- Under Section 78 of the Income Tax Act, where a change has occurred in the constitution of the firm, then the firm shall not be entitled for carried forward losses and set-off of so much of the loss proportionate to the share of retired partner.
We are a partnership firm where I, along with one Mr B, are the partners having profit share of 40% and 60%, respectively. The firm has unabsorbed losses of Rs10 crore upto the Assessment Year 2017-18. Due to the losses, Partner B wants to resign and in his place one Mr C is ready to join. Please let us know whether there will be any impact on the allow ability of carried forward losses in the subsequent years with myself and Mr C as partners?
- Under Section 78 of the Income Tax Act, where a change has occurred in the constitution of the firm, then the firm shall not be entitled for carried forward losses and set-off of so much of the loss proportionate to the share of retired partner. Thus, unabsorbed loss to the extent of 60%, i.e. share of retired partner Mr. B, will not be allowed to be carried forward and set-off against subsequent year’s income and, accordingly, it will go waste. However, the firm may be entitled to balance loss of 40%, i.e., the share of the continuing partner for set-off against future income of the firm.
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