Curtains to Evergreening of Tax Losses: Decoding the Section 72A Amendments in Finance Bill 2025
Summary: The Finance Bill 2025 introduces amendments to Section 72A of the Income Tax Act, restricting the carry-forward of accumulated tax losses in business reorganizations. Previously, amalgamated companies could restart the 8-year carry-forward period upon merger. Under the new rule, effective from April 1, 2025, losses must be set off within the remaining period from the original assessment year. The amendment raises ambiguity due to the term “effected,” which could refer to the “Appointed Date” in the scheme or the final “Effective Date.” Judicial precedents suggest that the “Appointed Date” is the relevant date for tax purposes. However, mergers finalized after April 1, 2025, with an earlier appointed date, may still qualify for the extended benefit. While the amendment aims to curb tax loss evasion, it could also deter beneficial mergers, particularly in distressed asset acquisitions under the Insolvency and Bankruptcy Code (IBC).
Existing Framework of Section 72A of Income Tax Act, 1961:
72A. Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc.
“(1) Where there has been an amalgamation of—
(a) a company owning an industrial undertaking or a ship or a hotel with another company; or
(b) a banking company referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a specified 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 five years from the end of the previous year in which the restriction on amalgamation in the share purchase agreement ends,
then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly:…”
Accordingly, as per the provisions of Section 72A, in case of amalgamation of specified companies, the accumulated loss and unabsorbed depreciation of the transferor company is deemed to be the loss and unabsorbed depreciation of transferee company for the previous year in which such amalgamation is effected i.e. transferee company would be able to enjoy fresh period of 8 years for carry forward of business losses.
Amendment via Finance Bill 2025:
In the case of any amalgamation or business reorganization occurring on or after 1st April 2025, any accumulated loss of the predecessor entity shall be carried forward and deemed to be the loss of the successor entity for a period not exceeding eight assessment years immediately following the assessment year in which the loss was originally calculated for the predecessor entity.
Relevant extract of proposed sub section (6B) –
“(6B) Where any amalgamation or business reorganisation, as the case may be, is effected on or after the 1st April, 2025, any loss forming part of the accumulated loss of the predecessor entity under subsection (1), (6) or (6A), being–
(a) the amalgamating company; or
(b) the firm or proprietary concern; or
(c) the private company or unlisted public company, as the case may be, which is deemed to be the loss of the successor entity, being––
(i) the amalgamated company; or
(ii) the successor company; or
(iii) the successor limited liability partnership,
as the case may be, shall be carried forward in the hands of the successor entity for not more than eight assessment years immediately succeeding the assessment year for which such loss was first computed for original predecessor entity.”
What are the ambiguities in applicability of Amendment?
The use of the word “effected” in the proposed provision creates ambiguity, as it could be interpreted in different ways depending on the context of the scheme. Specifically, it raises the question of whether the term “effected” should be understood in the same manner as the term “Appointed Date” defined in the Scheme, or whether it should be aligned with the “Effective Date” of the Scheme.
Key Judicial Precedents:
1. The Supreme Court in Marshall Sons & Co. (India) Ltd. v. ITO [1997] 223 ITR 809 (SC) held that the date of amalgamation for tax purposes is the “appointed date” specified in the Scheme of amalgamation, and not the date when the Court sanctions the Scheme, if the Court does not change the date in the Scheme.
2. In Dalmia Power Ltd. v. ACIT [2020] 420 ITR 339, the Supreme Court reaffirmed its earlier decision in Marshall Sons & Co. (India) Ltd. v. ITO (1996) and held that the Scheme of amalgamation takes effect from the Appointed Date, which is the date on which the assets and liabilities of the transferor company are transferred to the transferee company.
3. In IRM Ltd. v. DCIT [2016] 72 taxmann.com 288, the Gujarat High Court held that once a Scheme of amalgamation is sanctioned by the High Court, it relates back to the Appointed Date specified in the Scheme, as long as the Court does not modify the date.
4. In the case of Intas Pharmaceuticals Ltd. [2023] 151 taxmann.com 447, the Gujarat High Court followed its earlier decision in IRM Ltd. (2016) and upheld the principal that date of effect of scheme for the purpose of Section 72A shall be considered as “Appointed Date” mentioned in the Scheme.
Considering the above well-settled positions on this, it is possible to take a view that any amalgamation with an appointed date prior to 1 April 2025, the amalgamated company shall be eligible to get a fresh life of eight years irrespective of when the final merger order is approved i.e. even if Effective Date falls after 1 April 2025.
What can be challenges?
While the above amendment is intended to curb the misuse of loss carry-forwards, it can unintentionally discourage mergers that have the potential to drive economic recovery, especially cases involving distressed companies or acquisitions under the Insolvency and Bankruptcy Code (IBC), where synergies could play a key role.
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