Section 79 of the Income Tax Act is an important provision that deals with the carry forward and set off of losses incurred by a company in a particular financial year. It applies to all companies, including domestic companies, foreign companies, and Indian subsidiaries of foreign companies.
The section is designed to ensure that companies are not penalized for losses incurred in previous years by allowing them to set off such losses against future profits. This provision helps companies to maintain their financial stability and invest in growth opportunities without being burdened by past losses.
Let us understand the provisions of Section 79 in detail:
Carry Forward Losses
If a company incurs a loss in a particular financial year, it can carry forward such losses and set them off against the profits earned in subsequent years. The provision allows companies to carry forward their losses for up to eight assessment years immediately succeeding the assessment year in which the loss was incurred.
For example, if a company incurs a loss in the financial year 2022-23, it can carry forward this loss and set it off against the profits earned in the subsequent eight assessment years, i.e., up to the financial year 2030-31.
Set Off of Losses
Section 79 also allows companies to set off their losses against future profits. The set-off can be done in the following manner:
Losses from Specified Sources: The losses incurred by a company under the head “profits and gains of business or profession” can be set off against profits earned from any business or profession in the subsequent years.
Losses from Other Sources: The losses incurred by a company from sources other than business or profession, such as capital gains or income from other sources, can be set off only against income earned from similar sources in the subsequent years.
Inter-Source Set Off: A company can also set off losses from one source against profits earned from another source. For example, if a company incurs a loss in its business operations, it can set off this loss against capital gains earned in subsequent years.
Conditions for Carry Forward and Set Off of Losses
Section 79 lays down certain conditions that companies must fulfill to carry forward and set off their losses:
Continuity of Ownership: The ownership of at least 51% of the voting power of the company should remain the same in the year in which the loss was incurred and the year in which it is sought to be set off.
Continuity of Business: The business of the company should remain the same in the year in which the loss was incurred and the year in which it is sought to be set off.
Compliance with Provisions: The company should have complied with all the provisions of the Income Tax Act, including the filing of returns, payment of taxes, and maintenance of books of accounts.
Final Conclusion:
In conclusion, Section 79 of the Income Tax Act is a crucial provision that provides relief to companies that incur losses in a particular financial year. Allowing them to carry forward and set off their losses against future profits, it enables companies to maintain financial stability and invest in growth opportunities without being burdened by past losses. However, companies must fulfill the conditions laid down under the section to avail of this benefit.
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Here are some frequently asked questions (FAQs) related to Section 79 of the Income Tax Act:
Q. What is Section 79 of the Income Tax Act?
A. Section 79 of the Income Tax Act is a provision that deals with the carry forward and set off of losses incurred by a company in a particular financial year. It allows companies to carry forward their losses for up to eight assessment years and set them off against the profits earned in the subsequent years.
Q. Can all companies avail of the benefits under Section 79?
A. Yes, all companies, including domestic companies, foreign companies, and Indian subsidiaries of foreign companies, can avail of the benefits under Section 79.
Q. What is the period for which a company can carry forward its losses?
A. A company can carry forward its losses for up to eight assessment years immediately succeeding the assessment year in which the loss was incurred.
Q. How can a company set off its losses against future profits?
A. A company can set off its losses against future profits in two ways:
Losses from specified sources: The losses incurred by a company under the head “profits and gains of business or profession” can be set off against profits earned from any business or profession in the subsequent years.
Losses from other sources: The losses incurred by a company from sources other than business or profession, such as capital gains or income from other sources, can be set off only against income earned from similar sources in the subsequent years.
Q. What are the conditions for availing of the benefits under Section 79?
A. To avail of the benefits under Section 79, companies must fulfill the following conditions:
Continuity of ownership: The ownership of at least 51% of the voting power of the company should remain the same in the year in which the loss was incurred and the year in which it is sought to be set off.
Continuity of business: The business of the company should remain the same in the year in which the loss was incurred and the year in which it is sought to be set off.
Compliance with provisions: The company should have complied with all the provisions of the Income Tax Act, including the filing of returns, payment of taxes, and maintenance of books of accounts.
Q. Is there any time limit for setting off the carried forward losses?
A. No, there is no time limit for setting off the carried forward losses. A company can set off its carried forward losses against future profits in any of the subsequent eight assessment years immediately succeeding the assessment year in which the loss was incurred.
