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Section 119 Income Tax Act 2025: When Is Carry Forward of Losses Not Allowed?

Section 119 restricts the carry forward and set-off of losses when a partnership changes, a business is succeeded by another person, or a closely held company's beneficial shareholding changes. It also provides important exceptions for eligible start-ups, inheritances and specified reorganisations.

Current law: Income-tax Act, 2025, Section 119, applicable from 1 April 2026. The provision should be read with other loss set-off rules and any applicable saving provisions for earlier years.

What does Section 119 provide?

Section 119 is titled Carry forward and set off of losses not permissible in certain cases. It does not create a general new carry-forward period. Rather, it imposes additional eligibility restrictions on losses otherwise available under Chapter VII.

Its three main situations are changes in the constitution of firms, succession to a business or profession, and changes in beneficial voting ownership of certain companies. The rule for companies is subject to several statutory exceptions.

Section 119(1): Retirement or death of a partner

When the constitution of a firm changes during a tax year, the firm cannot carry forward and set off the part of the loss attributable to a retired or deceased partner to the extent that this amount exceeds that partner's share of profits, if any, in the firm for the tax year.

This is a proportionate restriction, not necessarily a complete forfeiture of the firm's losses. The partner's share, the relevant profit allocation and the change in constitution must be examined carefully.

Section 119(2): Succession to business or profession

If one person succeeds another in carrying on a business or profession otherwise than by inheritance, the successor generally cannot carry forward and set off losses incurred by the predecessor. The benefit remains with the person who incurred the loss, subject to other specific statutory provisions.

A purchase or takeover of a business does not, by itself, transfer the seller's historical tax losses to the buyer. Qualifying amalgamations and reorganisations must be separately examined under provisions such as Sections 116 to 118.

Section 119(3): Change in shareholding of a closely held company

For a company in which the public are not substantially interested, earlier losses generally cannot be carried forward and set off in a tax year involving a shareholding change unless persons beneficially holding shares carrying at least 51% of the voting power on the last day of the loss year also beneficially hold shares carrying at least 51% on the last day of the relevant tax year.

Special rule for eligible start-ups

An eligible start-up referred to in Section 140 may qualify despite a change in ownership percentages if all shareholders holding voting shares on the last day of the loss year continue to hold those shares on the last day of the relevant tax year and the loss was incurred within the first ten years beginning with the year of incorporation.

These tests are alternatives within the statutory framework. Eligibility must be established for the particular loss year and tax year.

Section 119(4) and (5): When does the shareholding restriction not apply?

Death or gift to a relative: a change due to a shareholder's death or gift of shares to a relative.
Foreign parent restructuring: a qualifying amalgamation or demerger of a foreign parent of an Indian subsidiary, subject to the prescribed 51% shareholder continuity test.
IBC resolution plan: a change under a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, with the specified tax authority given a reasonable opportunity of being heard.
Companies Act intervention: specified companies and subsidiaries affected by a Tribunal-approved resolution plan under Sections 241 and 242 of the Companies Act, 2013, subject to the statutory conditions.
Specified relocation: qualifying shareholding changes arising from relocation referred to in Section 70(2), Table, serial number 5.C.
Strategic disinvestment: an erstwhile public sector company where the prescribed ultimate holding company retains at least 51% aggregate voting power directly or through subsidiaries.

Important: Under Section 119(5), failure to maintain the prescribed strategic-disinvestment condition in a later tax year brings the restriction in Section 119(3) into operation for that year and subsequent years.

Relevant statutory definitions

Beneficial holding of voting power: The Section 119(3) continuity test focuses on persons who beneficially hold shares carrying voting power, not merely changes in the registered names of shareholders.

Eligible start-up: A company satisfying the requirements referred to in Section 140; the special continuity rule under Section 119(3)(b) also requires retention of the relevant shares and a loss within the first ten years from incorporation.

Subsidiary: For Section 119, one company is a subsidiary of another if the latter holds more than half the nominal value of its equity share capital, as specified in Section 119(6)(a).

Erstwhile public sector company: Has the meaning assigned under Section 116(3)(b).

Strategic disinvestment: Has the meaning assigned under Section 116(3)(c)(i).

Tribunal: Has the meaning assigned in Section 2(90) of the Companies Act, 2013.

For the meaning of a company in which the public are substantially interested, and of a relative, consult the applicable definitions in the Act and the particular facts.

Practical examples

Example 1: Business sold to a new owner

A sole proprietor has eligible carried-forward business losses of Rs. 8 lakh and sells the business to an unrelated buyer. The buyer generally cannot use the seller's losses under Section 119(2), because succession is not by inheritance.

Example 2: Change of beneficial voting ownership

A closely held company incurred a business loss in an earlier year. The persons who held at least 51% of its voting power in that loss year no longer satisfy the required 51% beneficial ownership continuity in the relevant tax year. The brought-forward loss may be disallowed for set-off, unless an applicable statutory exception or eligible start-up rule is satisfied.

Example 3: Gift of shares to a relative

A shareholder gifts shares to a relative. The resulting change may fall within the specific exclusion under Section 119(4)(a). The precise relationship and mode of transfer must satisfy the statutory requirements.

Practical checklist: Preserve the share register, beneficial ownership records, voting-right details, loss-year records, partner profit-sharing arrangements, succession documents and any restructuring approvals before claiming set-off.

Relationship with the Income-tax Act, 1961

Section 119 of the 2025 Act consolidates subject matter previously addressed in Sections 78 and 79 of the Income-tax Act, 1961. Earlier-year losses require attention to the transition and saving provisions in Section 536 of the 2025 Act. The Income Tax Department has clarified that valid pre-2026 losses retain their original character and relevant limits.

Because Section 119 is a statutory restriction rather than a tax-rate provision, no judgment is attributed to it as a case title. Judicial authorities should be added only when their facts and continuing relevance have been verified.

Frequently asked questions

Can a company use old losses after a change in shareholders?

Not always. A company in which the public are not substantially interested must ordinarily satisfy the 51% beneficial voting-power continuity test or an applicable exception under Section 119.

Does every change in shareholding disqualify a company?

No. The statutory test concerns beneficial voting ownership and includes exceptions, including qualifying transfers on death, gifts to relatives and specified restructurings.

Can an eligible start-up retain losses after a funding round?

Potentially, if the conditions of Section 119(3)(b), including continuity of all relevant shareholders' shares and the ten-year loss condition, are met.

Can the buyer of a business claim the seller's carried-forward losses?

Generally no, under Section 119(2), where the business is succeeded to otherwise than by inheritance. Specific reorganisation provisions require separate examination.

Do losses from before 1 April 2026 automatically expire?

No. Section 536 contains transition provisions, but a loss must have been validly eligible for carry-forward under the former law and remains subject to its applicable conditions.

Official law and further reading

Review the Income Tax Department's Income-tax Act, 2025 resources and its official FAQs on set-off and carry-forward of losses. For related provisions see Section 116, Section 117 and Section 118.

Last reviewed: 10 November 2026. This article is general legal information and is not a substitute for advice on particular transactions.