Section 119: carry forward and set off of losses not permissible in certain cases

Change in constitution of a firm

Where a firm's constitution changes during a tax year, the firm cannot carry forward and set off so much of the loss proportionate to a retired or deceased partner's share as exceeds that partner's share of profits (if any) in the firm for that tax year.

Succession of a business or profession

Where a person carrying on a business or profession is succeeded in that capacity by another person, otherwise than by inheritance, only the person who incurred the loss (not the successor) can have it carried forward and set off against their own income.

Change in shareholding of a closely-held company

For a company in which the public are not substantially interested, no loss incurred in a year prior to the tax year can be carried forward and set off against that tax year's income unless, on the last day of the tax year, shares carrying not less than 51% of the voting power are beneficially held by the same persons who held shares carrying not less than 51% of the voting power on the last day of the year(s) in which the loss was incurred.

Exception for eligible start-ups

For a company that is an eligible start-up referred to in Section 140, the loss can still be carried forward and set off despite a change in shareholding percentage, provided: all shareholders who held voting shares on the last day of the loss year(s) continue to hold those shares on the last day of the current tax year, and the loss was incurred during the ten-year period beginning from the year the company was incorporated.

Other exceptions to the 51%-continuity condition

The 51%-shareholding continuity condition does not apply in these situations:

• A change in voting power/shareholding due to the death of a shareholder, or a gift of shares to a relative of the shareholder.
• A change in shareholding of an Indian subsidiary of a foreign company, arising from amalgamation or demerger of the foreign parent, where 51% of the shareholders of the amalgamating/demerged foreign company are shareholders of the amalgamated/resulting foreign company.
• A change in shareholding consequent to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after a reasonable opportunity of being heard was given to the jurisdictional Principal Commissioner or Commissioner.
• A company (and its subsidiary and step-down subsidiary) whose Board of Directors was suspended by the Tribunal on a Central Government application under Section 241 of the Companies Act, 2013, and new directors were appointed under Section 242 of that Act, where the shareholding change follows a Tribunal-approved resolution plan under Section 242 (again after a reasonable opportunity of hearing to the jurisdictional Principal Commissioner or Commissioner).
• A change in shareholding on account of relocation referred to in Section 70(2) (Table, Sl. No. 5.C).
• An erstwhile public sector company, where its ultimate holding company continues (directly or through subsidiaries) to hold at least 51% of its voting power in aggregate immediately after completion of strategic disinvestment.

If the strategic-disinvestment exception later fails

If the 51%-holding condition for an erstwhile public sector company (the last exception above) is not complied with in any tax year after completion of the strategic disinvestment, the ordinary 51%-continuity rule applies again for that tax year and all subsequent tax years.

Key definitions

A company is a "subsidiary" of another company if that other company holds more than half of the nominal value of its equity share capital.

"Erstwhile public sector company" has the meaning assigned in Section 116(3)(b); "strategic disinvestment" has the meaning assigned in Section 116(3)(c)(i); "Tribunal" has the meaning assigned in Section 2(90) of the Companies Act, 2013.

Frequently asked questions