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Corporate Tax Planning

Notes Carry Forward and Set-off of Losses in Case of Closely Held Companies
(Section 79]

Where in any previous year, there has been a change in the shareholding of a company in which
the public are not substantially interested, any unabsorbed loss of the company shall be allowed
to be carried forward and set off against the income of the previous year only if the benefi cial
shareholders of at least 51 % of the voting power on the last day of the previous year remained
the same as on the last day of the year or years in which the loss was incurred.
However, this restriction shall not apply in the following two cases:
(i) where a change in the voting power is consequent upon the death of a shareholder or on
account of transfer of shares by way of gift by a shareholder to his relative; and
(ii) where the change in shareholding takes place in an Indian company, being a subsidiary
of a foreign company, as a result of amalgamation or demerger of the foreign company.
However, this is subject to the condition that 51% of the shareholders of the amalgamating
or demerged company continue to be shareholders of the amalgamated or resulting
company.
The provisions of this section are applicable only in respect of carry forward of losses and not in
respect of carry forward of unabsorbed depreciation, which is covered by section 32(2).

Where there is a succession by inheritance, the legal heirs (assessable as BOI) are entitled to
set-off the business loss of the predecessor. Such carry forward and set-off is possible even if the

legal heirs constitute themselves as a partnership firm. In such a case, the firm can carry forward

and set-off the business loss of the predecessor.

Did u know? Any company that has only a limited number of shareholders, its closely held
company stock is publicly traded on occasion, but not on a regular basis. These entities
differ from privately owned fi rms that issue stock that is not publicly traded. Those who
own shares of closely held corporations should consult a financial planner with expertise

in the tax and estate ramifications that come with owning this type of stock.
Self Assessment

Fill in the blanks:
26. The ……………….of the Income Tax Act, 1961 deals with the treatment of setoff and carry
forward of losses in case of change in constitution of firm or succession.

27. Where there is a succession by inheritance, the legal heirs assessable as……………. are
entitled to set-off the business loss of the predecessor.

4.11 Order of Set-off of Losses

As per the provisions of section 72(2), brought forward business loss is to be set-off before setting
off unabsorbed depreciation. Therefore, the order in which set-off will be effected is as follows:
(i) Current year depreciation or current year capital expenditure on scientific research and

current year expenditure on family planning, to the extent allowed.
(ii) Brought forward loss from business or profession [Section 72(1)]
(iii) Unabsorbed depreciation [Section 32(2)]
(iv) Unabsorbed capital expenditure on scientific research [Section 35(4)]

(v) Unabsorbed expenditure on family planning [Section 36(1)(ix)]

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