When Loss Carry Forward Is Not Allowed: Change of Shareholding, Firms and Successors (Income Tax Act 2025)

Section 119 of the Income Tax Act 2025 lists three situations where a brought-forward loss cannot be set off against later income: a company whose shareholding changes, a firm that loses a partner, and a business taken over by someone other than the person who incurred the loss. The best known is the company rule: unless the same persons still hold at least 51% of the voting power on the last day of the tax year, old losses cannot be set off against that year's income. Listed and other widely held companies are outside this rule.

This guide walks through each sub-section of section 119, the exceptions in sub-section (4), and worked examples. The law is as amended by the Finance Act 2026, applicable from 1 April 2026 (tax year 2026-27). The figures and names in the examples are made up to show the arithmetic.

What does section 119 of the Income Tax Act 2025 say?

Sub-section	Situation	What is blocked
119(1)	Change in constitution of a firm during the tax year	Loss attributable to a retired or deceased partner, to the extent it exceeds his share of profits in that tax year
119(2)	Business or profession succeeded to by another person, other than by inheritance	Anyone other than the person who incurred the loss carrying it forward and setting it off
119(3)(a)	Change in shareholding of a company that is not widely held	Set-off of earlier years' losses unless the 51% voting power test is met
119(3)(b)	Eligible start-up (section 140)	Relief: a different test applies (see below)
119(4)	Listed exceptions	Sub-section (3) does not apply

When is a company's loss carry forward not allowed after a change in shareholding?

Section 119(3)(a) applies to a company that is not a "company in which the public are substantially interested". That phrase is defined in section 2(29). It includes, among others, a company owned by or with at least 40% held by the Government or the Reserve Bank of India, a section 8 company, and certain non-private companies whose shares are listed on a recognised stock exchange in India on the last day of the tax year. In practice, closely held private companies are the ones that must run the test.

The test compares two dates:

• the last day of the tax year in which you want to set off the loss; and
• the last day of the year or years in which the loss was incurred.

The loss can be set off only if shares carrying not less than 51% of the voting power on the first date were beneficially held by the same persons who beneficially held shares carrying not less than 51% of the voting power on the second date. Two points follow from the wording. The test is on voting power, not on the number of shares or the share capital. And it is on beneficial holders, so look at who ultimately holds the shares, not only at the register.

Worked example 1: the 51% test passes and fails

Assumptions: Alpha Traders Pvt Ltd is a closely held private company. It incurred a business loss of Rs 40,00,000 in tax year 2025-26, carried forward under section 112. In tax year 2026-27 its income before set-off of that loss is Rs 25,00,000. On 31 March 2026, Ravi held 35% of the voting power and Meena held 30%, together 65%. Other shareholders held 35%.

Step	Case A: Ravi sells 5% to a new investor	Case B: Ravi sells all 35% to a new investor, Karan
Voting power of Ravi and Meena on 31 March 2027	30% + 30% = 60%	0% + 30% = 30%
Is it 51% or more?	Yes	No
Set-off of Rs 40,00,000 loss	Allowed: Rs 25,00,000 set off	Not allowed under section 119(3)(a)
Income left to tax (before other deductions)	Rs 25,00,000 − Rs 25,00,000 = Rs 0	Rs 25,00,000
Loss left to carry forward	Rs 40,00,000 − Rs 25,00,000 = Rs 15,00,000	Not set off this year

In Case B the company pays tax on the full Rs 25,00,000 even though it has an unabsorbed loss on paper. The eight-year limit in section 112(2) counts from the year the loss was first computed, so the passage of time does not reset.

Does the rule apply if the shareholding changed in an earlier year?

Section 119(3) opens with a "change in shareholding during the tax year". The loss-year comparison is then made between the last day of the tax year and the last day of the loss year or years. If the company has several loss years, the persons holding 51% on the last day of each loss year are the comparison group for that year's loss, so check each loss year separately.

Which changes in shareholding are excluded from the rule?

Section 119(4) says sub-section (3) does not apply in these cases:

Clause	Exception
119(4)(a)	The change in voting power and shareholding is due to the death of a shareholder, or a transfer of shares by gift to a relative of the shareholder
119(4)(b)	An Indian company that is a subsidiary of a foreign company, where the change arises from amalgamation or demerger of the foreign company and 51% of the shareholders of the amalgamating or demerged foreign company become shareholders of the amalgamated or resulting foreign company
119(4)(c)	Change in shareholding in the tax year consequent to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after a reasonable opportunity of being heard was given to the jurisdictional Principal Commissioner or Commissioner
119(4)(d)	A company, its subsidiary and the subsidiary of that subsidiary, where the Tribunal suspended the board on an application of the Central Government under section 241 of the Companies Act, 2013, new directors were appointed under section 242, and the change follows a Tribunal-approved resolution plan (with the same hearing opportunity)
119(4)(e)	A company, to the extent the change in shareholding is on account of a relocation referred to in section 70(2) (Table Sl. No. 5.C)
119(4)(f)	An erstwhile public sector company where, after strategic disinvestment, the ultimate holding company continues to hold at least 51% of the voting power, directly or through subsidiaries

Under section 119(5), if the condition in 119(4)(f) is not met in any later tax year, section 119(3) applies for that year and all years after it.

Real-life example. Suman holds 60% of a private company that has carried-forward losses. She passes away and her two children inherit the shares. The company's shareholding has changed, but because the change is due to the death of a shareholder, section 119(4)(a) takes it out of section 119(3). In the same way, if Suman had gifted 20% of the shares to her daughter, a relative, during her lifetime, the gift would also fall within 119(4)(a). A sale of the same 20% to a business associate would not.

Do start-ups get different treatment?

Yes. Under section 119(3)(b), a company that is an eligible start-up referred to in section 140 can carry forward and set off a loss regardless of the change in shareholding percentage, if both conditions hold:

• all the shareholders who held voting shares on the last day of the year or years in which the loss was incurred continue to hold those shares on the last day of the tax year; and
• the loss was incurred during the ten years beginning from the year of incorporation.

Read the first condition carefully. It is stricter in one way: every earlier shareholder must still be there. It is looser in another: the 51% arithmetic is replaced by this "no one left" test, so a new investor can come in alongside existing holders (new shares issued) without breaking it, provided every earlier shareholder still holds the shares they held in the loss year (their percentage may fall, because 119(3)(b) applies regardless of the change in percentage).

Real-life example. Neha and two friends incorporated a start-up in 2022 that qualifies as an eligible start-up under section 140. It lost money in 2023-24 and 2024-25. In 2026-27 an angel investor subscribes to new shares and holds 40% of the voting power. All three founders still hold their original shares on 31 March 2027, so under section 119(3)(b) the old losses are still available even though the founders' combined holding fell. If one founder had sold her shares to the investor instead, the condition would fail.

What happens to a firm's loss when a partner retires or dies?

Under section 119(1), where the constitution of a firm changes during a tax year, the firm cannot carry forward and set off so much of the loss, proportionate to the share of a retired or deceased partner, as exceeds that partner's share of profits, if any, in the firm for that tax year.

Worked example 2. Assumptions: Sharma and Co, a partnership firm, has an unabsorbed business loss of Rs 12,00,000. Partner Anil had a 25% share. He retires on 30 September 2026. The firm earns profit in 2026-27 and Anil's share of that year's profit is Rs 1,00,000.

Step	Amount
Loss proportionate to Anil's 25% share	Rs 12,00,000 × 25% = Rs 3,00,000
Anil's share of profit in tax year 2026-27	Rs 1,00,000
Excess of loss share over profit share (not allowed)	Rs 3,00,000 − Rs 1,00,000 = Rs 2,00,000
Loss available to the firm for set-off	Rs 12,00,000 − Rs 2,00,000 = Rs 10,00,000

This is a simplified reading of the sub-section to show the mechanics. If your case involves several loss years or changing profit-sharing ratios, apply the wording to each year's figures.

What if someone else takes over the business?

Section 119(2) covers a person carrying on a business or profession who has been succeeded in that capacity by another person, otherwise than by inheritance. In that case, only the person who incurred the loss can carry it forward and set it off. The successor cannot.

Real-life example. Ravi runs a trading business that has lost money for two years. He sells the entire business as a going concern to Kiran. Kiran cannot use Ravi's carried-forward loss against Kiran's own income under section 119(2). If Ravi had died and his son had continued the business, the succession would be by inheritance, and section 119(2) would not block the loss. The section does not say what happens to the loss in the hands of the original person once the business is gone, so that question needs a separate look at the facts.

Common mistakes

• Counting shares instead of voting power. The test is on voting power. A company with differential voting rights can give a different answer from a simple share count.
• Checking only the register. The test is on beneficial holding. An indirect change through a holding company can still change who beneficially holds the shares.
• Testing only the current year. The comparison is with the last day of the year or years in which the loss was incurred. Old losses from different years may need to be checked against their own dates.
• Assuming a private company is safe because the change was small. The line is whether the same persons still hold 51%, so a modest sale by a key holder can break it while a bigger transfer among others does not.
• Missing the widely held carve-out. If the company falls within section 2(29), section 119(3) does not apply. Check the definition before concluding that a loss is blocked.
• Treating a gift to a friend as a gift to a relative. Section 119(4)(a) is limited to a relative of the shareholder.

Quick reference

Item	Rule
Who the 51% test applies to	Companies other than those in which the public are substantially interested
Test date	Last day of the tax year of set-off vs last day of the loss year(s)
Threshold	Not less than 51% of voting power, held beneficially by the same persons
Start-up relief	All earlier shareholders still hold; loss within ten years of incorporation
Business loss carry-forward period	Up to eight tax years after the year the loss was first computed (section 112(2))

Where this is in the Act

• Section 119(1): firm, retired or deceased partner
• Section 119(2): succession to a business or profession
• Section 119(3): change in shareholding, 51% voting power test; 119(3)(b) eligible start-up
• Section 119(4) and (5): exceptions, and when the public sector exception lapses
• Section 119(6): definitions of subsidiary, erstwhile public sector company, strategic disinvestment, Tribunal
• Section 2(29): company in which the public are substantially interested
• Section 112: carry forward and set off of business loss
• Section 116: losses in amalgamation or demerger
• Section 140: eligible start-up

For the wider set-off rules, read our complete guide to set-off and carry forward of losses and the note on filing the return to carry forward losses.

For a CA firm, the practical task is keeping a dated record of each closely held client's shareholding at every year-end alongside its loss register. Finexo's practice management software can hold that checklist and the client tasks with reminders. It does not run the section 119 test for you. This article is information, not tax advice.