).
Examples:
- Firm Example:
- A firm has three partners: A, B, and C, each with a 1/3 share. Partner A retires, and the firm incurs a loss of ₹9 lakh. The loss attributable to A (₹3 lakh) cannot be carried forward unless adjusted by A’s share of profit, if any.
- Company Example:
- A private company incurs a loss in 2022-23. In 2023-24, its shareholding changes, and the original shareholders now hold only 40% of the voting power. The company cannot carry forward the 2022-23 loss unless it qualifies under the startup exception.
- Exception Example:
- A company undergoes amalgamation, and the shareholders of the amalgamating company continue to hold 51% of the voting power in the new entity. The company can carry forward its losses despite the change in shareholding.
This section ensures that loss carry-forward provisions are not misused while providing flexibility in specific scenarios.