Income Tax Section 79 – Set Off and Carry Forward of Losses

Section 79 of the Income Tax Act, 1961 deals with the carry forward and set off of losses in case of certain companies. Vide the Finance (No. 2) Act, 2019, the entire Section 79 is substituted, and the new provisions would be effective from 1^st April 2020. The present article tries to explain the newly substituted provisions of Section 79 of the Income Tax Act.

New Provisions of Section 79 as effective from 1^st April 2020

Provisions of Section 79 apply to a company, not being a company in which the public are substantially interest.

Condition to be fulfilled

In order to carry forward losses and set off against the income of the previous year, the following condition needs to be fulfilled:

51% of the voting power of the company are beneficially held, as on the last day of the previous year in which the loss is sought to be set off, by the same person who holds at least 51% of the shares on the last day of the financial year in which the loss was incurred.

Situation of carry forward and set off of losses in case of eligible start-ups

Situation/conditions to be satisfied for carry forward and set off of losses with regard to start-ups is covered under the provision to newly substituted Section 79 which means:

Even if the above-referred condition is not satisfied by the ‘eligible start-ups’, the loss incurred in any year (prior to the previous year) shall be allowed to be carried forward and set off against the income of the previous year, if the following condition is satisfied:

• All the shareholders having voting power on the last day of the previous year in which loss was incurred continue to be holding shares on the last of day of the previous year in which income is to be set off.
• The above relief is available in case the loss is incurred during the period of 7 years beginning from the year of incorporation.

Exceptional Cases

The provisions of Section 79 of the Income Tax Act doesn’t apply under the following cases:

1. When the change in voting power and shareholding takes place in a previous year on account of the death of the shareholder.
2. When the change in voting power and shareholding takes place in a previous year on account of share transfer resulted due to gift to any relative of the shareholder making such gift.
3. In case of a change in shareholding of an Indian company (being a subsidiary of a foreign company) due to demerger or amalgamation of a foreign company. The demerger or amalgamation is undertaken with the condition that 51% shareholding of amalgamating or demerged foreign company would continue to be the shareholders of the amalgamated or the resulting foreign company.
4. When the change in shareholding takes place based on a resolution plan which is approved under the Insolvency and Bankruptcy Code.
5. When the company and it is subsidiary (including a subsidiary of such subsidiary) in case:
   • The Tribunal (on application under Section 241) has suspended the Board of Directors of the company and has appointed new directors; and
   • Change in shareholding of the company and its subsidiary (including a subsidiary of such subsidiary) on the basis of resolution plan approved by the tribunal under Section 242 of the companies act.