Restriction on Losses of Closely Held Companies
Introduction
Section 79 restricts the set-off of carried forward losses in closely held companies if substantial changes occur in voting power. Exceptions apply for eligible start-ups and under specific circumstances like strategic disinvestment or resolution plans under IBC.
Conditions for Carry forward and Set-off of Losses
- Closely Held Companies:
Losses can be carried forward and set off only if at least 51% of voting power is beneficially held by the same persons:
o On the last day of the previous year in which loss occurred.
o On the last day of the previous year, when set-off is claimed.
- Eligible Start-ups:
Start-up companies incorporated between 01-04-2016 and 31-03-2030, with a turnover not exceeding Rs. 100crore and holding a valid “eligible business” certificate from the Inter-Ministerial Board of Certification, can carry forward losses if either of the following conditions is met in the year of set-off:
o At least 51% of the voting power is beneficially held by the same persons who held it on the last day of the year when the loss was incurred, or
o 100% of the shareholders on the last day of the year in which the loss was incurred continue to hold their shares on the last day of the preceding year in which the loss is set-off.
- Exceptions toSection 79:
Closely held companies or eligible start-ups can carry forward losses despite shareholding changes, if the change meets specified conditions.
o Shareholding or voting power changes due to death or gift.
o Amalgamation or demerger of a foreign parent company with its Indian subsidiary.
o Strategic disinvestment of erstwhile public sector companies by the Government.
o Resolution plans approved under IBC.
o Cases where the NCLT has suspended the Board and appointed new directors.
o Changes due to relocation of offshore funds to IFSC.