Carry Forward and Set-Off of the Accumulated Business Losses and Unabsorbed Depreciation Allowance in Amalgamation or Demerger, etc. (Section 72A)

In the realm of business, mergers and demergers are common occurrences. These corporate restructuring activities are undertaken to achieve various objectives such as expanding market presence, gaining synergies, or streamlining operations. However, such transactions often have tax implications, especially concerning the carry forward and set-off of accumulated business losses and unabsorbed depreciation allowance.

Section 72A allows carry forward of business loss and unabsorbed depreciation in case of:

• Amalgamation of a company [Section 72A(1), (2) and (3)], or
• Demerger of a company [Section 72A(4) and (5)], or
• Reorganisation of business [Section 72A(6) & (6A)].

Section 72A of the Income Tax Act

Section 72A of the Income Tax Act deals with the provisions related to the carry forward and set-off of accumulated business losses and unabsorbed depreciation allowance in cases of amalgamation, demerger, or certain other arrangements. This section provides relief to the amalgamating or demerging company by allowing them to carry forward and set-off their accumulated losses and unabsorbed depreciation against future profits.

Carry Forward of Accumulated Business Losses

Under Section 72A, when an amalgamation or demerger takes place, the accumulated business losses of the amalgamating or demerging company can be carried forward and set-off by the amalgamated or resulting company. The accumulated losses can be set-off against the profits and gains arising from the business of the amalgamated or resulting company for up to 8 assessment years immediately succeeding the assessment year in which the amalgamation or demerger takes place.

Set-Off of Unabsorbed Depreciation Allowance

In addition to the carry forward of accumulated business losses, Section 72A also allows for the set-off of unabsorbed depreciation allowance. The unabsorbed depreciation allowance of the amalgamating or demerging company can be set-off by the amalgamated or resulting company against its own income in the same manner and to the same extent as if the amalgamation or demerger had not taken place.

Conditions for Carry Forward and Set-Off

In order to avail the benefits of carry forward and set-off of accumulated business losses and unabsorbed depreciation allowance under Section 72A, certain conditions need to be fulfilled:

• The amalgamation or demerger should be in accordance with the provisions of the Income Tax Act.
• All the conditions specified in Section 72A should be satisfied.
• The amalgamated or resulting company should continue the business of the amalgamating or demerging company for a minimum period of 5 years from the date of amalgamation or demerger.
• The amalgamated or resulting company should not transfer, in the next 5 years, the accumulated losses or unabsorbed depreciation to any other company through a scheme of amalgamation, demerger, or any other arrangement.

Example:

Suppose Company A and Company B amalgamate to form Company C. Company A has an accumulated business loss of Rs. 10 lakh and Company B has an unabsorbed depreciation allowance of Rs. 5 lakh.

Company C can carry forward and set off the accumulated business loss of Rs. 10 lakh and the unabsorbed depreciation allowance of Rs. 5 lakh against its own income.