Section 79: How a funding round can kill your carry forward losses

A startup spends its first two years burning cash, building product, and accumulating losses on its books. Those losses are not dead weight. Under the Income Tax Act, 1961, they are a deferred tax asset: a future claim to reduce taxable income once the company turns profitable. Then a VC arrives with a term sheet, the cap table shifts, and those losses silently disappear. No court order, no notice, no refund. Section 79 of the Income Tax Act, 1961 is the provision that makes this happen, and most founders discover it only after the damage is done.

This article explains exactly how Section 79 works, which companies it applies to, how a typical funding round triggers it, and, critically, what the startup exception actually protects against (and where it does not). For the full set of startup tax benefits including the Section 80-IAC income tax holiday, ESOP deferral, and the angel tax abolition, see Treelife’s complete guide to startup tax exemptions in India.

Does raising a funding round automatically destroy your carry-forward losses?

Not automatically, but it can, depending on whether the persons who beneficially held shares carrying at least 51% of voting power on the last day of the loss year continue to hold those same shares on the last day of the set-off year. Under Section 79(1) of the Income Tax Act, 1961, a closely held company cannot set off carried-forward losses if that 51% continuity is broken. Most early-stage funding rounds break it. The startup exception under Section 80-IAC provides a narrower but real rescue, provided no original shareholder exits fully.

What Section 79 actually says

Section 79 of the Income Tax Act, 1961 sits in Chapter VI, which deals with aggregation of income and set off of losses. The section opens with a non-obstante clause (“notwithstanding anything contained in this chapter”), which tells you it overrides the general set-off rules in Sections 70, 71, and 72.

The core rule is this: where a change in shareholding has taken place during a previous year in the case of a company where the public is not substantially interested (a “closely held company”), no loss incurred in any prior year shall be carried forward and set off against the income of the current year, unless on the last day of the current year, the shares carrying not less than 51% of the voting power are beneficially held by the same persons who beneficially held them on the last day of the year in which the loss was incurred.

Three terms in that rule carry enormous weight.

First, “closely held company.” Section 2(18) of the Income Tax Act defines a company where the public is substantially interested as one where 40% or more of shares are held by the public, or which is listed, or government-owned, and so on. Any private limited company with VC investors is typically a closely held company for this purpose. Section 79 applies only to such companies; publicly listed companies are outside its scope.

Second, “beneficially held.” The section uses the term beneficial ownership, not legal or registered ownership. This becomes critical in layered VC structures: if a fund holds shares through a nominee entity or a special purpose vehicle, the beneficial owner for Section 79 purposes is the ultimate person or entity that controls and benefits from those shares. The Finance Bill 2025 clarified the language from “person who beneficially held shares” to “beneficial owner of shares,” tightening the standard and bringing it closer to what courts have consistently held in cases like Hiranandani Healthcare Pvt. Ltd. vs. Commissioner of Income Tax.

Third, “voting power.” Section 79 tracks voting rights, not economic ownership. This matters when a company has issued preference shares without voting rights, convertible notes, or CCPS. The Section 79 test runs on voting shares, not on fully diluted economic stakes. A VC holding 60% CCPS with no voting rights may not break the test. A VC holding 60% equity shares with standard voting rights will.

Table 1: Section 79 scope at a glance

Parameter	Rule
Applicable company type	Closely held companies (not widely held / not listed)
Loss types covered	Business losses under Sections 70-72
Loss types not covered	Unabsorbed depreciation (Section 32(2)), capital expenditure on scientific research, family planning expenditure
Threshold	51% of voting power must be held by same persons
Test date (loss year)	Last day of the financial year in which the loss was incurred
Test date (set-off year)	Last day of the financial year in which set-off is claimed
What “same persons” means	Beneficial owners, not necessarily registered holders

How the 51% rule is measured in practice

Consider a startup incorporated in FY 2022-23. The founders, Arjun (60%) and Priya (40%), accumulate ₹80 lakhs in business losses by 31 March 2024. On that date, Arjun beneficially holds 60% of voting power and Priya holds 40%.

In FY 2024-25, a seed investor takes a 30% stake through fresh share allotment. Post-allotment: Arjun 42%, Priya 28%, Investor 30%. Total voting power held by Arjun and Priya: 70%. The 51% test passes. The ₹80 lakh carry-forward is intact.

The following year, Series A closes. The VC takes 55% through fresh allotment and a secondary purchase of Priya’s stake. Post-closing: Arjun 18%, VC 55%, New ESOP pool 10%, Seed investor 17%. Arjun, who held 60% in the loss year, now holds 18%. Priya, who held 40% in the loss year, holds zero. The persons who held 51% or more in the loss year (Arjun + Priya together) see their aggregate holding in the set-off year collapse well below 51%. Section 79 fires. The ₹80 lakh loss is gone.

This is not an edge case. This is the standard trajectory of a Series A round for an early-stage startup.

Why a funding round is the most common Section 79 trigger

A funding round changes the cap table in four ways, each of which independently tests the 51% rule.

Fresh share allotment to new investors. When a VC takes 40-60% through new share issuance, existing shareholders are diluted proportionally. If founders collectively held, say, 80% before the round and are diluted to 40% after, the 51% continuity condition fails from the perspective of any fixed base-year calculation where founders held the majority.

Pre-money ESOP pool creation. Investors almost universally require an ESOP pool to be created on a pre-money basis, meaning the pool is carved from existing shareholders before the new investor’s shares are counted. A 15% ESOP pool created pre-money dilutes founder voting power in the cap table. Ungranted options sitting in the pool do not have voting rights until exercised, but the reserved shares reduce the founders’ percentage of total issued capital (depending on how the pool is structured). This timing matters for Section 79 because the year-end cap table is the comparison point.

Secondary sales by early shareholders. This is where the startup exception gets silently killed. If an angel investor or early-stage VC takes a secondary exit as part of a larger round, they transfer their shares to the incoming investor. The angel was a shareholder in the loss year. After the secondary sale, they hold nothing. Even if the new investor is well-resourced and the company’s future is bright, Section 79 does not care about economic logic. The original shareholder has exited. If the startup exception is being relied on, this single exit can destroy it.

Conversion of convertible instruments. CCDs, CCPS, and convertible notes, when converted into equity, issue new shares and fundamentally alter the voting percentage of existing holders. The timing of conversion relative to the financial year end directly affects which cap table snapshot Section 79 sees. Consider a startup that incurred losses in FY 2023-24, when founders held 80% of voting shares and a seed VC held 20% via CCPS with no voting rights. The CCPS converts in November 2024, mid-way through FY 2024-25, giving the seed VC 55% equity. On 31 March 2025 (the last day of FY 2024-25), the founders hold only 45% of voting power. The 51% continuity test, measured against the FY 2023-24 base, fails. Had the conversion been timed for April 2025 instead (the first day of FY 2025-26), the FY 2024-25 year-end snapshot would still show founders at 80%, keeping the test intact for one more year. Founders negotiating conversion triggers in their CCPS term sheets should build this timing optionality explicitly into the instrument.

The startup exception: what it protects and what it does not

Recognising that the 51% rule was effectively penalising legitimate, investment-driven ownership changes in early-stage companies, Parliament introduced an exception via the Finance Act, 2017, amended further by Finance Act, 2020, and then extended by Budget 2023-24 and Budget 2025-26. Under the current position, the startup exception operates as follows:

For an eligible startup as defined under Section 80-IAC of the Income Tax Act, 1961, a loss incurred during the eligible period can be carried forward and set off even if the 51% continuity condition is not met, provided:

1. All shareholders of the company who held shares carrying voting power on 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.
2. The loss was incurred within 10 years from the year of incorporation (extended from 7 years by Budget 2023-24, and kept at 10 years by Budget 2025-26).

This is structurally different from the 51% test. Under the standard test, the question is whether the same bloc of 51% voting power is held. Under the startup exception, the question is whether every individual shareholder from the loss year is still on the cap table in the set-off year, even as a single-share holder.

The practical benefit is significant. If Arjun and Priya held all the shares in FY 2022-23 when the loss was incurred, and a VC takes 65% through fresh allotment in FY 2024-25, the 51% test fails. But if Arjun still holds his diluted stake and Priya still holds her diluted stake (both can be at 1% each now), the startup exception passes. New investors can join and dilute the founders below 51% without destroying the carry-forward, as long as no original shareholder exits completely.

Who qualifies as an eligible startup for this exception?

The company must be an eligible startup as referred to in Section 80-IAC. This requires:

• Incorporation as a private limited company or LLP
• Date of incorporation between 01/04/2016 and 31/03/2030 (as extended by Union Budget 2025-26)
• DPIIT recognition (via the Startup India portal, Notification GSR 127(E), 2019)
• Engagement in an innovative business, scalable with high potential for employment generation or wealth creation
• Annual turnover not exceeding ₹100 crore in the financial year for which the deduction is claimed

Note that DPIIT recognition alone is not sufficient for the Section 80-IAC tax holiday. That separately requires Inter-Ministerial Board (IMB) certification. But for Section 79 purposes specifically, the eligibility as an “eligible startup referred to in Section 80-IAC” means the company must satisfy the 80-IAC conditions, and the DPIIT recognition is a necessary part of that eligibility chain. Get your DPIIT recognition early, before the first funding round, not after.

Table 2: Standard 51% test vs. startup exception

Scenario	Standard 51% test result	Startup exception result
VC takes 55%, founders diluted but still holding	Fails (51% continuity broken)	Passes (founders still on cap table)
One founder exits fully (secondary sale)	Fails	Fails (all-original-shareholders condition broken)
Angel exits via secondary; new VC enters	Fails	Fails (angel no longer holds)
New ESOP pool created, founders diluted to 48%	Fails	Passes (founders still hold)
Foreign parent amalgamation causing India sub’s shareholding change	Exception under Sec 79(2) applies	Exception under Sec 79(2) applies
NCLT resolution plan (IBC)	Exception under Sec 79(2) applies	Exception under Sec 79(2) applies

The Finance Bill 2025 amendment: continuous holding, not just year-end

This is the change that most founders and many advisors have not fully internalised. Before the Finance Bill 2025, the Section 79 test was applied as a point-in-time comparison: you compared the shareholding on the last day of the loss year against the shareholding on the last day of the set-off year. A company could theoretically break the 51% continuity mid-year and then restore it before 31 March through a reverse transaction. Courts had differing views on this, but the position was not entirely settled.

The Finance Bill 2025 changed this definitively. The amendment clarifies that the 51% continuity must be maintained at all times after the loss year. If the continuity is broken at any point between the loss year and the set-off year, the carry-forward right is permanently extinguished, even if shareholding is later restored to meet the 51% requirement by the year end. Temporary breaches are now fatal.

One housekeeping point that affects every filing from FY 2026-27 onwards: Section 79 of the Income Tax Act, 1961 is renumbered as Section 101 under the Income Tax Act, 2025, which is operative from 01/04/2026. The substantive rules are unchanged. Tax returns, assessment orders, and legal opinions referencing this provision for Tax Year 2026-27 and beyond should cite Section 101 of the Income Tax Act, 2025. Prior-year assessments continue under the 1961 Act numbering.

What this means practically: if a secondary transaction happens in, say, October 2025, breaks the 51% continuity, and then the company tries to restore it through a share buyback or rights issue by March 2026, it does not matter. The loss carry-forward for the pre-break losses is gone.

The Mumbai Income Tax Appellate Tribunal had already held in Sodexo India Services Private Limited that Section 79 “gets attracted in the year in which set-off is claimed and not in the year when the shareholding changes.” The 2025 amendment goes further: once the continuity is broken, no future year’s claim survives.

For startups relying on the exception, the same logic applies: if an original shareholder exits at any point after the loss year, the exception fails permanently for those losses. The exit does not need to coincide with the set-off year to cause damage.

ESOP pool timing and its Section 79 interaction

The ESOP pool question is where cap table mechanics and tax law collide in ways that founders rarely anticipate.

Investors at Series A and beyond routinely require an ESOP pool of 12-15% to be created on a pre-money basis. This means the pool is funded by diluting existing shareholders before the new investment is counted. The pool consists of reserved but unissued shares. Options are granted from this pool to employees over time.

From a Section 79 standpoint, the key questions are: (a) does creating the ESOP pool change “beneficial” voting power? and (b) do option grants or exercises affect the 51% calculation?

Ungranted options have no voting rights and no beneficial owner; they sit in the pool. The voting percentage of existing shareholders on the date of the reserve creation is calculated on total issued shares, not on the fully-diluted count. So if the pool is created by board resolution and shareholder special resolution (as required under Section 62(1)(b) of the Companies Act, 2013), but no shares are actually issued, the 51% test looks at current issued capital only.

The risk arises when options are exercised. Each exercise increases the total issued share count, diluting all existing holders proportionally. If exercise events happen in a year where the 51% position is already close to the boundary, they can tip the company over.

The second risk is more structural: some companies create the ESOP pool by first issuing shares to a trust or SPV and then allocating from there. If the trust or SPV holds shares, that entity is a new registered shareholder and its beneficial owner question matters. If the trust was not a shareholder in the loss year, its shares cannot be counted toward the 51% continuity on the founders’ side.

Create the ESOP pool early, ideally at incorporation or before the first priced round. This ensures that the pool’s dilutive impact is baked into the earliest cap table, including the loss year, and does not create a new disruptive change in later years.

Secondary sales: the silent kill switch

Secondary sales, where an existing shareholder sells some or all of their shares to an incoming investor, are common at Series A and beyond. Angels and seed funds often want liquidity; Series A investors often want to concentrate ownership; founders sometimes take partial liquidity. From a business perspective, secondary sales are neutral: no new money enters the company, the cap table just rearranges.

From a Section 79 perspective, secondary sales are far more dangerous than primary issuances. Here is why.

In a primary issuance, existing shareholders are diluted but remain on the cap table. In a secondary sale, the selling shareholder exits. If that shareholder was a holder in the loss year, two consequences follow:

Under the standard 51% test: the selling shareholder’s percentage is now held by the buyer. If the buyer was not a holder in the loss year, that percentage no longer counts toward the 51% continuity test on the side of “same persons who held in the loss year.” This reduces the qualifying bloc.

Under the startup exception: the condition requires all original shareholders to continue holding. A single full exit by any original shareholder, regardless of how small their stake was, fails the condition entirely, for all accumulated losses, not just for the loss year in which that particular shareholder’s exit falls.

This is the silent kill switch. A 2% angel who took a few lakhs of equity at the friends-and-family stage, if they do a full secondary in a Series A round three years later, can wipe out ₹2 crores of carry-forward losses that the founders were counting on to offset future profits.

The solution is not to prevent secondary sales. Secondaries are legitimate and often important for cap table health. The solution is to plan them correctly. Two structural approaches are available:

Option one: partial secondary instead of full exit. If the angel exits 90% of their stake but retains even one share, the startup exception continuity condition is technically preserved. This requires a specific carve-out in the term sheet and SHA, and the angel’s cooperation. It is a small administrative burden with a potentially large tax benefit for the company.

Option two: schedule secondaries to fall in a year after the company has turned profitable and set off all accumulated losses. Once losses are utilised, there is nothing left to protect. The secondary then has no Section 79 consequence.

Unabsorbed depreciation: what is fully immune from Section 79

This is the most important relief that Section 79 does not touch. The Supreme Court in Commissioner of Income Tax vs. Shri Subhulaxmi Mills Ltd. (2001) 249 ITR 795 definitively held that Section 79 does not apply to unabsorbed depreciation. The section’s text covers “losses,” and unabsorbed depreciation under Section 32(2) of the Income Tax Act is categorically not a loss; it is an allowance that remains unabsorbed. Income Tax Appellate Tribunals across jurisdictions have consistently applied this ratio.

What this means for a hardware startup or a SaaS company with significant capital expenditure: even if a funding round triggers Section 79 and kills your business loss carry-forwards entirely, your unabsorbed depreciation survives. You can continue to set it off against future income, even if the 51% test was broken years ago.

Founders who own significant fixed assets, proprietary equipment, or have capitalised software development costs should specifically bifurcate their brought-forward tax assets between (a) business losses and (b) unabsorbed depreciation before modelling the impact of a funding round. The depreciation pool is safe.

Similarly, capital expenditure on scientific research (Section 35) and on family planning (Section 36(1)(ix)) are also not subject to Section 79 restrictions, as confirmed by judicial precedent.

Table 3: What survives Section 79 and what does not

Item	Section 79 applies?	Survival after shareholding change
Business losses (Section 70-72)	Yes	Destroyed if 51% continuity broken
Unabsorbed depreciation (Section 32(2))	No	Fully survives
Capital expenditure on scientific research (Section 35)	No	Fully survives
Capital loss (Section 74)	Separate rules apply	Not directly governed by Section 79
MAT credit (Section 115JAA)	Separate rules apply	Not directly governed by Section 79

How the insolvency exception works

Section 79 contains one more important carve-out. Where a change in shareholding of a closely held company (and its subsidiaries) results from a resolution plan approved by the National Company Law Tribunal under Section 242 of the Companies Act, 2013 (i.e., an insolvency resolution under the Insolvency and Bankruptcy Code, 2016), Section 79 restrictions do not apply. The loss carry-forward survives even a complete ownership change, as long as it flows through an NCLT-approved resolution plan.

This matters for distress acquisitions. If you are acquiring a company in financial difficulty through an IBC process, you inherit its tax losses without the Section 79 trigger. This makes IBC acquisitions structurally attractive for loss-rich targets.

Separately, amalgamations and demergers involving foreign companies are also carved out if at least 51% of the foreign company’s shareholders continue to hold shares in the resulting entity. This is relevant for multinational restructurings where an Indian subsidiary’s shareholding changes as a by-product of an offshore transaction.

Common mistakes founders make before and during a funding round

Mistake 1: not checking if the company qualifies for the startup exception before relying on it. Founders assume DPIIT recognition activates the Section 79 relief automatically. The company must satisfy all the Section 80-IAC conditions, including the turnover cap of ₹100 crore. If the company has crossed that threshold in any prior financial year, the 80-IAC eligibility for new claims is gone, and with it the Section 79 startup exception.

Mistake 2: letting a seed investor or angel do a full secondary without considering the loss impact. The secondary itself triggers no immediate Section 79 event; the trigger happens when set-off is claimed. But the damage is done silently. By the time the company turns profitable and wants to set off losses, the startup exception condition fails because one original shareholder no longer holds. The loss was frozen two rounds ago.

Mistake 3: not mapping losses to specific loss years. Losses from FY 2022-23 and losses from FY 2023-24 are separate; each loss year has its own “who held shares on the last day” base. A secondary sale in a later year may destroy the exception for the FY 2022-23 losses but not (if the sale happened after year-end) for FY 2024-25 losses. Mapping which loss belongs to which year allows surgical planning.

Mistake 4: assuming the ESOP trust’s holding is neutral. If the company uses an ESOP trust structure, the trust’s beneficial owner is not the employees until options are exercised. The trustee holds the shares. If the trustee is a professional third party who was not a shareholder in the loss year, that bloc of shares does not count toward the 51% continuity on the founders’ side.

Mistake 5: ignoring the Finance Bill 2025 continuous-holding test. Some founders and their advisors plan Section 79 around a year-end snapshot. The 2025 amendment makes this irrelevant. The continuity test now runs at all times. A mid-year restructuring that temporarily breaks 51% and is then restored does not preserve the losses.

Mistake 6: not documenting the commercial rationale when structuring partial exits for Section 79 purposes. The recommendation to have an angel retain even one share to preserve the startup exception is commercially sound and legally permissible. But if the sole documented reason for that retention is to preserve the carry-forward, a well-prepared Assessing Officer can invoke the General Anti-Avoidance Rules under Chapter X-A of the Income Tax Act, 1961 (Sections 95-102, renumbered as Chapter XII under the Income Tax Act 2025) and disregard the arrangement as an impermissible avoidance arrangement whose main purpose is to obtain a tax benefit. The GAAR risk is real but manageable. The retention must have a genuine commercial basis: the angel continues to hold for upside, participates in future information rights, or benefits from a tag-along on exit. Document the business rationale contemporaneously in board minutes and the SHA. Retention structured purely as a nominee holding with no economic purpose will not survive GAAR scrutiny. The CBDT notification dated 31/03/2026 clarified that GAAR applies to investments made on or after 01/04/2017, which covers most active funding rounds.

Treelife practitioner note

In the fundraising transactions we have structured at Treelife, Section 79 analysis is now a standard deliverable at term-sheet stage, not an afterthought during tax due diligence post-closing. The reason: once a round closes and shares are allotted, the Section 79 damage is locked in. You cannot undo a completed secondary sale. You cannot retrospectively retain a shareholder who has already exited.

The pattern we see most often is a startup that has ₹1 to ₹3 crores in business loss carry-forwards by Series A. If the company turns profitable within 4-5 years (which is the goal), those losses would offset 25-35% of profits in the first good years, saving ₹25-80 lakhs in tax at a 25% effective rate. That is meaningful capital for a growth-stage company.

What destroys this is a combination of two things that both felt fine at the time: a full secondary by an early angel (who wanted liquidity, which is reasonable), and an ESOP pool created after the loss year with no analysis of beneficial ownership timing. Together, they break the startup exception. The losses are forfeited. The founders find out when their CA files the tax return two years later.

The fix is simple but requires advance planning. We run a pre-round cap table simulation, map all loss years to their base-year shareholders, identify which shareholders’ continued holding is critical for the startup exception, and then negotiate the term sheet to structure secondaries as partial exits rather than full exits where the tax benefit justifies it. The angel gets 90% liquidity. The company keeps its ₹2 crore carry-forward. Both outcomes are achievable.

Pre-closing checklist: Section 79 before a funding round

Before any term sheet is signed and any shares are allotted or transferred, run through these steps:

• Confirm DPIIT recognition is active and the company qualifies as an eligible startup under Section 80-IAC (turnover below ₹100 crore in all prior years)
• Map every business loss by financial year and identify who held shares on 31 March of each loss year
• Identify every original shareholder who has not yet exited and whose continued holding is required for the startup exception
• List every proposed secondary sale and determine whether it constitutes a full exit by any original loss-year shareholder
• If any full exit is proposed, model the tax cost of losing the carry-forward against the benefit of providing full liquidity vs. partial liquidity to that seller
• Confirm that the ESOP pool creation will not create a new class of “beneficial owners” outside the loss-year base
• Check the Finance Bill 2025 continuous-holding point: any mid-year event that temporarily breaks 51% (or the all-shareholders test for startups) is now permanently fatal
• Ensure the term sheet and SHA contain provisions that allow remaining original shareholders to retain at least one share post-secondary, with appropriate tag-along protections
• Have the tax structuring analysis reviewed by a specialist before closing, not after

FAQs

Q: Does Section 79 apply to LLPs?
A: No. Section 79 of the Income Tax Act, 1961 applies to companies. LLPs are governed by separate provisions. An LLP carrying forward losses does not face the 51% shareholding continuity condition. This makes the LLP structure occasionally attractive for entities that expect significant early-stage losses and multiple capital changes.

Q: If Section 79 destroys my business losses, does it also destroy my MAT credit?
A: No. Minimum Alternate Tax credit under Section 115JAA of the Income Tax Act is not a loss carry-forward; it is a tax credit. Section 79 does not apply to MAT credit. The credit can be used in subsequent years regardless of shareholding changes, subject to the standard 15-year carry-forward period.

Q: My startup lost DPIIT recognition. Does the Section 79 startup exception still apply to losses incurred while I was recognised?
A: The income tax authorities interpret Section 80-IAC eligibility as a year-by-year condition. If recognition was active in the loss year, you could argue the exception applies for that loss. However, the current legal position is not definitively settled. Seek specific advice if DPIIT recognition lapses.

Q: How does the startup exception interact with losses incurred after the 10-year window?
A: Losses incurred more than 10 years after the year of incorporation do not qualify for the startup exception. They fall under the standard 51% rule. If the company is still closely held and has experienced a shareholding change, those post-window losses are subject to the general Section 79 test.

Q: What if the VC holds CCPS with no voting rights? Does this break the 51% test?
A: Section 79 tracks shares carrying voting power, not all shares. If a VC holds CCPS that carry no voting rights (which is common in early tranches), those shares do not affect the voting power calculation. The test runs only on shares with actual voting rights. You need to check the specific rights in your SHA and CCPS term sheet.

Q: Can a secondary sale to a holding company of an existing shareholder preserve the startup exception?
A: If the holding company is a different legal entity from the original shareholder, the original shareholder has exited. The startup exception requires the original shareholders (the specific persons, not their related entities) to continue holding. A transfer from an individual to their wholly-owned holding company would break the condition unless the individual still holds at least one share directly.

Q: My company is not DPIIT-recognised. Is there any other way to save carry-forward losses after a funding round?
A: Under the standard Section 79 rule, you need 51% voting power to be held by the same persons. The only ways to achieve this after a round that crosses the threshold are: (a) structure the round so founders retain 51% of voting shares, which is often not commercially viable; or (b) use differential voting rights (DVR) shares where founder shares carry higher voting weight, preserving 51% of voting power even with economic dilution below 51%. DVR shares are permitted under Section 43 of the Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014, with the 2019 amendment raising the maximum DVR cap to 74% of total voting power.

Q: What happens to Section 79 analysis in an acquisition where my company is being bought out?
A: In a full acquisition via share purchase, the target company’s losses are inherited by the new owners, but Section 79 fires immediately at the point the 51% continuity breaks. The new owners cannot set off the pre-acquisition losses of the target. The only way losses survive an acquisition cleanly is through an IBC resolution plan approved by the NCLT under Section 242 of the Companies Act, or through a qualifying amalgamation under Section 72A.

Q: Are capital losses under Section 74 affected by Section 79?
A: No. Capital losses are governed by Section 74, which has its own carry-forward and set-off rules. Section 79 applies specifically to business losses under Sections 70-72. Capital losses can be carried forward for 8 years regardless of shareholding changes, subject to Section 74’s own conditions.

Q: Does Section 79 apply between a parent company and its wholly-owned subsidiary?
A: The Mumbai ITAT in cases involving group restructurings, and the Karnataka High Court in AMCO Power, have held that where the ultimate beneficial ownership remains unchanged (that is, the same person controls both the transferring and receiving entity in the corporate chain), Section 79 does not apply. This position, however, conflicts with the Delhi High Court’s ruling in Yum India, which applied a strict legal-entity-based test. The law on intra-group transfers is not uniformly settled. Seek advice specific to your group structure before relying on beneficial ownership arguments.

Q: How should I document beneficial ownership for Section 79 purposes?
A: Maintain shareholder registers updated after every allotment and transfer. Document the beneficial owner for any shares held through nominees, trusts, or SPVs. For DPIIT-recognised startups, maintain a loss-year cap table record separately from the operational cap table, annotated with the beneficial owner of each share bloc on the last day of each loss year. This documentation becomes critical if the Assessing Officer challenges the carry-forward claim during scrutiny assessment.

Regulatory references:

• Section 79, Income Tax Act, 1961 (as amended by Finance Act 2017, Finance Act 2020, Finance Act 2022, Finance (No. 2) Act 2023, and Finance Bill 2025); renumbered as Section 101, Income Tax Act, 2025, operative from 01/04/2026
• Section 80-IAC, Income Tax Act, 1961 (as amended, including Union Budget 2025-26 extension of incorporation deadline to 31/03/2030); renumbered as Section 158, Income Tax Act, 2025
• Sections 95-102 (GAAR), Income Tax Act, 1961; renumbered as Chapter XII, Income Tax Act, 2025
• CBDT Notification dated 31/03/2026 (GAAR applicability clarification)
• Section 32(2), Income Tax Act, 1961 (unabsorbed depreciation)
• Section 72A, Income Tax Act, 1961 (amalgamation losses)
• Section 2(18), Income Tax Act, 1961 (company where public is substantially interested)
• Section 115JAA, Income Tax Act, 1961 (MAT credit)
• Section 43, Companies Act, 2013 (differential voting rights)
• Section 62(1)(b), Companies Act, 2013 (ESOP share issuance)
• Section 242, Companies Act, 2013 (NCLT resolution plan)
• DPIIT Notification GSR 127(E), dated 19/02/2019 (startup recognition criteria)
• Commissioner of Income Tax vs. Shri Subhulaxmi Mills Ltd. (2001) 249 ITR 795 (SC) (unabsorbed depreciation not covered by Section 79)
• Sodexo India Services Private Limited, Mumbai ITAT (Section 79 triggered in year of set-off)