Business reorganizations have played a major role in bringing / enhancing synergies in businesses. The tax issues stemming from business reorganizations have been subjected to litigation, some issues have attained finality but few issues are still litigated between tax authorities and taxpayers.

Highlighting that one of the prominent issues is carry forward of accumulated business losses of the predecessor by successor, Ms. Bharathi Krishnaprasad (Associate Director, Lakshmikumaran & Sridharan) and Mr. B. Venkat Ramanan (Associate Partner) analyze this dispute in the wake of a proposed amendment carried out in the Finance Bill, 2025. Remarking that, while the Budget has curtailed the carry forward of business losses in case of such amalgamations/successions, the authors opine that it certainly has not attempted to end existing ligation or completely take away all benefits enjoyed in such cases. In conclusion, the authors inter alia quip, “The amendment would, however, not alter the inter head ‘set-off’ benefit already available in the year of amalgamation or succession. Further, clarification regarding the cut-off date being the appointed date or effective date, would avoid any potential litigation.”

“Business Reorganization: The Ever-Continuing Conundrum of Tax Loss Adjustments”

Business reorganizations have played a major role in bringing / enhancing synergies in businesses. The objective is integration between businesses either forward, backward, vertical or horizontal. Amidst varied financial and business considerations, taxation also play a key role in decision making. The tax issues stemming from business reorganizations have been subjected to litigation, some issues have attained finality but few issues are still litigated between tax authorities and taxpayers. One of the prominent issues is carry forward of accumulated business losses of predecessor by successor. This article attempts to analyze this dispute in the wake of a proposed amendment carried out in the Finance Bill, 2025 (‘FB25’).

Existing provision:

Section 72 of the Income-tax Act, 1961 (‘IT Act’) provides for carrying forward and set off of business losses for a period of eight years, after the year in which they were incurred. The losses are attached to the assessee who has incurred them. The assessee who suffered the loss has a right to carry forward them[1]. If there is succession of business, then, prior to the Finance (No. 2) Act, 1977, the loss of predecessor could not be carried forward by the successor[2]. Therefore, carry forward of loss is not permissible in the hands of another assessee.

However, Sections 72A and 72AA of the IT Act, inserted by the Finance (No. 2) Act, 1977, constituted an exception to the above rule. By way of deeming fiction, in certain categories of business reorganizations (except demerger), the accumulated losses & unabsorbed depreciation of the predecessor is deemed to be the loss or depreciation of the successor[3]. Most importantly, such loss is deemed to be the loss for the year in which business reorganization (except demerger) was effected. Accordingly, the provisions of set off and carry forward of such losses applied to the successor entity.

Thus, Ss. 72A and 72AA in deeming such losses to be loss of successor in the year of reorganization (except demerger), essentially grants a new lease of life for the losses. They enable the successor entity to carry forward losses for a fresh period of 8 years.

Issue with present provisions:

As per the memorandum explaining the Finance Bill, the taxpayers with accumulated losses and unabsorbed depreciations were resorting to multiple business reorganizations so as to carry forward such losses for a fresh period of 8 years every time. This practice led to evergreening losses. Whether is it in line with the intent of these provisions? Well, this is neither clear from the rationale behind the introduction of these provisions nor from the plain text of the statute.    

Proposed Amendment:

The FB25 intends to curb such evergreening of accumulated business loss in the case of such specified amalgamations/successions. To this end, an amendment is proposed in Ss. 72A & 72AA to the effect that the accumulated business loss of the predecessor entity can be carried forward by the successor entity, only for the remaining period which the predecessor company would have been otherwise eligible to carry forward. In other words, the total period of carry forward of accumulated business loss will be capped at 8 years cumulatively in the hands of the predecessor and the successor. The successor entity will not get a fresh period of 8 assessment years.

The proposed amendment will only be applicable for the specified amalgamations/successions effected on or after April 1, 2025. If the specified amalgamations/successions are effective on or before 31st March 2025, then the proposed amendments will not be applicable.

Analysis of the Proposed Amendment:

While Budget has curtailed the carry forward of business losses in case of such amalgamations/successions, authors opine that it certainly has not attempted to end existing ligation or completely take away all benefits enjoyed in such cases. The Article attempts to discuss three important issues in this regard.

1. Should the “appointed date” or the “effective date” be on or after 01st April 2025?

2. Does the amendment completely dilute all benefits that these reorganizations earlier enjoyed?

3. Is an enabling provision (like 72A and 72AA) required, in the first place, to carry forward all other losses of the predecessor by the successor?

Whether the appointed date or the effective date should be on or after 01st April 2025?

The business organization schemes (such as amalgamation, merger etc.) are conditional upon the satisfaction of specified conditions. The date the conditions are satisfied is ‘effective date’. However, the scheme also provides that upon fulfilment of all conditions, the scheme shall be effective from a date, more particularly referred to as the ‘appointed date’. Thus, an effective date is generally different that the appointed date. But it is the appointed date from which the scheme of arrangement comes into effect and force.

Therefore, the proposed amendments referring to the “amalgamation or business reorganization effected on or after 01st April 2025”, are referring to the appointed date and not the effective date.

Does the amendment completely dilute all benefits that these reorganizations earlier enjoyed?

The current year business loss can be set off against any income of that year[4]. However, the brought forward business loss can be set off only against business income[5]. In the context of specified amalgamations/successions, by a deeming fiction u/s. 72A and 72AA, the accumulated business loss and unabsorbed depreciation of the predecessor entity is deemed to be that of successor entity, for the year of amalgamation/succession. That is, the year of amalgamation/succession will be considered as the year in which business loss / depreciation was incurred by the successor entity. Further, such loss can be carried forward and set off, as per the other provisions of the IT Act.

Two benefits were conferred on the successor entity as a consequence of the above-mentioned provision:

1. Inter head set off: In the year of amalgamation/succession, the accumulated business loss/unabsorbed of the predecessor entity can be set off against any other head of income of the successor. Thus, set off is not restricted to business income alone u/s. 72 of the IT Act.

2. Fresh carry forward period of 8 years: The successor entity was entitled to carry forward losses of the predecessor entity for an additional period of 8 years.

The amendment proposed by FB25 undoubtedly seeks to take away the second benefit. However, it is significant to note that the first benefit, i.e. benefit of inter head set off in the year of amalgamation/ succession, is not impacted by the proposed amendments introduced by the FB25.

Need for an enabling provision (like 72A and 72AA) to carry forward losses of the predecessor

If one analyses Ss. 72 to 74 of the IT Act (except Ss. 72A and 72AA), then it is clear that the statutory right of carry forward and set off of losses is available only to the person who has suffered the loss and to no one else. That is, the losses are attached to the assessee. The principle that successor, unless permitted by the statute, cannot carry forward and set off the loss of predecessor is based on the general principle that the successor in business must be treated as if he had commenced or set up a new business[6]. In various cases[7], it has been held that an enabling provision is required for a successor to carry forward the loss of predecessor. If there is none, then the carry forward of loss by successor, is not permissible.

However, in the context of claim of bad debt deduction by successor, the Apex Court in T Veerabhadra Rao[8] held that upon a business reorganization, the successor steps into the shoes of the predecessor and consequently, all provisions of the IT Act would apply to the successor in the same manner that they would have applied to the predecessor. Applying this ratio, the Pune Tribunal in Capgemini Technology Services India Ltd.[9] upheld the claim of amalgamated company to carry forward the long-term capital loss of the amalgamating company. This is despite the fact that there is no specific enabling provision for carry forward of capital loss unlike Ss. 72A/72AA for accumulated business loss.

Thus, the question as to whether losses other than business losses, can be carried forward by the successor, in the absence of any enabling provision, would continue to remain a bone of contention even after the proposed amendments.

Conclusion