Chapter VII - Set Off, or Carry Forward and Set Off of Losses
Section 119
Section 119: carry forward and set off of losses not permissible in certain cases
Section 119 sets out situations where a loss cannot be carried forward and set off, even though it otherwise would be under this Chapter - typically because the ownership or constitution of the business has changed. It also carves out important exceptions, including a favourable rule for eligible start-ups.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) In case of change in constitution of a firm during a tax year, nothing in this Chapter shall entitle the firm to have carried forward and set off so much of the loss proportionate to the share of a retired or deceased partner as exceeds his share of profits, if any, in the firm in respect of the tax year.
(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.
(3) Irrespective of anything contained in this Chapter, in case of a change in shareholding during the tax year of a company (not being a company in which the public are substantially interested),— (a) no loss incurred in any year prior to the tax year shall be carried forward and set off against the income of the tax year unless on the last day of the tax year, the shares of the company carrying not less than 51% of the voting power were beneficially held by the person 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; and (b) regardless of the change in percentage of shareholding, where the company is an eligible start up referred to in section 140, the loss incurred in any year prior to the tax year shall be allowed to be carried forward and set off against the income of the tax year, if— (i) all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such tax year; and (ii) such loss has been incurred during the period of ten years beginning from the year in which such company is incorporated.
(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)(Table: Sl. No. 5.C); 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.
(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.
(6) For the purposes of 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)(i); (d) “Tribunal” shall have the same meaning as assigned to it in section 2(90) of the Companies Act, 2013.
Introduction
Section 119 restricts carry-forward losses after specified changes in a firm's constitution, business succession or closely held company's shareholding. The 51% beneficial-voting-power test has exceptions, including an eligible start-up route and defined reorganisations.
Key takeaways
Loss follows the taxpayer
A business successor generally cannot use the predecessor’s loss unless succession is by inheritance; a firm’s loss attributable to a retired or deceased partner is restricted.
Private-company continuity
A closely held company ordinarily needs continuing beneficial ownership of at least 51% voting power to use earlier losses, subject to the start-up and other statutory exceptions.
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.
Step-by-step flow for applying Section 119
- 1
What kind of change happened during the tax year?
Section 119 deals with three situations: a change in constitution of a firm (sub-section (1)), succession to a business or profession (sub-section (2)), and a change in shareholding of a company in which the public are not substantially interested (sub-section (3)).
- None of these: Section 119 does not restrict the loss; apply the ordinary carry-forward provisions of the Chapter.
- One of these: Go to the step for that situation.
- 2
Firm: did a partner retire or die?
The firm cannot carry forward so much of the loss proportionate to the retired or deceased partner's share as exceeds that partner's share of profits (if any) in the firm for the tax year.
- 3
Business succession: was it by inheritance?
- By inheritance: Sub-section (2) does not bar the successor.
- Otherwise than by inheritance: Only the person who incurred the loss can carry it forward and set it off against their own income.
- 4
Closely held company: does an exception in sub-section (4) apply?
Exceptions cover death of a shareholder or gift of shares to a relative, specified foreign-parent amalgamations or demergers, an IBC resolution plan, a Tribunal-approved plan under sections 241/242 of the Companies Act, 2013, relocation under Section 70(2), and an erstwhile public sector company after strategic disinvestment (subject to sub-section (5)).
- Yes: The sub-section (3) restriction does not apply to that change.
- No: Go to the next step.
- 5
Is the company an eligible start-up referred to in Section 140?
- Yes: The loss can be set off if all loss-year voting shareholders still hold those shares on the last day of the tax year and the loss arose within ten years from the year of incorporation.
- No: Apply the 51% test in the next step.
- 6
Did the loss-year holders of at least 51% voting power still beneficially hold shares carrying at least 51% voting power on the last day of the tax year?
- Yes: The earlier loss may be set off, subject to the other provisions of the Chapter.
- No: No loss of any earlier year can be carried forward and set off against the income of this tax year.
Practical checklist
Do
- Trace each loss year and beneficial voting ownership at that year's end and the current year's end.
- For a start-up or statutory exception, preserve the special shareholding and event records rather than applying a blanket 51% rule.
Avoid
- Do not carry a retired partner's ineligible share of firm loss without the subsection (1) calculation.
- Do not assume legal share register changes alone settle the beneficial-ownership test.
Illustrative example
Worked example: a private company and a firm after ownership changes
Hypothetical facts (illustration only, not a real taxpayer): Alpha Pvt Ltd (not a company in which the public are substantially interested, and not an eligible start-up) has a brought-forward loss of ₹20,00,000. On the last day of the loss year, Mr. A held shares carrying 70% of the voting power and Ms. B held 30%. During the current tax year Mr. A sells his entire holding to an unrelated investor, C. Separately, a firm with a carried-forward loss of ₹8,00,000 sees a 25% partner retire; his share of profits in the firm for the tax year is ₹50,000.
Check the exceptions
A sale to an unrelated investor is not a death, a gift to a relative or any other change listed in Section 119(4), so sub-section (3) applies.
Apply the 51% test
On the last day of the current tax year, the loss-year holders (A and B) beneficially hold only B's 30%. That is below 51%.
Result for the company
No part of the ₹20,00,000 earlier-year loss can be set off against the current tax year's income under Section 119(3)(a).
Firm: proportionate share
The loss proportionate to the retired partner's 25% share is ₹8,00,000 × 25% = ₹2,00,000. His share of profits for the tax year is ₹50,000, so the excess of ₹1,50,000 cannot be carried forward and set off by the firm.
Outcome
- Alpha Pvt Ltd loses the use of its earlier loss for this tax year because loss-year holders keep less than 51% of the voting power.
- If Mr. A had instead gifted his shares to a relative, Section 119(4)(a) would take the change outside sub-section (3).
- The firm can carry forward ₹8,00,000 − ₹1,50,000 = ₹6,50,000, subject to the other provisions of the Chapter.
Glossary
- Beneficial voting power
- Voting interest held for the actual beneficial owner, used by the 51% continuity test.
- Eligible start-up
- A start-up category with a separate shareholder-continuity route under subsection (3)(b).
Frequently asked questions
Can a retiring partner's share of loss still be carried forward by the firm?
Only up to that partner's share of profits (if any) for the tax year of retirement - any excess loss proportionate to the retired or deceased partner's share cannot be carried forward by the firm.
Does a closely-held company always lose its carried-forward losses on a change in majority shareholding?
Generally yes, unless the change falls within one of the listed exceptions - such as death of a shareholder, gift to a relative, certain foreign-parent amalgamations/demergers, an approved insolvency resolution plan, a Tribunal-approved resolution under Sections 241/242 of the Companies Act, relocation under Section 70(2), or continued indirect holding after strategic disinvestment of an erstwhile public sector company.
Do eligible start-ups get special treatment on change in shareholding?
Yes - an eligible start-up under Section 140 can carry forward losses despite a drop below 51% continuity, as long as all shareholders who held voting shares in the loss year(s) still hold those shares, and the loss was incurred within ten years of incorporation.
Need help applying this provision to your situation?
Check how a change in ownership affects your loss carry-forwardLast updated 10 October 2026