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Income Tax

Comparison of Section 119 "Carry forward and set off of losses not permissible in certain cases." between the Income-Tax Act, 2025 (as passed) and the Income-Tax Bill, 2025 (as originally introduced)

2 September, 2025

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

Income-tax Act, 2025

At a Glance

These materials set out Clause 119 of the Income Tax Bill, 2025 (Old Version) and Section 119 of the Income-tax Act, 2025 - both addressing restrictions on carry forward and set off of losses where there is change in constitution of firms, succession in business, or change in shareholding of companies. The provisions affect taxpayers (firms and companies), and the tax administration whenever continuity of ownership or control is questioned for loss carry-forwards. Effective dates or enactment/notification dates: Not stated in the document.

Background & Scope

Statutory hooks: the text sits under the chapter on "Set off, or carry forward and set off of losses" and cross-refers to section 140 (eligible start-ups), section 70(2) (relocation), section 116(3)(b)/(c) (definitions of "erstwhile public sector company" and "strategic disinvestment"), and Companies Act provisions (sections 241, 242) and the Insolvency and Bankruptcy Code, 2016. The section covers: (1) change in firm constitution (retirement/death of partner); (2) succession in business by another person otherwise than by inheritance; and (3) change in shareholding of companies not being public companies, together with specified exceptions. Definitions provided within the section include subsidiary (holds more than half the nominal equity) and references for defined terms. Any additional definitions or explanatory material: Not stated in the document.

Statutory Provision Mode

Text & Scope

Coverage and principal ingredients:

  • Firms (sub-section (1)): When a firm's constitution changes during a tax year (retirement or death of partner), the firm is restricted from carrying forward and setting off that portion of loss that is proportionate to the share of the retired/deceased partner to the extent it exceeds the partner's share of profits, if any, in respect of that tax year. The Act and Bill use slightly different formulations for the computation of the disallowed quantum (see Differences below).

  • Succession (sub-section (2)): Where a business or profession is succeeded by another person otherwise than by inheritance, only the person who incurred the loss can carry it forward and set it off; successors cannot claim carry-forwards.

  • Companies (sub-sections (3)-(6)): For a private company (i.e., "not being a company in which the public are substantially interested"), a change in shareholding during the tax year generally bars carry forward and set off of losses incurred in years prior to that tax year, unless specified continuity conditions are satisfied. The key continuity test is beneficial ownership of shares carrying at least 51% of voting power (variously expressed). There is a special carve-out for eligible start-ups (subject to shareholder continuity and a ten-year incidence period), and several exceptions where the restriction does not apply (death, gift to relative, certain amalgamations/demergers of foreign holding companies, resolution plans under IBC/Company Act intervention, relocation u/s 70(2), and strategic disinvestment where ultimate holding retains at least 51% voting power).

Interpretation

Legislative intent, as discernible from the text, is to prevent continuity of losses being exploited after a change in ownership/control - a common anti-avoidance objective - while preserving losses where economic continuity of ownership (51% voting power continuity or specified exceptions) exists or where special policy considerations apply (eligible start-ups, strategic disinvestment with retention of 51% voting power, insolvency/resolution processes). The text emphasizes beneficial ownership and voting power as the decisive indicia for continuity. Where silence exists on ancillary matters (procedures for proving beneficial ownership, valuation of voting power, treatment of multiple classes of shares), the document is silent: Not stated in the document.

Exceptions/Provisos

The section sets out explicit carve-outs:

  • Death of shareholder or transfer by way of gift to a relative - continuity rules do not apply.
  • Change in shareholding of an Indian subsidiary of a foreign company due to amalgamation/demerger of the foreign company where 51% of shareholders of the amalgamating/demerged foreign company are shareholders of the resulting foreign company.
  • Change consequent to a resolution plan approved under the IBC, 2016, where a reasonable opportunity to be heard was given to the jurisdictional Principal Commissioner or Commissioner.
  • Companies (and their subsidiaries and sub-subsidiaries) where Boards were suspended by the Tribunal and changes follow a Tribunal-approved resolution plan under Companies Act, 2013, with opportunity to tax authorities to be heard.
  • Change on account of relocation referred to in section 70(2) (Act cites a specific Table reference in one version; Bill uses a general reference).
  • Erstwhile public sector companies after strategic disinvestment where the ultimate holding company immediately post-disinvestment continues to hold at least 51% voting power.

Illustrations

  • Example 1 - Firm: A partner holding 25% retires in the tax year; the firm had a loss for the year. The portion of loss proportionate to the retired partner's share that exceeds any share of profits attributable to that partner for that tax year is not available for carry forward by the firm. (Numerical computation methodology: Not stated in the document.)
  • Example 2 - Private company change in shareholding: A company incurred losses in prior years. During the tax year more than 49% of beneficial voting power transfers to new persons so that continuity of >=51% beneficial voting power fails. Unless the beneficial owners who held >=51% on the loss-incurring date continue to hold >=51% at the end of the tax year, the earlier losses cannot be carried forward and set off. If the company is an eligible start-up and all shareholders who held voting shares on the loss year continue to hold them and the loss was incurred within ten years of incorporation, carry-forward is permitted.
  • Example 3 - IBC resolution: Change in shareholding pursuant to an IBC resolution plan, with tax authorities given an opportunity to be heard, will not trigger denial of carried-forward losses.

Interplay

The section expressly cross-refers to: section 140 (eligible start-ups); section 70(2) (relocation); section 116(3)(b)/(c) (definitions); Companies Act sections 241/242; Insolvency and Bankruptcy Code, 2016. The provisions therefore operate in tandem with corporate law mechanisms for suspension of boards, tribunal-approved resolution plans, and the tax treatment of relocated undertakings. How beneficial ownership is to be evidenced or how valuation of voting power is to be carried out is Not stated in the document. The relationship between this section and general anti-avoidance rules or other loss-restriction provisions is Not stated in the document.

Practical Implications

  • Compliance and risk areas: Taxpayers should monitor changes in firm constitution and company shareholding within tax years; loss carry-forwards can be disallowed when continuity of beneficial 51% voting power is broken. For start-ups, maintain shareholder registers and evidence that original shareholders continued to hold voting shares and ensure losses are within the ten-year window. For firms, document profit shares and any payments to retired/deceased partners to substantiate allowable carry-forwards. For succession of business, document whether succession is by inheritance; otherwise, successors cannot claim pre-existing losses.
  • Record-keeping/evidence points: Beneficial ownership records, share transfer instruments, gift deeds (to demonstrate exceptions), death certificates, tribunal/IBC/resolution plan documents (showing opportunity to be heard), board suspension orders, and relocation approvals u/s 70(2) should be preserved. Evidence of shareholding/voting power on the relevant last days of the tax years in question will be crucial. Specific documentary requirements or forms: Not stated in the document.

Key Takeaways

  • The section restricts carry forward and set off of losses when firm constitution changes or when business succession occurs other than by inheritance.
  • For companies (non-public), a 51% beneficial voting-power continuity test operates to allow prior losses to be carried forward; failure of continuity leads to denial.
  • Eligible start-ups enjoy an exception subject to shareholder continuity and a ten-year time limit for the loss incidence.
  • Several specified exceptions preserve loss carry-forwards (death, gift to relative, certain amalgamations/demergers, IBC resolution plans, tribunal-approved restructuring, relocation, strategic disinvestment with 51% retention).
  • The statute emphasizes beneficial ownership and voting power but is silent on procedural proof, valuation across share classes, and interaction with other anti-avoidance provisions.
  • Taxpayers and advisors should maintain contemporaneous evidence of shareholding and corporate events to establish entitlement to carry-forward losses where ownership changes occur.
  • Where details are absent (computation method, evidentiary procedures, effective date), the document is silent: Not stated in the document.

Differences Between the Two Texts and Practical Impact

Topic Clause 119 of the Income Tax Bill, 2025 (Old Version) Section 119 of the Income-tax Act, 2025
Firm clause wording States firm "shall not be entitled to carry forward and set off so much of the loss proportionate to the share of retired or deceased partner as reduced by his share of profit, if any, from the firm for that tax year." States "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."
Practical impact - firm Difference is largely drafting nuance; both aim to restrict carry-forward of loss portion attributable to a retiring/deceased partner beyond that partner's profit share. The Act wording may read as broader in framing ("nothing in this Chapter shall entitle") but substantive effect appears the same. Computation detail remains unspecified in both. See left.
Company continuity test Requires beneficial owners who held at least 51% voting power on the last day of the loss year to continue to hold at least 51% on the last day of the tax year in which change occurs. Requires that on the last day of the tax year, shares carrying not less than 51% of the voting power were beneficially held by the person who beneficially held shares carrying not less than 51% on the last day of the year(s) in which the loss was incurred.
Practical impact - company continuity Bill's formulation ties the 51% test to the last day of the year in which loss was incurred and the last day of the tax year where change occurs - straightforward continuity test. Act wording extends to the "year or years" in which loss was incurred and may capture cumulative loss years; it highlights continuity of the person(s) who held 51% across relevant loss years. Practically, this may broaden enquiry when losses span multiple years.
Start-up carve-out Provides carve-out if all shareholders who held voting shares on last day of loss year continue to hold them on last day of change year and loss occurred within first ten years from incorporation. Similar, but cross-reference is to section 140 and the Act specifies "regardless of the change in percentage of shareholding, where the company is an eligible start up referred to in section 140," and uses similar conditions; wording close but Act emphasises "continue to hold those shares" and the ten-year period.
Relocation reference Refers to section 70(2) generally. Refers to section 70(2)(Table: Sl. No. 5.C) - a more specific cross-reference in the Act.
Strategic disinvestment  definition Cross-refers to section 116(3)(c) (Bill). Cross-refers to section 116(3)(c)(i) (Act) - more specific sub-clause reference.
Other drafting differences Minor variances in phrasing of exceptions and definition clause numbering (e.g., Bill's (6)(c) vs Act's (6)(c)). Act refines some cross-references and adds a specific table citation for relocation; otherwise substantive architecture remains consistent.

Overall practical impact: the Act text refines and slightly narrows or clarifies certain cross-references and the temporal focus (e.g., "year or years" language), but does not materially alter the core policy: protecting the tax base by denying carried losses where ownership/control continuity is broken, while allowing exceptions for policy and insolvency/tribunal-approved restructurings. Several operational questions necessary for administration (proof of beneficial ownership, treatment of compound share classes, procedural mechanism to record continuities) remain unaddressed in the texts: Not stated in the document.

Full Text:

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

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Acts Income Tax
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