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Section 79 of the Income Tax Act: Carry Forward and Set-Off of Losses

One significant clause in the Income Tax Act that addresses a company's ability to carry forward and deduct losses from a specific fiscal year is Section 79. All businesses are covered by it, including foreign and domestic businesses and the Indian subsidiaries of foreign businesses. By enabling the deduction of losses from future profits, the section aims to prevent businesses from being penalised for losses sustained in prior years. This clause frees businesses from the burden of previous losses to invest in expansion prospects and preserve their financial stability.

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What are Carry Forward Losses

If a business experiences a loss during a given fiscal year, it may carry over those losses and deduct them from future profits. According to the provision, firms can carry forward their losses for a maximum of eight assessment years that follow the assessment year in which the loss occurred. For instance, a business that experiences a loss in the financial year 2022–2023 may carry over that loss and deduct it from its profits in the next eight assessment years or till the fiscal year 2030–2031 at the latest.


What are Set-Off of Losses

Businesses can also deduct their losses from future profits under Section 79. The following is one way to carry out the set-off:


  • Losses from Select Sources: A company's losses under the heading of "profits and gains of business or profession" may be offset by profits from any other business or occupation in the following years.


  • Losses from Other Sources: A business's losses from sources other than its business or profession, such as capital gains or income from additional sources, can only be offset by revenue from comparable sources.


  • Inter-Source Set Off: Losses incurred from one source offset by gains from another. For instance, if a business experiences a loss in its operations, it can deduct that loss from capital gains in later years.


Conditions for Carry Forwards & Set Off of Losses under Section 79

Companies must satisfy the condition outlined in Section 79 to carry forward and deduct their losses:

  • Continuity of Ownership: Between the year the loss was incurred and the year it is being sought to be offset, the ownership of at least 51% of the company's voting power should not change.


  • Business Continuity: The company's operations should not change in the year the loss was incurred and the year it is being sought to be set off.


  • Observance of the provisions:  All of the Income Tax Act's requirements, such as filing returns, paying taxes, and keeping up with books of accounts, should have been met by the business.


New Provisions of Section 79 

A company that is not one in which the public has a significant interest is subject to the provisions of Section 79.


A requirement that must be satisfied

The following prerequisite for losses to be carried forward and deducted from the prior year's income: On the last day of the fiscal year in which the loss was incurred, A person has beneficially held 51% of the voting power if they owned at least 51% of the company's shares on the last day of the previous year.


The situation of set-off and carryover of losses for qualified start-ups

Situations for carrying forward and setting off losses about start-ups are addressed by the recently substituted Section 79 provision. It means that even if the "eligible start-ups" do not meet the foregoing requirement, the loss incurred in any year (before the initial year) will be permitted to be carried forward and set off against the income of the previous year provided the following condition is met:

  • Every shareholder had the ability to vote on the last day of the year that the loss occurred and still held shares on the last day of the year that the income was to be deducted.


  • If the loss occurs within seven years of the year of incorporation, the preceding relief is available.


Exceptional Cases

The following situations exempt the Income Tax Act's Section 79 provisions:

  1. When the shareholder's life ends in a preceding year, the voting power and shareholding are modified.


  2. When the transfer of shares to any relative of the shareholder rendered the gift caused a change in voting power and ownership in the previous year.


  3.  If a foreign company's demerger or merger results in a change in the shareholding of an Indian company that is a subsidiary of that foreign company.


  4. The condition of the demerger or amalgamation is that the members of the merging or demerged foreign company will still hold 51% of the shares in the combined or resulting foreign company.


  5. A resolution plan authorised by the Insolvency and Bankruptcy Code determines the change in shareholding.


  6. In the following cases, the business and its subsidiaries (including a subsidiary of such a subsidiary).


  7. The Tribunal suspended the company's board of directors and appointed new directors in response to an application under Section 241. 


  8. Additionally, the Tribunal approved a resolution plan under Section 242 of the Companies Act that resulted in a change in the company's and its subsidiary's (including a subsidiary of such subsidiary) shareholding.


Conclusion

In summary, Section 79 of the Income Tax Act is a key clause that helps businesses that suffer losses in a given fiscal year. It supports businesses in keeping their finances stable and invests in expansion prospects without being constrained by losses by allowing them to carry forward and deduct their losses from future profits. However, to receive this benefit, businesses must meet the requirements outlined in this section.


FAQ

Q1. What is Section 79 of the Income Tax Act?

The Income Tax Act's Section 79 addresses the predefined holdover of losses incurred by a business during a specific fiscal year. It enables firms to deduct losses from their profits in the following years and carry them forward for up to eight assessment years.


Q2. Can all companies get the benefits under Section 79?

The benefits under Section 79 are available to all companies, including foreign companies, domestic companies, and Indian subsidiaries of foreign companies.


Q3. What is the period for which a company can carry forward its losses?

A business may carry forward its losses for a maximum of eight assessment years just after the assessment year in which the loss occurred.


Q4. How can a company set off its losses against future profits?

A business has two options for deducting its losses from its future earnings:

  • Losses resulting from specific sources: A company's losses under the heading of "profits and gains of business or profession" may be deducted from any profits made from any other business or profession.

  • Losses from other sources: The income from comparable sources in the following years offset a company's losses from sources other than business or profession, such as capital gains or income from other sources.


Q5. What are the conditions to avail of the benefits under Section 79?

Companies must satisfy the following criteria to receive the benefits under Section 79:

  • Ownership continuity: The ownership of 51% of the company's voting power should not change between the year the loss was incurred and established.

  • Business continuity: The company's operations should not change between the year the loss was incurred and deducted.

  • Provisional compliance: The business should have complied with all of the Income Tax Act's requirements, such as maintaining books of accounts, filing returns, and paying taxes.


Q6. Is there any time limit for setting off the carried forward losses?

The carried forward losses can be set off at any time; there is no time limit. In any of the eight assessment years, the evaluation year in which the loss was incurred, a company may deduct its losses from future profits.


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