[Section 72A]- Carry Forward and Set Off of The Accumulated Business Losses and Unabsorbed Depreciation Allowance in Amalgamation/Demerger

Section 72A of the Income Tax Act, 1961, provides exceptional relief for companies undergoing restructuring (amalgamation, demerger, or reorganization) by allowing the carry forward and set-off of accumulated business losses and unabsorbed depreciation. This ensures that genuine business reorganizations do not result in the loss of tax benefits. Below is a detailed analysis:

1. Key Scenarios Covered Under Section 72A

A. Amalgamation of Companies [Section 72A(1)-(3)]

• Applies when one or more companies mergeinto another company.
• Accumulated lossesand unabsorbed depreciation of the amalgamating company can be carried forward by the amalgamated company.
• Conditions:
  • The amalgamated company must continue the businessfor at least 5 years.
  • It must retain 75% of the fixed assetsacquired for 5 years.

B. Demerger of Companies [Section 72A(4)-(5)]

• Losses and depreciation are apportionedbetween the demerged and resulting companies based on:
  • Assets transferred(for directly relatable losses).
  • Ratio of retained vs. transferred assets(for non-directly relatable losses).

C. Business Reorganization [Section 72A(6)-(6A)]

• Applies to:
  • Firms/proprietary concerns converting to companies(if conditions under Section 47(xiii)/(xiv) are met).
  • Private/unlisted companies converting to LLPs.

2. Key Conditions for Availing Benefits

To claim carry-forward benefits under Section 72A, the following must be satisfied:

1. Business Continuity:
   • The amalgamated/resulting company must continue the businessfor 5 years post-restructuring.
2. Asset Retention:
   • 75% of fixed assetsmust be retained for 5 years.
3. Genuine Business Purpose:
   • Restructuring cannot be tax-driven; it must have commercial justification.
4. Timely Compliance:
   • Losses can be carried forward only if the return is filed on time(Section 139(1)).

Failure to comply results in:

• Losses/depreciation being taxed as incomein the year of default.

3. Time Limits for Carry Forward

Amendment (2025):

• Losses cannot be “evergreened”via successive amalgamations. The 8-year limit is fixed from the original loss year.

4. Practical Examples

Case 1: Amalgamation

• Amalgamating Co. (XYZ Ltd.): Loss = ₹10 lakh, Unabsorbed depreciation = ₹5 lakh.
• Amalgamated Co. (ABC Ltd.): Profit = ₹12 lakh.
• Set-off: ₹10 lakh (loss) + ₹2 lakh (depreciation) → Taxable profit: ₹0.
• Remaining depreciation: ₹3 lakh (carried forward indefinitely).

Case 2: Demerger

• Demerged Co.: Total loss = ₹20 lakh (₹15 lakh relates to transferred assets).
• Resulting Co.: Set-off allowed = ₹15 lakh (directly relatable).

5. Exceptions & Special Cases

• Banking Companies: Section 72AA allows loss carry-forward in bank amalgamationssanctioned by the Central Government.
• Co-operative Banks: Section 72AB extends similar benefits to co-operative banks.

6. Key Takeaways

✅ Losses can be transferred in amalgamation/demerger, subject to conditions.

✅ 8-year limit for business losses (unabsorbed depreciation has no limit).

⚠️ Strict compliance required (business continuity, asset retention).

📅 2025 Amendment: Prevents evergreening; fixes 8-year window from the original loss year