Sec 79 of Income Tax Act, 1961: Carry forward and set off of losses in case of certain companies

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The Income Tax Law does recognize that in order to determine the assesses "total revenue," on which tax is due, a loss from one year must be adjusted against income from another year. However, such losses are allowed to be carried forward and set off, provided that they comply with certain conditions and limitations outlined in the Act. Contrary to popular assumption, not all losses can be carried over and used to balance revenue in a subsequent year or used to offset income in the current year. Understanding the requirements and limitations is essential for maximizing the benefits of this provision and minimizing taxes.

Section 79 of the Income-tax Act, 1961 provides for carry forward and set-off of losses where a change in shareholding has taken place in a previous year in case of following companies:-

1. In case of a company, being a company in which the public are not substantially interested but not being an eligible start-up as referred to in section 80-IAC, no loss incurred in any year prior to the previous year in which change in shareholding has taken place shall be carried forward and set off against the income of the previous year, unless on the last day of the previous year, the shares of the company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred.

2. The loss incurred in any prior year to the prior year in which a change in shareholding has taken place may be carried forward and set off only if all of the shareholders of the company who held shares with voting power on the last day of the prior year in which the loss was incurred continue to hold such shares. This applies to companies that are eligible start-ups and companies in which the public are not substantially interested. Additionally, the loss must have occurred within the seven-year window commencing with the year the company is incorporated.

However, the provisions of section 79 shall not apply in following cases. In other words, there shall be no restriction on carry forward and set-off of losses if:

1. The change in shareholding takes place consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making such gift; or

2. The assessed is a subsidiary of a foreign company and the foreign holding company is amalgamated or merged with another foreign company subject to condition that 51% shareholders of the amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the resulting foreign company.

3. The change in shareholding took place in the previous year pursuant to approved resolution plan under the Insolvency and Bankruptcy Code, 2016 after affording a reasonable opportunity of being heard to the jurisdictional Principal CIT or CIT.

4. A company, and its subsidiary and the subsidiary of such subsidiary, where: i. National Company Law Tribunal (NCLT), on a petition moved by the Central Govt., has suspended the board of directors of such companies and has appointed new directors. ii. Change in shareholding has taken place in a previous year pursuant to a resolution plan approved by the NCLT.

5. Change in the shareholding has taken place during the previous year on account of relocation referred to in the Explanation to clauses (viiac) and (viiad) of section 47.