Mr. Vinay Deshmane (Partner, Tax & Regulatory Services, BDO India) shares insights on the proposal to amend Sections 72A and section 72AA of the Act to provide that any loss-forming part of the accumulated loss of the predecessor entity, which is deemed to be the loss of the successor entity, shall be eligible to be carried forward for not more than 8 AYs immediately succeeding the AY for which such loss was first computed for the original predecessor entity. Opining that the aforesaid amendment is likely to impact mergers involving substantial accumulated business losses with amalgamating entity, the author however remarks, “While the proposed amendment is applicable for mergers effective on or after 1 April 2025, it is not clear if such date makes reference to the ‘effective date’ of merger or ‘appointed date’ of merger in the context of the Corporate Laws.

“Carry-Forward of Business Losses during Amalgamation - End of Fresh Lease of Life”

Section 72A and 72AA of the Income Tax Act, 1961 (the Act) provide for carry-forward and set-off of accumulated business loss and unabsorbed depreciation in cases of amalgamation of specified companies such as those owning an industrial undertaking (subject to fulfilment of certain additional conditions prescribed under Rule 9C of the Income Tax Rules, 1962), banking companies, etc. These provisions are applicable notwithstanding anything contrary contained in any other provision of the Act. There is no restriction on carry-forward and set-off of unabsorbed depreciation of the predecessor entity and the same can be carried forward for set off indefinitely.

Section 72 of the Act provides that business loss (other than loss from speculation business) shall not be carried forward for more than 8 Assessment Years (AY) immediately succeeding the AY for which the loss was first computed.

As per section 72A and 72AA of the Act, accumulated business loss of the amalgamating entity or predecessor entity shall be deemed to be the loss of the amalgamated entity or the successor entity for the financial year in which amalgamation has been effected. In view of this deeming provision, especially for amalgamation, it was possible to reset the 8-year clock for set-off of business losses. In other words, it was possible take a position that successor entity is eligible to claim carry-forward and set-off of business losses for a fresh period of 8 years from the year of amalgamation even if such losses were incurred by the predecessor entity in earlier years and the period of 8 years was not expired.

The Hon’ble Mumbai Tribunal in the case of Supreme Industries Ltd. vs. DCIT [TS-5478-ITAT-2007(Mumbai)-O] held that the amalgamated/ successor company had the right to carry forward the business loss for a period of 8 AYs immediately succeeding the AY relevant to the financial year in which the merger was effected.

Further, facts of the recent decision of the Hon’ble Bombay High Court in the case of Hindoostan Mills Ltd. v. Dy. CIT [TS-5709-HC-2023(Bombay)-O] reveal that the assessing officer had initially held that as per section 72A(2), business losses on amalgamation get fresh life for further 8 years from the year of amalgamation. Thereafter, the assessment was reopened on the ground that the amalgamated company would be entitled to carry forward such losses for only the unexpired period and not full 8 years afresh. While the Hon’ble High Court quashed the reopening on technical grounds without going into the merits of the claim regarding the period of carry forward of losses, it evidences that this issue was far from settled.

Proposed amendment and implications thereof

To prevent evergreening of the losses, Budget 2025 proposes to amend section 72A and section 72AA of the Act to provide that any loss-forming part of the accumulated loss of the predecessor entity, which is deemed to be the loss of the successor entity, shall be eligible to be carried forward for not more than 8 AYs immediately succeeding the AY for which such loss was first computed for the original predecessor entity.

The proposed amendment shall apply to any amalgamation effected on or after 1 April 2025.

This amendment is likely to impact mergers involving substantial accumulated business losses with amalgamating entity. The demand of extending benefit of section 72A to service industries was not met and instead, the existing provisions available for manufacturing/ banking sector have been tightened by proposing to end fresh lease of life for business losses.

While the proposed amendment is applicable for mergers effective on or after 1 April 2025, it is not clear if such date makes reference to the ‘effective date’ of merger or ‘appointed date’ of merger in the context of the Corporate Laws. 

Disclaimer - The views, thoughts and opinions expressed in the article are solely the author’s and are not representative of the author's employer/ organisation.