As per the Income Tax Act, a company is not eligible to carry forward and set off its losses if 51% or more of the voting power in the year, in which the set-off is claimed, is not beneficially held by the same shareholders that beneficially held 51% or more voting power on the last day of the previous year in which the loss was incurred.
Section 79 of the Income Tax states, “Where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless on the last day of the previous year the shares of the company carrying not less than 51% of the voting power were beneficially held by person who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred.”
The Finance Bill 2017 has made some amendments to section 79 for eligible startups. It states that in the case of a company, not being a company in which the public are substantially interested but being an eligible startup as referred to in section 80-IAC, the loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year, if, all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred —
(i) continue to hold those shares on the last day of such previous year and
(ii) such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated.
However, there are two exemptions to this section:
- Change in shareholding on account of death of a shareholder, or transfer of shares by way of gift to any relative.
- An Indian company that becomes a subsidiary of a foreign company as a result of amalgamation or demerger of a foreign company. However, this provision is subject to certain conditions.
This amendment will take effect from April 1, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.
