Clause 35 of the Finance Bill 2023 proposes to amend Section 79 of the Income Tax Act, 1961 to provide relief to start-ups by extending the benefit of loss carry forward on shareholding changes in start-ups from seven to ten years after incorporation.
Section 79 allows certain companies to carry forward and set off losses. The continuity of at least 51% shareholding condition does not apply to an eligible start-up referred to in section 80-IAC if all shareholders of the company as of the last day of the year in which the loss was incurred continue to hold those shares on the last day of the previous year in which the loss is set off. Under this provision, losses incurred during the seven-year period beginning with the year in which such company is incorporated are eligible for carry forward and set-off.
This section is being amended to provide that losses incurred during the ten-year period beginning with the year in which such company is formed are eligible for carry forward and set-off.
1. Section 79 of the Income Tax Act limits loss carry forward and set-off in the case of companies other than those in which the public has a substantial interest. It forbids the offset of carried forward losses if the shareholding pattern changes significantly. The carried forward loss is set off only if at least 51% of the company’s shareholding (as of the previous year’s end) remains unchanged.
2. However, some flexibility has been granted in the case of an eligible start-up, as defined in section 80-IAC of the Act. The continuity of at least 51% shareholding condition does not apply to an eligible start-up if all shareholders of the company as of the last day of the year in which the loss was incurred continue to hold those shares as of the last day of the previous year in which the loss is set off. There is an additional condition that the loss may be set off only if it was incurred during the seven-year period beginning with the year in which the company was incorporated.
3. To align this seven-year period with the ten-year period contained in sub-section (2) of section 80-IAC of the Income Tax Act, the time period for loss of eligible start-ups to be considered for relaxation is proposed to be increased from seven to ten years from the date of incorporation.
4. It is thus proposed to amend the proviso to section 79(1) of the Income Tax Act so that the carried forward loss of eligible start-ups will be considered for set off under this proviso if such loss was incurred within ten years of the year in which such company was incorporated.
5. This amendment will become effective on April 1, 2023, and will apply to the assessment years 2023-24 and onwards.
Related Posts: