The shares of my closely held company moved from the foreign parent to that parent's new Indian subsidiary, and the officer has struck out the brought-forward business loss, the unabsorbed depreciation, the house property loss and the capital loss under s.79 - how much of that can I get back?
The client is a private limited company writing embedded software, assessed at a circle in Noida, in which the public are not substantially interested. It has three sets of brought-forward figures: business loss of Rs 2,14,00,000 for AY 2020-21 and Rs 96,00,000 for AY 2021-22, unabsorbed depreciation of Rs 1,38,00,000 accumulated over the same years, a house property loss of Rs 9,40,000 on a let-out office, and a short-term capital loss of Rs 22,00,000 on the sale of listed securities. All those returns were filed inside the s.139(1) due date. Until November 2023 a Singapore parent held 98 per cent of the equity and the founder held 2 per cent. On 22 November 2023 the parent transferred its entire 98 per cent to a newly incorporated Indian company of which it holds every share, and in the same month the founder gifted his 2 per cent to his son. The ultimate parent did not change. AY 2024-25 was the first profitable year, with income of Rs 3,40,00,000 before set-off; the return was filed on 29 October 2024 setting off the business loss, adding the unabsorbed depreciation to the year's allowance and absorbing both the house property and the capital loss. The assessment under s.143(3) read with s.144B, dated 12 March 2026, refuses all four under s.79, relying on the 98 per cent transfer and on the gift. The demand is Rs 1,21,00,000 with interest. The appeal was filed on 9 April 2026 and is pending.
Build the shareholding table before writing a single ground. One row for each of the last days of the years in which each loss was incurred, one row for the last day of AY 2024-25, and a column for beneficial holding of voting power as against registered holding. Section 79 is a comparison between two dates and nothing else, and four different losses in this order stand or fall on four different footings. A ground sheet drafted before that table exists will argue the wrong thing about the depreciation and will miss the carve-out that answers the gift entirely.
The library's statutory page on the section is blunt about this: four different texts of s.79 have governed the last decade and the one that applies is the one in force for the assessment year in which the set-off is claimed. The Finance Act 2017 substituted the section with effect from 1 April 2018 in a clause (a) and clause (b) form, and it has been rewritten since. The Supreme Court principle behind that is on the library as well - it is a cardinal principle of tax law that the law to be applied is that in force in the assessment year unless otherwise provided expressly or by necessary implication, so an assessee who carried a loss forward under an older and kinder text takes no vested right with him. Here the set-off year is AY 2024-25, so the text to argue is the one in force for that year, and the losses of AY 2020-21 and AY 2021-22 are relevant only as the years against whose last days the comparison is made.
The library's concept page puts the test in one sentence: the loss survives only if, on the last day of the year in which the set-off is claimed, shares carrying at least 51 per cent of the voting power are beneficially held by the same persons who beneficially held 51 per cent on the last day of each year in which the loss was incurred. Two things follow and both are worth putting in the grounds. The section compares the last days of years, not the date of the share transfer, so a holding that moves and moves back inside a year never engages it; and it speaks of beneficial holding of voting power, not of the register. The Karnataka High Court has built on that second point, holding that s.79 speaks of voting power rather than merely of registered shareholding. This matters here because the assessment order recites the date of the transfer and never identifies who beneficially held what on 31 March 2020, 31 March 2021 and 31 March 2024.
This is the whole case and it is the weakest part of it. On one side the Karnataka High Court held that where a parent transferred shares to a company it wholly owned, the parent and that subsidiary together still controlled 51 per cent of the voting power, so the section was not attracted - which is this file exactly. A Delhi Bench decided the same way where an Indian company's shares moved between group companies and the ultimate parent abroad did not change. On the other side the library holds a High Court decision going the opposite way on the same facts: a transfer of the entire shareholding from one holding company to another changes the beneficial ownership of the shares for s.79 even though the ultimate parent stays the same, so the earlier losses cannot be carried forward. The department will cite it and it answers the argument head on.
Rs 1,38,00,000 of this addition should not survive the first hearing. The Supreme Court has held, agreeing with the Gujarat High Court, that when s.79 speaks of loss it does not include unabsorbed depreciation or unabsorbed development rebate; only the brought forward business loss is at risk, and unabsorbed depreciation continues to be governed by s.32(2). The library's page on s.32(2) explains why that follows from the mechanics rather than from indulgence: the sub-section does not create a carried-forward loss, it adds the unabsorbed allowance to the following year's allowance and deems it to be part of it, so it becomes current year depreciation and the restrictions written for losses do not reach it. The Delhi High Court has applied the same reasoning to the late-return bar, and the Madras High Court has applied it to hold that carried-forward depreciation takes the character of current year depreciation and can be set off against current year income other than capital gains.
The officer has swept Rs 9,40,000 of house property loss and Rs 22,00,000 of short-term capital loss into the same order without separate reasoning, and that is where a concession is most often made by accident. The library's concept page on the section and its statutory page both discuss s.79 against brought-forward business loss under s.72 and unabsorbed depreciation under s.32(2), and the High Court decision here dealing with a s.79 remark in a loss year order is expressed against the same provisions together with s.74. What none of them does is decide whether the bar reaches a house property loss carried forward under s.71B, or a capital loss carried forward under s.74. The point has to be argued from the words the section uses and from its place in the chapter, and pleaded as a separate ground so that it is not lost inside the shareholding argument.
Sub-section (2) takes several changes out of the bar altogether, and the library's statutory page sets them out against the four texts: a change on the death of a shareholder or on a gift of shares to a relative, a change consequent on an amalgamation or demerger of a foreign holding company on stated conditions, a change following a resolution plan approved under the Insolvency and Bankruptcy Code after the jurisdictional Principal Commissioner has been heard, and the separate relaxation for an eligible start-up where the original shareholders continue. The gift of 2 per cent from the founder to his son falls inside the relative carve-out on its face, and the officer has relied on it as part of his reasoning - a straightforward error to put first in the grounds. On the resolution plan limb the Bombay High Court has held that where the Commissioner was given the opportunity the clause requires and made no submissions before or at approval, the Revenue cannot afterwards reopen the point.
Two separate stages are being run together in most orders of this kind. The Supreme Court has held that whether a loss may be carried forward and set off is to be determined by the officer dealing with the assessment of the subsequent year, and that a decision recorded in the loss year is not final against the assessee. The Delhi High Court has applied that to this very section, holding that the officer of the loss year has only to notify the amount of the loss he has computed, and upholding a direction to expunge his remark that the loss would not be carried forward because the shareholding had changed. That is the answer if either loss year order carries such a line. Before relying on it, check the returns: a Tribunal has held that if the loss year return was filed inside the s.139(1) time the loss has already become eligible for carry forward, while the Supreme Court has held on a different provision that a declaration required by the due date and filed late is fatal.
The unabsorbed depreciation almost always comes back, and it is worth more than half the addition on this file. The gift to the son goes too, on the carve-out, without much argument. The 98 per cent transfer is the one that is usually lost: the decision in this library that reads voting power through a wholly owned subsidiary is marked as one on which High Courts differ, the order relying on an unchanged ultimate parent carries no reasoning to follow, and the decision going the other way is squarely on the facts. Expect the business loss of Rs 3,10,00,000 to stay disallowed unless the first appellate authority is in a jurisdiction that has followed the voting power reading. The house property and capital loss ground is genuinely open and is more often conceded by the department than decided, because nobody has reasoned about it in the order.
