Condition for carry forward and set off of losses in cases of strategic restructuring : Clause 119 of the Income Tax Bill, 2025 and Comparison with Section 79 of the Income Tax Act, 1961

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Contents

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, introduces substantial modifications to the rules governing the carry forward and set off of losses in specific cases. This clause is particularly relevant for firms undergoing changes in constitution, businesses experiencing succession, and companies witnessing alterations in shareholding. The clause aims to regulate the conditions under which losses can be carried forward and set off against future income, thereby affecting tax liabilities. This commentary will also compare Clause 119 with the existing Section 79 of the Income Tax Act, 1961, which already provides a framework for the carry forward and set off of losses in certain companies.

Objective and Purpose

The legislative intent behind Clause 119 is to ensure that tax benefits related to the carry forward and set off of losses are not misused in cases of strategic restructuring or changes in ownership. By setting specific conditions, the clause aims to prevent tax avoidance while still allowing genuine business losses to be offset against future profits. The historical context reveals a consistent effort by lawmakers to balance the interests of the revenue department with those of businesses seeking to manage their tax liabilities effectively.

Detailed Analysis

1. Change in Constitution of a Firm

Clause 119(1) addresses the scenario where there is a change in the constitution of a firm during a tax year. It stipulates that the firm cannot carry forward and set off losses proportionate to the share of a retired or deceased partner, reduced by their share of profit, if any. This provision is designed to prevent firms from exploiting changes in partnership to unjustly benefit from loss carry forwards.

2. Succession of Business or Profession

Clause 119(2) deals with the succession of a business or profession by another person, other than by inheritance. It specifies that the successor cannot carry forward and set off losses incurred by the predecessor. This rule ensures that business successions do not result in unjust tax benefits, maintaining the integrity of the tax system.

3. Change in Shareholding of Companies

Clause 119(3) outlines conditions under which the carry forward and set off of losses are permitted in the event of a change in shareholding of a company not substantially owned by the public. It requires that the beneficial owners of at least 51% of voting power at the time the loss was incurred must continue to hold at least 51% at the time of the shareholding change. This provision is crucial for preventing tax avoidance through strategic changes in company ownership.

Clause 119(3)(b) provides an exception for eligible start-ups, allowing them to carry forward losses if all shareholders at the time the loss was incurred continue to hold their shares at the time of the shareholding change, and the loss was incurred within the first ten years of incorporation. This exception reflects a policy decision to support start-ups by providing them with greater flexibility in managing their tax liabilities.

4. Exceptions to the General Rule

Clause 119(4) enumerates several exceptions where the restrictions on carrying forward and setting off losses do not apply. These include changes due to the death of a shareholder, gifts to relatives, amalgamations or demergers of foreign companies, and changes pursuant to an approved resolution plan under the Insolvency and Bankruptcy Code, 2016. These exceptions recognize scenarios where changes in shareholding are not motivated by tax avoidance.

5. Conditions for Strategic Disinvestment

Clause 119(5) introduces a condition related to strategic disinvestment, stating that if the ultimate holding company does not maintain a 51% voting power post-disinvestment, the restrictions of sub-section (3) will apply. This provision ensures that strategic disinvestments do not become a loophole for tax avoidance.

6. Definitions and Clarifications

Clause 119(6) provides definitions for terms such as "subsidiary," "erstwhile public sector company," "strategic disinvestment," and "Tribunal." These definitions are critical for the accurate interpretation and application of the clause.

Practical Implications

Clause 119 has significant implications for businesses, particularly those undergoing restructuring or ownership changes. Firms must carefully evaluate their eligibility for carrying forward and setting off losses under the new rules. Compliance requirements will increase, necessitating meticulous record-keeping and legal consultation to navigate the complexities introduced by the clause.

Comparative Analysis with Section 79 of the Income Tax Act, 1961

1. Similarities

Both Clause 119 and Section 79 aim to regulate the carry forward and set off of losses in cases of changes in shareholding. They share a common goal of preventing tax avoidance through strategic ownership changes while allowing genuine business losses to be offset against future income.

2. Differences

Clause 119 introduces a broader scope by including provisions related to the change in constitution of firms and succession of businesses, which are not explicitly covered by Section 79. Additionally, Clause 119 provides specific exceptions for start-ups and strategic disinvestment, reflecting a more nuanced approach to contemporary business practices.

Section 79 focuses primarily on changes in shareholding and does not provide the same level of detail regarding exceptions and special cases as Clause 119. The introduction of start-up provisions and strategic disinvestment conditions in Clause 119 represents a significant evolution in tax policy, accommodating modern business dynamics.

3. Policy Evolution

The transition from Section 79 to Clause 119 signifies a policy shift towards a more comprehensive and flexible framework for managing loss carry forwards. This evolution reflects an understanding of the complexities of modern business structures and the need for tax laws to adapt accordingly.

Conclusion

Clause 119 of the Income Tax Bill, 2025, represents a significant advancement in the regulation of loss carry forwards. By addressing a wider range of scenarios and providing detailed exceptions, the clause offers a more robust framework for preventing tax avoidance while supporting genuine business activities. The comparative analysis with Section 79 of the Income Tax Act, 1961, highlights the evolution of tax policy in response to changing business environments. As businesses navigate these new regulations, ongoing legal interpretation and potential judicial clarification will be essential to ensure the effective implementation of Clause 119.

Full Text:

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

Dated: 12-4-2025