Clause 119 Carry forward and set off of losses not permissible in certain cases.

Income Tax Bill, 2025

Introduction

Clause 119 of the Income Tax Bill, 2025, addresses the conditions under which losses can be carried forward and set off against future profits. This provision is significant as it delineates the circumstances under which a company or firm loses the ability to offset past losses against future income due to changes in its structure or ownership. This clause is particularly relevant for businesses undergoing structural changes, such as mergers, acquisitions, or changes in partnership, as it can significantly impact their tax liabilities and financial planning.

Objective and Purpose

The primary objective of Clause 119 is to ensure that the benefits of tax loss carryforwards are not misused or exploited through strategic changes in ownership or structure. The provision aims to maintain the integrity of the tax system by preventing companies from artificially creating situations to benefit from tax losses. The legislative intent is to curtail tax avoidance strategies that could arise from changes in the constitution of a firm, succession of business, or changes in shareholding patterns.

Detailed Analysis

1. Change in Constitution of a Firm:- Clause 119(1) stipulates that in the event of a change in the constitution of a firm, the firm cannot carry forward and set off losses attributable to a retired or deceased partner's share, reduced by any profits attributable to them. This provision is designed to prevent the manipulation of partnership structures to exploit tax losses.

2. Succession of Business or Profession:- Sub-section 2 addresses scenarios where a business or profession is succeeded by another person, other than through inheritance. In such cases, the successor cannot carry forward and set off the predecessor's losses. This prevents the transfer of tax benefits to unrelated parties, ensuring that only the entity that incurred the loss benefits from it.

3. Change in Shareholding of a Company:-

- This sub-section specifies that for companies not publicly held, losses from previous years cannot be set off against current or future income if there is a change in shareholding unless certain conditions are met. These conditions include maintaining at least 51% of the voting power by the original beneficial owners or specific conditions for eligible start-ups.

- Eligible Start-ups: For start-ups, the clause provides some flexibility, allowing the set-off of losses if all shareholders at the time of incurring the loss remain shareholders at the time of shareholding change, and if the loss occurred within the first ten years of incorporation.

4. Exceptions to Sub-section 3:

- The provision outlines exceptions where changes in shareholding do not affect the ability to carry forward losses. These include changes due to the death of a shareholder, gifts to relatives, corporate restructuring like amalgamations or demergers, resolution plans under the Insolvency and Bankruptcy Code, government interventions in company management, and strategic disinvestments.

- Strategic Disinvestment:- Clause 119(4)(f) provides an exception for erstwhile public sector companies involved in strategic disinvestment, provided the government retains significant control post-disinvestment.

5. Compliance and Continuity:- Sub-section 5 ensures that if conditions for strategic disinvestment are violated in subsequent years, the restrictions on loss carryforward apply, reinforcing compliance and continuity of control.

Comparative Analysis with Section 78 of the Income-tax Act, 1961

1. Change in Constitution of a Firm: - Both Clause 119(1) and Section 78(1) address the issue of loss carryforward in the event of changes in firm constitution. However, Clause 119 provides a more detailed framework, including specific reductions by the share of profits, which is not explicitly outlined in Section 78.

2. Succession of Business or Profession: - The provisions in Clause 119(2) and Section 78(2) are similar in preventing the transfer of loss benefits in cases of succession other than inheritance. The consistency in these provisions reflects a continued policy to restrict the transferability of tax losses.

3. Change in Shareholding: - Clause 119 introduces comprehensive conditions and exceptions for changes in shareholding, particularly for private companies and start-ups, which are not explicitly addressed in Section 78. This reflects an evolution in policy to accommodate modern business practices, such as start-up growth and strategic disinvestment.

4. Exceptions and Strategic Disinvestment: - The detailed exceptions in Clause 119(4) provide clarity and flexibility for specific scenarios, such as corporate restructuring and government interventions, which are absent in Section 78. This indicates a more nuanced approach to modern corporate realities.

Practical Implications

The implications of Clause 119 are profound for businesses undergoing structural changes. Companies must carefully consider the impact of any changes in ownership or structure on their ability to utilize tax losses. This requires strategic planning and consultation with tax professionals to navigate the complexities of these provisions and ensure compliance. Failure to adhere to these rules could result in significant tax liabilities and financial repercussions.

Conclusion

Clause 119 of the Income Tax Bill, 2025, represents a significant advancement in the regulation of tax loss carryforwards, reflecting contemporary business practices and challenges. By providing detailed conditions and exceptions, the clause aims to prevent tax avoidance while accommodating legitimate business needs. The comparative analysis with Section 78 of the Income-tax Act, 1961, highlights the evolution in legislative approach, offering a more comprehensive and flexible framework for modern businesses.

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Full Text:

Clause 119 Carry forward and set off of losses not permissible in certain cases.

Loss carryforward restrictions: ownership or constitution changes can bar set-off unless continuity conditions and specified exceptions apply. Clause 119 conditions the permissibility of carrying forward and setting off past losses where ownership or constitution changes occur: it denies set-off for losses attributable to retired or deceased partners upon firm reconstitution, disallows successors (other than by inheritance) from using predecessor losses, and restricts non-public companies from setting off prior losses after shareholding changes unless continuity conditions including original beneficial owner control or start-up safeguards are met; specified exceptions and ongoing compliance requirements are provided.