Section 119 of the Income-tax Act, 2025 — Carry Forward and Set Off of Losses Not Permissible in Certain Cases

In plain language

What Section 119 is about

Section 119 of the Income-tax Act, 2025 (effective 1 April 2026) is an anti-abuse / blocking provision. Ordinarily, if you make a business loss, you can carry it forward and set it off against future profits. Section 119 lists the specific situations where this right is switched off, mainly to stop people from "buying" a loss-making entity or transferring losses to someone who did not actually suffer them. It consolidates ideas that were spread across Sections 78 and 79 of the old Income-tax Act, 1961.

The three core blocking situations

• Change in constitution of a firm (sub-section 1): When a partner retires or dies, the firm cannot carry forward the portion of loss that is proportionate to that partner's share (reduced by his share of profit for that year). The logic: the loss "belonged" to the outgoing partner, so it should not stay with the continuing firm.
• Succession of business otherwise than by inheritance (sub-section 2): If a business or profession is taken over by a new owner (sale, transfer, etc.), only the person who actually incurred the loss may carry it forward. The successor cannot inherit the loss. The one exception is succession by inheritance — where the heir can carry the loss forward.
• Change in shareholding of a closely held company (sub-section 3): This is the most important limb, replacing old Section 79. For a company in which the public is not substantially interested (a private / closely held company), brought-forward losses can be set off only if shares carrying at least 51% of the voting power are beneficially held on the last day of the current tax year by the same persons who held 51% on the last day of the loss year.

Who it applies to

• Partnership firms undergoing a change in partners (retirement/death).
• Any proprietor / business owner whose business is taken over by another person.
• Closely held (private) companies — NOT companies in which the public are substantially interested (broadly, widely-held / listed companies), which are exempt from the 51% test.

The start-up carve-out

An eligible start-up (referred to under Section 140) gets softer treatment. Instead of the 51% test, the loss is allowed if all the shareholders who held shares in the loss year continue to hold their shares, and the loss was incurred during the first ten years from the year of incorporation. This lets founders raise fresh equity (which dilutes them below 51%) without losing their accumulated losses.

Exceptions where the 51% rule does NOT bite (sub-section 4)

• Death or gift: Change in voting power due to death of a shareholder, or transfer of shares by way of gift to a relative.
• Foreign parent restructuring: An Indian company that is a subsidiary of a foreign company, where the change is due to amalgamation/demerger of the foreign parent and 51% of shareholders of the amalgamating company continue.
• IBC resolution: Change pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 (after opportunity of hearing to the jurisdictional Principal Commissioner/Commissioner).
• Company-law rescue: Change on account of a resolution plan for a company whose board was suspended and taken over on Central Government reference under Companies Act sections 241–242.
• Relocation: Change consequent to relocation as referred to in Section 70(2).
• PSU disinvestment: An erstwhile public sector company after strategic disinvestment, so long as the ultimate holding company continues to hold 51% of voting power.

Continuing conditions and definitions

• Sub-section 5 claws back the PSU relief: if the disinvestment condition in 4(f) is later breached in any year, the 51% block in sub-section 3 applies from that year onwards.
• Sub-section 6 defines "subsidiary", "erstwhile public sector company" and "strategic disinvestment" (cross-referring to Section 116) and "Tribunal".

Practical implications

• Do due diligence before buying a private company for its losses — if more than 49% of voting power changes hands, the accumulated losses generally lapse.
• Unabsorbed depreciation is treated differently — the 51% test primarily hits business losses carried forward; depreciation carry-forward has historically not been caught by this restriction, but structure transactions carefully and take advice.
• Founders raising funding should track the start-up window (10 years / Section 140 eligibility) to preserve losses despite dilution.