Section 79 of the Income Tax Act is an important provision that impacts the carry forward and set-off of losses for a company. If you are running a business and have incurred losses in a previous year, you may want to carry forward those losses to offset future profits. However, under certain circumstances, Section 79 imposes restrictions on this carry-forward of losses. In this blog post, we will discuss how you can legally bypass these restrictions under Section 79 of the Income Tax Act, and how tools like accounting software and GST billing software can play a crucial role in compliance.
What is Section 79 of Income Tax Act?
Before understanding how to bypass restrictions, it’s important to first grasp what Section 79 is about.
Section 79 primarily deals with the carry-forward of losses for a company. If a company has incurred a loss in a particular financial year, the loss can be carried forward to set off against future profits. However, this benefit is available only under certain conditions. According to Section 79, if there is a change in the shareholding of a company by more than 51% during a financial year, the company will lose the ability to carry forward its losses.
The purpose of this restriction is to prevent companies from acquiring loss-making firms just to set off their losses against future taxable profits. It ensures that only the original shareholders who incurred the loss can avail of the benefit of carrying forward the losses.
Key Provisions of Section 79:
- Losses can only be carried forward if the same set of shareholders who were holding shares in the loss-incurring year hold more than 51% of the shares in the subsequent year.
- If there’s a change in the ownership of the company, either due to the sale or acquisition of shares, the carry-forward of losses becomes disallowed.
- The provision applies to both long-term and short-term capital loss carry-forwards.
How Can You Legally Bypass Restrictions Under Section 79?
Although Section 79 imposes restrictions, there are several ways to legally bypass them while ensuring compliance with tax laws.
1. Restructure Shareholding with Careful Planning
One of the ways to legally avoid the restrictions of Section 79 is by restructuring the shareholding of the company in a way that doesn’t trigger a change of more than 51% ownership. The key is to keep track of the ownership and ensure that the same shareholders retain the majority stake in the company.
If you need to bring in new investors or transfer shares, careful planning and consultation with a tax expert or legal advisor can help avoid violating the provisions of Section 79.
How Can Accounting Software Help?
By keeping an accurate record of shareholder information, accounting software can help track the ownership status of the company. Features such as shareholder registers, share transfer records, and capital account management can help monitor the shareholding structure and ensure that the company stays compliant.
2. Set-Off of Losses in the Event of a Merger or Amalgamation
If a company undergoes a merger or amalgamation, the restrictions under Section 79 may not apply if certain conditions are met. In such cases, if the company is merged with another company that has similar business activities, the carry-forward of losses may still be allowed. This can be a strategic move to bypass the provisions of Section 79 while also benefiting from the losses incurred by the company.
However, for this to happen, both the merging companies must meet specific conditions laid down by the Income Tax Act. One of the main conditions is that the business continuity must be maintained post-merger, i.e., the company’s main business activities should not change.
How Can GST Billing Software Help?
During a merger or amalgamation, a company may also need to update its GST billing software to ensure that all transactions, invoicing, and tax filings are correctly handled under the new structure. This is crucial because the GST laws require accurate reporting of sales and tax credits, which could affect the financial status of the company and its eligibility for carrying forward losses.
3. Use of Carry-Forward Provisions under Different Sections
In certain cases, losses from other heads of income, capital gains, or business losses may be eligible for carry-forward under provisions other than Section 79. If Section 79 prevents you from carrying forward losses, you can explore other sections of the Income Tax Act that may offer similar provisions for carrying forward losses, including sections 70, 71, and 72.
This can be an alternative route for companies that are unable to bypass Section 79 directly. Consulting a tax professional for advice on the best course of action is recommended.
4. Joint Ventures and Partnerships
If your company is part of a joint venture or partnership, the losses incurred by the entity can sometimes be passed on to the individual partners, depending on the agreement and structure. In this case, partners may have the ability to carry forward their share of the loss without the same restrictions imposed by Section 79.
How Accounting Software Supports Partnerships?
Accounting software can play a crucial role here by generating detailed partnership reports, profit-sharing ratios, and accounting entries that ensure the proper division of profits and losses. This documentation is essential for tax filing and for taking advantage of loss carry-forward provisions in joint ventures.
5. Adequate Documentation and Record-Keeping
Keeping accurate records and maintaining proper documentation is essential in ensuring that your company remains compliant with the Income Tax Act, particularly in the case of loss carry-forwards. Good accounting practices can help you prove that the losses were incurred legitimately and were not part of an attempt to bypass tax provisions.
Role of Accounting Software:
Advanced accounting software, Marg Books helps businesses maintain precise financial records, including P&L statements, balance sheets, and loss reports, all of which are essential when filing tax returns and proving eligibility for carrying forward losses.
Why Marg Books is the Best Choice for Businesses?
For businesses looking to manage their accounting and GST processes, MargBooks offers a reliable, easy-to-use solution. It can simplify complex tasks such as tracking shareholder records, managing business transactions, and ensuring tax compliance, all while providing seamless integration with GST billing. With MargBooks, businesses can avoid errors, save time, and stay on top of all financial and tax-related obligations.
Conclusion
While Section 79 of the Income Tax Act imposes significant restrictions on the carry-forward of losses, there are various legal ways to bypass these restrictions with careful planning, restructuring, and proper documentation.
Using tools like Accounting software and GST billing software can streamline the process by ensuring accurate records are maintained and compliance is met. Always remember, it’s best to consult a tax advisor or legal expert to navigate these provisions effectively.
