Mr. Ajay Agashe (Partner - International Tax & Transaction Services, Ernst & Young LLP), Mr. Arijit Jain (Manager) and Ms. Chavi Jain (Consultant), while chalking out the evolution of Section 72A which facilitates the carry forward and set-off of accumulated business losses and unabsorbed depreciation in cases of amalgamation, demerger, conversion of firms/cos., analyse the recent amendment in this section as recommended by the Finance Bill, 2025. Inter alia highlighting that the amendment does not propose to alter the existing provisions which state that the transitioned losses are the losses of current year in the hands of amalgamated entity, the authors conclude, “Considering the overarching impact of the proposed amendment it will be interesting to see if while passing the bill, appropriate changes are made to make such change applicable only for case involving tax avoidance and genuine amalgamations done for commercial reasons will be kept out of the scope of the proposed amendment.”

“Green to Red: The Sunset of Fresh Loss Carry Forwards in Amalgamations”

The Income-Tax Act, 1961, includes several provisions designed to promote business continuity and economic growth. One such key provision is Section 72A, which facilitates the carry forward and set-off of accumulated business losses and unabsorbed depreciation in cases of amalgamation, demerger, conversion of firms or proprietary concerns into companies and conversion of private limited companies or unlisted public companies into LLPs.

This section was initially introduced vide Finance (No. 2) Act, 1977, with the objective of encouraging the revival of financially struggling businesses owning an industrial undertaking by means of amalgamation.

As per the provisions inserted at that point in time, the accumulated losses and unabsorbed depreciation of the amalgamating company as on the last day of the financial year preceding the year in which the amalgamation was effected shall be deemed to be the loss of the amalgamated company for the year in which the amalgamation was effected on satisfaction of the following conditions:

a. Amalgamating company was not financially viable prior to amalgamation;

b. Amalgamation is in public interest;

c. Accumulated loss as on the last day of the year preceding the year of amalgamation should exceed 50% of aggregate of paid-up share capital and reserves of the amalgamating company;

d. Business of amalgamating company is carried on by the amalgamated company without any modification or reorganization in the year in which losses are set-off or allowance is claimed by amalgamated company;

e. Satisfaction of such other condition as may be laid down by the Central Government.

So as per the provisions enacted, the accumulated business losses of amalgamating company attain a fresh term in the hands of amalgamated entity and is eligible for carry forward and set-off for 8 years from the year of amalgamation.

Based on the explanation provided in the memorandum explaining the bill, it is clear that the intention of introducing section 72A was to facilitate the rehabilitation or revival of the business of the financially unviable amalgamating company in a more economical and efficient manner and such business of amalgamating company is continued by the amalgamated company without any major modification or reorganization.

As per provisions of section 71, in case of current year business loss, the same is eligible for set-off against income under any head of income except for income under the head “Salaries”. Further, as per provisions of section 72, where any business losses (except for Speculation Loss) is carried forward in subsequent years, the same can be set-off only against income under the head “Profits & Gains from Business & Profession”. Hence, as per the scheme of loss utilization under the Income-Tax Act, 1961, in the year of amalgamation, the amalgamated company is eligible to set-off the business losses of amalgamating company (which is deemed to be the loss of the amalgamated company) against income under any head except for income under the head Salaries.

Thereafter, Finance Act, 1999 overhauled the provisions of Section 72A of Income-Tax Act, 1961. It indicated a shift in the Government’s intent for allowing carryforward of loss in amalgamation only if the amalgamations amongst others are in the public interest and revival of business to merely uninterrupted continuation of the business of the amalgamating company in the hands of amalgamated entity. This can be clearly deciphered from the new conditions prescribed for availing the benefit of continuity of accumulated tax losses.

As per the then amended provisions of Finance Act, 1999, amalgamated company is eligible to carry forward and set-off accumulated business losses and unabsorbed depreciation of amalgamating company on satisfaction of the following conditions:

a. Amalgamated company continues to hold for a minimum period of 5 years from the date of amalgamation at least three-fourth of the value of assets of the amalgamating company;

b. Amalgamated company continues the business of the amalgamating company for a minimum period of 5 years from the date of amalgamation;

c. Satisfaction of such other condition as may be laid down by the Central Government.

The government vide Rule 9C of Income Tax Rules, 1962 has laid down following additional conditions:

a. Amalgamated company shall achieve at least fifty percent level of production of the installed capacity before the end four years from the date of amalgamation and continue to maintain the said minimum level of production till the end of five years from the date of amalgamation;

b. Amalgamated Company to furnish certificate to the Assessing Officer in the year in which level of production is met.

As you can see the conditions are more or less in context of continuity of the business going forward.

It may be noted that despite the overhaul in the conditions, the following provisions remained unmodified and consequent benefit of such provisions were continued:

a. Fresh lease of life of accumulated business loss for 8 years in the hands of the amalgamated company; and

b. Accumulated business loss of amalgamating company is deemed to be the business loss of the amalgamated company for the year in which amalgamation is effected.

Further, specific provisions were also introduced vide Finance Act 1999 for the carry forward and set-off of accumulated losses and unabsorbed depreciation in cases of demerger. An interesting point to note is that the law did not prescribe fresh term of accumulated business loss transferred by demerging company to resulting company in the case of demerger. Therefore, this suggests that it was the deliberate choice by the government to provide such a beneficial provision of fresh term of losses only in case of amalgamation

Having survived this clause for almost 5 decades and with the introduction of GAAR provisions from 2017 to curb tax evasion, the said provision of carry forward and set-off of accumulated business loss of fresh 8 years in the hands of amalgamated company has now come into re-consideration and is proposed to be curtailed under the newly proposed sub-section. Consequently, it can be observed that there is a drastic change in the approach followed by government initially when this section was introduced in 1977, thereafter reinforced in 1999 versus the amendment proposed now.

This amendment even poses challenges in case of genuine amalgamations where utilisation of tax losses is not an objective but a consequence of genuine commercial rationale. While the rationale of the government of curbing ever-greening of losses by way of successive amalgamation could be addressed by way of GAAR, the government has proposed to curb the fresh life of 8 years in case of all amalgamations vide this proposed introduction of new sub-section.

Finance Bill, 2025 proposes to insert a new sub-section 6B to section 72A wherein it is proposed that the fresh term for the business loss in the hands of amalgamated entity is now curtailed. In other words, for any amalgamation effected on or after 1 April 2025, the carry forward of amalgamating company’s accumulated business loss is limited to eight assessment years from the assessment year for which the loss was first incurred / computed in original amalgamating entity.

The Explanatory Memorandum to Finance Bill, 2025, seems to suggest that this amendment is proposed to bring clarity & parity, to prevent evergreening of losses and to ensure that carry forward & set off is not allowed beyond 8 years after the year in which the loss is originally incurred.

Separately it is important to note that, the proposed amendment clearly provides that this proposal will only impact amalgamation effected on or after 1 April 2025. Accordingly, it seems that losses which have successfully migrated to the amalgamated company on or before 31 March 2025 will effectively be grandfathered, that is, they will continue to enjoy the benefit of carry forward & set off in the hands of the amalgamated company for up to 8 years following the year of amalgamation.

However, the provisions of the said section is not clear and is still open to interpretation as to whether the word “amalgamation is effected” would mean the appointed date of scheme of arrangement or the date on which the scheme is given effect to i.e. typically the date on which scheme get registered with Registrar of Companies. Drawing reference from Hon’ble Supreme Court decision in the case of Marshall Sons and Co. [(223 ITR 809)] = [TS-5102-SC-1996-O], a plausible view may be adopted that the appointed date in the scheme is the date on which amalgamation is effected.

Considering the above plausible view, one may interpret the aforesaid amendment in such a way that the amalgamations with the appointed date prior to 1 April 2025 may not be impacted by proposed amendment even if the scheme of arrangement is sanctioned on or after 1 April 2025.

It is pertinent to note that the amendment does not propose to alter the existing provisions which state that the transitioned losses are the losses of current year in the hands of amalgamated entity. The restriction proposed to be inserted is limited to the period for which the business loss can be carried forward and set-off in the hands of the amalgamated company.

Also, carry forward and set-off of unabsorbed depreciation is beyond the scope of proposed amendment as the same can be carried forward and utilised for indefinite period.

Considering the overarching impact of the proposed amendment it will be interesting to see if while passing the bill, appropriate changes are made to make such change applicable only for case involving tax avoidance and genuine amalgamations done for commercial reasons will be kept out of the scope of the proposed amendment.