Set Off & Carry Forward of Losses in Case of Change in Constitution of Firm on Succession

SEC – 78: CARRY FORWARD AND SET OFF OF LOSSES IN CASE OF CHANGE IN CONSTITUTION OF FIRM OR ON SUCCESSION

  1. The losses and unabsorbed depreciation can be carried forward by a firm only.
  2. Section 78(1) provides that where a change in constitution of firm takes place on account of retirement of partner or death of the partner then, the firm shall not carry forward and set off the following brought forward losses.

A    Share of the retired/ deceased partner in the brought forward losses of the firm

B    Less: Share of the retired/ deceased partner in the current year profit

(A- B) cannot be carried forward by the firm or its partners

Notes:

  1. Section 78(1) does not apply if change in constitution takes place on admission of a new partner or if all partners remain with a change in profit sharing ratio.
  2. Section 78(1) does not apply to unabsorbed depreciation. It shall be carried forward by the firm even if a partner retires or dies.

SECTION 78(2):-

Where the business or profession has been succeeded by another person otherwise than by inheritance, then nothing in this chapter shall entitle any person other than the person incurring the loss to have it carried forward and set off against his income.

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