Carry forward and Set-off of Losses in case of Start-ups

Section 79 of the Income Tax Act, 1961 deals with the carry forward of losses for certain class of companies which satisfies the conditions specified in Section 79. In case of a company in which public are not substantially interested (other than eligible start-up company referred below), no loss shall be carried forward and set off against the income of the previous year, unless at least 51% of the voting power of the company are beneficially held (on the last day of the previous year in which the loss is sought to be set off) by the same person(s) who held at least 51% of the shares on the last day of the financial year in which the loss was incurred.

In case of an eligible start-up, section 79 has been amended to provide that loss incurred in any year prior to the previous year, shall be allowed tobe carried forward and set off against the income of the previous year onsatisfaction of either of the two conditions:-

Carry forward and Set-off of Losses in case of Start-ups

• Shares of the company carrying not less than 51% of voting power were beneficially held by persons who beneficially had held sharesof the company carrying not less than 51% of voting power on thelast day of the year or years in which the loss was incurred;

or

• All the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the losswas incurred, continue to hold those shares on the last day of suchprevious year and such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated.

Exceptions:-

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:

o The Tribunal (on application under Section 241) has suspended the Board of Directors of the company and has appointed new directors; and

o 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.

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