Mr. Maulik Doshi (Managing Director – Direct Tax and Regulatory Services, Nexdigm), Ms. Shraddha Shah (Director – M&A Tax) elaborate on the implications of the Budget 2025 proposal to amend Sections 72A and 72AA to provide that any loss forming part of the accumulated loss of the predecessor entity, shall be eligible to be carried forward for not more than 8 AY immediately succeeding the AY for which such loss was first computed for the predecessor entity. 

Expecting FinMin to revisit the genesis of the said provisions and reassure the industry of its commitment to support revival of sick/bankrupt units by relooking at the proposed change, the authors quip, “Nevertheless, where the amendment continues to stay, acquirers will have to reconsider the overall cost benefit analysis while acquiring sick units / companies.  The proposed amendment is likely to impact the M&A industry adversely.”

“Restricting Loss Carry forward - Setback for M&As!”

As per Section 72A and Section 72AA of the Income-tax Act, 1961(‘ITA’), accumulated loss and unabsorbed depreciation of amalgamating / predecessor company are deemed to be the loss or unabsorbed depreciation arising in hands of amalgamated / successor company in the year in which amalgamation was effected (emphasis supplied).

Further, Section 72 of the ITA, provides that any loss under the head “Profits and gains from business or profession” other than from speculative business, can be carried forward for 8 assessment years immediately succeeding the assessment years (AYs) for which the loss was first computed.

The above provision has been interpreted[1] to the effect that the benefit of carry-forward and set-off of loss of amalgamating company is available to amalgamated company for a fresh life of 8 years and unabsorbed depreciation for unlimited period.

Proposed Amendment by Budget 2025:

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, shall be eligible to be carried forward for not more than 8 AY immediately succeeding the AY for which such loss was first computed for the predecessor entity. The explanatory statement to budget memorandum, state that the proposed amendment is aimed to prevent evergreening of the losses (i.e. availability of fresh lease life of 8 years in hands of successor company) and is mainly to bring parity with other companies for whom the benefit is restricted to 8 years.

The amendment is proposed to apply to amalgamations effected on or after 1st April, 2025 (effective date).  Effective date is usually understood as the date from which the scheme is given effect to by the companies (which date needs to be specifically provided in the scheme).    However there exists a confusion as regards the interpretation of ‘effective date’ as to whether the same should be the date on which the conditions to a scheme are satisfied or the date when scheme is approved or date on which the scheme is filed?

The amendment is proposed to become effective from 1.4.2026 i.e. AY 2026-27. Accordingly, in all probabilities, the schemes passed on or after from 1st April 2025 with effective date being also being on or after 1st April 2025 shall be covered by the amendment.  A clarity on this aspect would help the tax payers.

Understanding the Genesis of section 72A:

This provision of section 72A has been on the statue since 1977 and has helped various companies going through distress situations to revive their business and to bring them back to health.  The key motivation of introducing section 72A was to save the government from social costs in terms of loss of production and employment and to relive the government of uneconomical burden of taking over and running the sick industrial units.  Initially the benefit under the section was available only to select units / industry and on approval from specified authority.  With the overall evolution of the economy and industry, in order to encourage rapid consolidation and growth in important sectors the ambit of the said provision was enlarged over the years and the conditions for its eligibility including approvals were also delegated further. 

Even in the current era, we have witnessed acquisitions followed by mergers under CIRP / IBC processes which have helped bankrupt / distress business to revive their health and the acquirer could use the company's losses to offset its own taxable income leading to some tax savings in the long run.

Thus, as can be seen from above, the benefit under section 72A was a conscious extension of support by the government to encourage the acquirer by extending some tax sops for supporting the government in reviving the sick industry.  Thus, this was always considered as a policy level tax relief extended by the government that too on satisfaction of certain conditions and due approvals. This is also evident from the fact that section 72A, which also covered the transactions of demerger specifically limited the period of benefit of losses in the hands of successor company to the remaining period only.

As the law stands today, the benefit is not automatic but is only subject to satisfaction of conditions which essentially requires continuation and revival of business / capacity utilization by the acquirer.  Thus, the proposed amendment does not seem to take into consideration the genesis of the said provision and the socio-economic impact that withdrawal of such provision could create.

Having said the above, various corporates have resorted to acquisition purely for benefiting from tax loss of amalgamating entities or are resorting to internal restructurings such that loss making entities within the group are merged into profit making entity to avail the benefit of above provisions. However, such Merger schemes are heavily challenged by tax authorities before NCLT[2] as well as in the course of normal assessment alleging that the main objective of the scheme is to take benefit of the accumulated losses, and the provisions of the General Anti-avoidance Rule (“GAAR”) should be invoked.  Thus, the approving authorities are well within their rights to reject a merger scheme where the same is not in public interest or is not driven by business / commercial objectives.

It is thus expected that the Ministry of Finance should revisit the genesis of the said provisions and reassure the industry of its commitment to support the revival of sick / bankrupt units by relooking at the proposed change. 

Nevertheless, where the amendment continues to stay, acquirers will have to reconsider the overall cost benefit analysis while acquiring sick units / companies.  The proposed amendment is likely to impact the M&A industry adversely.