Section 119 — Carry forward and set off of losses not permissible in certain cases. Successor to s.78, s.79 of the 1961 Act.
Section 119 is in Chapter VII — Set Off or Carry Forward and Set Off of Losses, which runs from section 108 to section 121.
Sub-section (1) denies a firm, on a change in its constitution during a tax year, the carry forward and set off of so much of the loss as is proportionate to a retired or deceased partner's share and exceeds his share of profits in the firm for that year. Sub-section (2) denies carry forward to anyone other than the person who incurred the loss where a business or profession has been succeeded to otherwise than by inheritance.
Sub-section (3) is the shareholding-continuity rule for a company in which the public are not substantially interested. Clause (a) denies carry forward and set off of an earlier year's loss unless, on the last day of the tax year, shares carrying not less than 51% of the voting power are beneficially held by the persons who beneficially held not less than 51% on the last day of the loss year. Clause (b) offers an eligible start-up referred to in section 140 an alternative: regardless of the change in percentage, the loss is allowed if all shareholders who held voting-power shares on the last day of the loss year continue to hold them on the last day of the tax year, and the loss was incurred within ten years from the year of incorporation.
Sub-section (4) lists six exceptions to sub-section (3): death of a shareholder or gift of shares to a relative; a change in an Indian subsidiary of a foreign company on the foreign company's amalgamation or demerger, where 51% of the shareholders of the amalgamating or demerged company are shareholders of the amalgamated or resulting company; a change under a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, where the jurisdictional Principal Commissioner or Commissioner was afforded a reasonable opportunity of being heard; a company, its subsidiary and that subsidiary's subsidiary where the Board was suspended by the Tribunal under section 241 of the Companies Act, 2013 and new directors appointed under section 242, and the change followed a resolution plan approved by the Tribunal under section 242 with the same opportunity of being heard; a change on account of relocation referred to in section 70(2) (Table: Sl. No. 5.C); and an erstwhile public sector company whose ultimate holding company, immediately after strategic disinvestment, continues to hold at least 51% of the voting power directly or through subsidiaries.
Sub-section (5) restores sub-section (3) for the tax year in which the sub-section (4)(f) condition is not complied with and for subsequent years. Sub-section (6) defines a subsidiary as a company more than half of whose equity share capital in nominal value is held by the other company, and adopts the meanings of "erstwhile public sector company", "strategic disinvestment" and "Tribunal" from section 116(3)(b), section 116(3)(c)(i) and section 2(90) of the Companies Act, 2013.
A carried forward loss belongs to those who bore it, and can otherwise be bought by acquiring the shell that holds it. Sub-section (3) ties the loss to continuity of beneficial ownership, and sub-sections (1) and (2) do the same for a firm losing a partner and a business changing hands otherwise than by inheritance. The exceptions release changes that are not commercial trades in losses, while sub-section (5) keeps the disinvestment exception conditional on the holding actually being maintained.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Continuity of beneficial voting power required | Not less than 51% of the voting power | Held on the last day of the tax year by persons who beneficially held not less than 51% on the last day of the loss year | Sub-section (3)(a) |
| Period within which an eligible start-up's loss must have been incurred | Ten years | Beginning from the year of incorporation; all loss-year shareholders must also continue to hold those shares | Sub-section (3)(b)(ii) |
| Shareholder continuity in a foreign amalgamation or demerger | 51% of the shareholders | Of the amalgamating or demerged foreign company, who must be shareholders of the amalgamated or resulting foreign company | Sub-section (4)(b) |
| Holding to be retained after strategic disinvestment | At least 51% of the voting power in aggregate | By the ultimate holding company, directly or through subsidiaries, and maintained in each subsequent tax year | Sub-section (4)(f) with sub-section (5) |
| Test of a subsidiary for this section | More than half in nominal value of the equity share capital | Held by the other company | Sub-section (6)(a) |
The 51% test is a snapshot comparison between the last day of the tax year and the last day of the loss year, so intermediate movements do not matter and a holding restored by the year end saves the loss. The start-up route is not a general relaxation: it frees the percentage but demands that every shareholder who held voting-power shares in the loss year still holds those shares, which is stricter, and it reaches only losses incurred within ten years of incorporation. The insolvency exceptions are conditional on procedure — both sub-section (4)(c) and (4)(d)(ii) require that the jurisdictional Principal Commissioner or Commissioner was afforded a reasonable opportunity of being heard. The disinvestment exception survives only so long as the 51% holding does.
A closely held company incurred a loss two years ago. During the current year its founders sell 60% of the equity, so on the last day of the year only 40% of the voting power is with people who held shares on the last day of the loss year, and sub-section (3)(a) denies the set-off. Had it been an eligible start-up under section 140 with the loss incurred within ten years of incorporation, sub-section (3)(b) could still have allowed it — but only if every loss-year shareholder had kept his shares, which the sale defeats.
In a scrutiny assessment where brought forward losses claimed in the return are disallowed after a change in shareholding, and in the shareholding particulars a closely held company furnishes with its return. It is also raised before the adjudicating authority in an insolvency resolution, since the exception depends on the jurisdictional Principal Commissioner or Commissioner having been heard.
unless on the last day of the tax year, the shares of the company carrying not less than 51% of the voting power were beneficially held by the persons who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred
nothing in this Chapter shall entitle any person other than the person incurring the loss to have it carried forward and set off against his income
See the full 1961 to 2025 concordance.
