Section 78 — Carry-Forward of Loss in Case of Change in Constitution of Firm

Function in the statutory architecture

Section 78 limits the carry forward and set-off of losses under Chapter VI when the person who incurred the loss changes. Sub-section (1) applies where a change has occurred in the constitution of a firm. The firm is not entitled to carry forward and set off so much of the loss as is proportionate to the share of a retired or deceased partner, to the extent it exceeds that partner's share of profits, if any, in the firm for the previous year.

Sub-section (2) applies where a person carrying on a business or profession has been succeeded in that capacity by another person otherwise than by inheritance. Nothing in Chapter VI entitles anyone other than the person who incurred the loss to carry it forward and set it off against his income.

Operative consequences

• On a retirement or death of a partner, the firm loses the part of the loss attributable to that partner's share, less his share of profits for the year.
• On a succession by sale, gift or other transfer, the loss stays with the predecessor and cannot be used by the successor.
• A succession by inheritance is excluded from sub-section (2), so the heir can carry forward and set off the loss.
• Section 78 operates subject to the specific reorganisation rules in s. 72A, s. 72AA and s. 72AB, which deem the predecessor's loss to be the successor's.

Status

Operative for assessment year 2026-27. Not omitted and not time-limited. The Finance Act, 2026 does not amend s. 78.

The Income-tax Act, 1961 governs assessment year 2026-27 and earlier years; the Income-tax Act, 2025 governs tax year 2026-27 onwards. For this subject, the corresponding provision is s. 119(1) and (2).