Recompute the eligible loss before using the opening schedule
For tax year 2026–27, Income-tax Act, 2025 section 119(1) restricts a firm’s carry-forward and set-off to the extent the loss proportionate to a retired or deceased partner’s share exceeds that partner’s share of profits, if any, in the firm for the tax year. Do not either preserve the entire opening loss automatically or delete the outgoing partner’s entire proportion without testing the profit adjustment. Checked on 25 October 2026, this article addresses a continuing firm with a qualifying change in constitution.
Establish the event and the tax loss population
Retain the original and amended deeds, effective retirement or death date, partner ratios and accounts supporting the outgoing partner’s profit allocation. A change in constitution and succession by a different taxpayer are not interchangeable. Section 119(2) separately addresses succession otherwise than by inheritance; do not treat the arithmetic below as permission to transfer losses to a purchaser or a newly formed entity.
Start from a duly determined, otherwise eligible loss balance. A capital-account debit, cash paid on retirement or book loss is not necessarily that balance. In the simplified model, L is the eligible loss being tested, r the outgoing partner’s applicable loss share and P the supported profit share for the tax year. Restricted amount = maximum of zero and (L × r − P). The balance survives this particular restriction only; it still needs the original loss rules, time limit, return condition and sufficient eligible income.
Keep vintage and partner workings together
Do not reset loss origin years when partners change. Ordinary business-loss eligibility under section 112 and the return condition under section 121 read with section 263(1) remain separate checks. For pre-April 2026 losses, inspect section 536’s transition provisions and the original-year records. This article does not decide unabsorbed depreciation by treating it as an ordinary loss, nor allocate one profit amount repeatedly across multiple vintages.
Where several loss years, outgoing partners or disputed ratios exist, build an allocation memorandum from the actual facts before using a spreadsheet formula. The examples each use a single independently supported loss pool and profit adjustment, so no cross-vintage priority is implied. All amounts are rupees, and final tax, cess and surcharge are outside these loss computations.
Review common errors before return preparation
Frequent errors include using the new partner’s ratio to value the old partner’s loss share, subtracting the retirement settlement instead of the tax profit share, allowing a negative restriction, and assuming the surviving amount is automatically deductible in the current return. Reconcile three stages: opening eligible loss, this reconstitution adjustment, and utilisation under the underlying loss provision. Keep disputed facts visible rather than hiding them in a hard-coded percentage.
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Retirement with a profit adjustment
Eligible loss L is ₹10,00,000, applicable outgoing share 30%, and supported profit share P ₹1,00,000. Proportionate loss ₹3,00,000 less P gives restriction ₹2,00,000. Balance surviving this test: ₹8,00,000.
Illustrative example 2: No current profit share
L ₹8,00,000, r 25%, P nil. Restriction is ₹2,00,000 and surviving balance ₹6,00,000. A ₹5,00,000 capital settlement is not substituted for P.
Illustrative example 3: Profit exceeds the proportionate loss
L ₹6,00,000, r 20%, P ₹1,50,000. The ₹1,20,000 proportionate loss is below P. Restriction is nil, not negative ₹30,000; balance remains ₹6,00,000 before other tests.
Illustrative example 4: A deceased partner’s supported allocation
L ₹12,00,000, r 25%, P ₹75,000. Restriction = ₹3,00,000 − ₹75,000 = ₹2,25,000. Surviving balance is ₹9,75,000, assuming a continuing firm and all stated facts established.
Illustrative example 5: Do not substitute the revised ratio
L ₹9,00,000, outgoing loss share 40%, P ₹60,000. Restriction ₹3,00,000; surviving ₹6,00,000. A new partner’s 20% ratio would wrongly produce restriction ₹1,20,000 and overstate surviving loss by ₹1,80,000.
Illustrative example 6: Separate eligibility from utilisation
After the preceding legal checks, assume ₹8,00,000 loss remains eligible and current eligible business income is ₹5,00,000. Set-off is ₹5,00,000 and remaining carry-forward ₹3,00,000 within its original remaining life. No fresh carry-forward period starts.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the continuing taxpayer | PAN, deeds and continuity analysis. |
| 2 | Establish the qualifying change | Retirement or death evidence and effective date. |
| 3 | Validate the opening tax loss | Return, determination and loss-head record. |
| 4 | Identify the applicable loss share | Original-year ratios and allocation memorandum. |
| 5 | Substantiate the profit adjustment | Tax-year accounts and outgoing partner’s entitlement. |
| 6 | Calculate the restriction | Non-negative L × r minus supported P working. |
| 7 | Preserve original vintages | Expiry dates and prior utilisation trail. |
| 8 | Check underlying eligibility | Sections 112, 121 and applicable return conditions. |
| 9 | Test succession and transition separately | Section 119(2) and old-year legal record. |
| 10 | Reconcile the filed loss schedule | Restriction, current use and closing balance. |
Sixteen practitioner FAQs
1. Is the retirement payout the profit adjustment?
No. Separate settlement consideration, capital and the relevant tax-year profit share.
2. Does every partner change mean a new taxpayer?
Establish the legal facts; do not assume continuity or succession from a renamed deed.
3. Should the incoming ratio replace the outgoing loss share?
No. Support the ratio relevant to the loss restriction.
4. Can the restriction become negative?
The excess formulation does not create an extra loss when profit exceeds the proportionate amount.
5. Does the surviving balance become immediately usable?
Only after the underlying set-off conditions and available eligible income are checked.
6. Is book loss sufficient evidence?
No. Reconcile to a determined eligible tax loss.
7. Can a loss be used twice in different schedules?
No. Tie each use to one vintage and one closing balance.
8. Does retirement restart the loss clock?
No. Keep original origin and expiry years.
9. Does death always dissolve every firm?
Determine continuity under the actual facts and applicable law; do not presume it.
10. Are capital and profit ratios necessarily identical?
No. Inspect the operative arrangements and tax allocation.
11. Can one profit adjustment be repeated against each old vintage?
Do not duplicate it. Resolve the proper allocation for the actual population.
12. Does section 119(1) resolve every succession case?
No. Subsection (2) addresses a separate situation.
13. Can the purchaser simply inherit the seller’s losses?
Do not infer that from a business purchase or this reconstitution formula.
14. Is unabsorbed depreciation the same loss pool?
Do not combine it without its separate legal analysis.
15. Can an old loss be relabelled as a 2026–27 loss?
No. Check the transition provisions and preserve its history.
16. What should the reviewer sign off?
The event, taxpayer continuity, eligible loss, applicable ratio, profit evidence and final utilisation trail.
Conclusion
On a qualifying firm reconstitution, test the outgoing partner’s proportionate loss against that partner’s share of current-year profits. Preserve loss vintages and distinguish the restriction from capital settlements and ordinary business-loss eligibility.