Section 79 of the Income Tax Act pertains to the carry forward and set-off of losses in case of certain companies, primarily addressing restrictions on carrying forward losses when there is a change in the company’s shareholding. Below is a summary:
- General Restriction:
Losses incurred in prior years cannot be carried forward if there is a significant change in shareholding during the previous year. Specifically, shares carrying at least 51% of voting power must be held beneficially by the same persons on:- The last day of the year when the loss was incurred, and
- The last day of the previous year.
- Exceptions to General Restriction:
- Eligible Startups: For companies qualifying under Section 80-IAC, losses can be carried forward if all shareholders of the year in which the loss was incurred remain shareholders in the year of set-off.
- Family Transfers: Changes due to death or gifts to relatives are excluded.
- Foreign Subsidiaries: Changes due to the merger or demerger of a foreign company are exempt if 51% of shareholders remain in the merged company.
- IB Code Resolution Plans: Changes in shareholding approved under the Insolvency and Bankruptcy Code, 2016, are exempt.
- Government Intervention: Shareholding changes in companies under Central Government’s intervention due to mismanagement are excluded.
- Strategic Disinvestment: Former public-sector companies continue to carry forward losses if 51% of voting power remains with the original government-linked ultimate holding company.
For more information on the above income tax provision, visit Groom Tax.
