SET-OFF & CARRY FORWARD OF LOSSES IN CASE OF AMALGAMATION & DEMERGER

CARRY FORWARD & SET-OFF OF LOSSES IN CASE OF AMALGAMATION & DEMERGER

1.Setoff and carry forward of loss in Amalgamation u/s 72A.

This section applies where there has been an Amalgamation of: –

a)Company owning an Industrial undertaking or a ship or a hotel with another company; or

b)Amalgamation of banking company with a specifies bank; or

c)One or more Public Sector company or companies with one or more Public Sector company or companies; or

d)An erstwhile Public Sector company with one or more company or companies, if the share purchase agreement entered into under strategic disinvestment restricted immediate amalgamation of the said Public Sector company and the amalgamation is carried out within 5 Years from the end of P.Y in which the restriction on amalgamation in the share purchase agreement ends.

NOTES: –

S.NO

NOTES

The loss of the amalgamating company, in case of amalgamation referred to in (iv), which is deemed to be the loss or unabsorbed depreciation of the Amalgamated company, shall not be more than the loss and unabsorbed depreciation of the Public Sector Company as on the date on which the Public Sector Company ceases to be a Public Sector Company as a result of strategic disinvestment.

“Strategic Disinvestment” means sale of shareholding by the Central Government or any State Government in a Public Sector Company which results in reduction of its shareholding to below 51% along with transfer of control to the buyer.

Example: –

Suppose shares of Air India Ltd. purchased by Tata Pvt. Ltd. in P.Y 22-23 under share purchase agreement (SPA). As per share purchase agreement its mentioned that Public Sector Company cannot amalgamate till 31/03/2025. Amalgamation took place in P.Y 2027-28.

In the above case whatever losses and unabsorbed depreciation of Air India as on 31/03/2025 shall be treated as losses and unabsorbed depreciation of Tata Pvt. Ltd. for P.Y 2027-28.

2.Conditions to be satisfied by Amalgamating & Amalgamated Company?

CONDITIONS TO BE SATISFIED BY AMALGAMATING CO.
S.NO	CONDITIONS
a)	Amalgamating company should have been engaged in the business for 3 Years or more prior to the date of amalgamation. Example: – Amalgamation takes place on 01.07.2025, then Amalgamating company should have started the business on or before 01.07.2022.
b)	The amalgamating company should hold at least 75% of the Book Value of Fixed Assets which it held two years prior to date of Amalgamation.

CONDITIONS TO BE SATISFIED BY AMALGAMTED CO.
S.NO	CONDITIONS
a)	Amalgamated company should continue the business of amalgamating company for the period of at least 5 Years from the date of amalgamation.
b)	Amalgamated Company should fulfil the prescribed conditions in case in case there is an Amalgamation of Industrial undertaking. The prescribed condition is as follows: – The Amalgamated company shall achieve the level of at least 50% of the installed capacity before the end of 4 Years from the date of amalgamation and continue to maintain such minimum level of production till the end of 5 Years from the date of Amalgamation. However, Central Government on an application made by the amalgamated company max relax the condition of achieving the level of production or period during which same is to be achieved or both in suitable cases.
c)	Amalgamated Company holds continuously for a minimum period of 5 years from the date of Amalgamation at least 75% of Book Value of Fixed Assets of Amalgamating Company acquired in the scheme of Amalgamation.

NOTE: –

If all the above conditions are satisfied, then the accumulated losses and unabsorbed depreciation shall be deemed to be of the amalgamated company for the P.Y in which amalgamation was effected i.e. accumulated losses can be carry forward for fresh 8 Years.

DEEMED INCOME: –

If any of the above conditions are not complied with, set off loss or depreciation made in any P.Y in the hands of Amalgamated Company shall be deemed to be the income of the Amalgamated Company chargeable to tax in the year in which such conditions are not complied with.

3.Set of Carry forward of losses in case of Demerger?

Allowability of carry forward and set-off of accumulated loss and unabsorbed depreciation by resulting company: Where there has been a demerger of an undertaking,

a)Accumulated loss and the unabsorbed depreciation is directly relatable to the undertaking transferred by the demerged company to the resulting company shall be allowed to carry forward and set off in the hands of the resulting company.

b)Accumulated loss or unabsorbed depreciation is not directly attributable to the undertaking, the same will be apportioned between the demerged company and the resulting company in the same proportion in which the value of assets have been transferred.

4.What do you mean by Industrial Undertaking?

It means any undertaking which is engaged in: –

a)Manufacture or processing of goods.

b)Manufacture of computer software.

c)Generation or distribution of electricity or any other form of power.

d)Mining.

e)The construction of ships, aircraft, or rail systems.

f)Providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trucking, broadband network, and internet services.

5.Conclusion

Carry Forward & setoff losses in case of Amalgamation, Demerger & Succession
Case	Accumulated Business Loss	Can be carry forward by	Time Limit
Amalgamation	Amalgamating Company	Amalgamated Company	Fresh 8 Years
Demerger	Demerged Company	Resulting Company	Remaining period of 8 Years
Conversion of Firm/ proprietary into company	Firm/ Proprietary concern	Successor Company	Fresh period of 8 Years.
Unlisted Company into LLP	Unlisted Company	LLP	Fresh period of 8 Years.
NOTES: 1.Unabsorbed depreciation can be forwarded by Amalgamating Company/ Resulting Company/ Successor company/ LLP for unlimited years. 2.Only business losses (except speculative business loss) can be carry forward by successor.

Nayan Saluja & Company

SET-OFF & CARRY FORWARD OF LOSSES IN CASE OF AMALGAMATION & DEMERGER

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