Carry Forward and Set Off of Accumulated Business Losses and Unabsorbed Depreciation in Certain Cases of Amalgamation, Demerger, Re-organisation of business & Conversion of a company into LLP

1. Amalgamation

Applicability:

This section applies where there has been an amalgamation of –

i. a company owning an industrial undertaking[i] or a ship or a hotel with another company; or

ii. a banking company with a specified bank[ii]; or

iii. one or more public sector company or companies with one or more public sector company or companies; or

iv. erstwhile public sector company (i.e., a company which was a public sector company in earlier previous years and ceases to be a public sector company by way of strategic disinvestment, meaning, sale of shareholding by the Central Government or any State Government in a public sector company which results in a reduction of its shareholding to below 51% along with transfer of control[1] to the buyer), 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 year from the end of the previous year in which the restriction on amalgamation in the share purchase agreement ends.

Allowability of carry forward and set-off of accumulated loss[iii] and unabsorbed loss by amalgamated company in case of amalgamation:

It provides that the accumulated loss and unabsorbed depreciation[iv] of the amalgamating company shall be deemed to be the loss or unabsorbed depreciation, as the case may be, of the amalgamated company for the previous year in which the amalgamation took place. Other provisions of the Act relating to set off and carry forward shall also apply accordingly.

However, in the case of an amalgamation of an erstwhile public sector company, with one or more company or companies, the accumulated loss and the unabsorbed depreciation of the amalgamating company, which is deemed to be the loss or, as the case may be, the allowance for unabsorbed depreciation of the amalgamated company, shall not be more than the accumulated 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.

Conditions for availing benefits under this section:

i. Conditions to be fulfilled by the amalgamating company

a) The amalgamating company should have been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for 3 or more years.

b) The amalgamating company has held continuously as on the date of amalgamation, at least 3/4th of the book value of the fixed assets held by it, 2 years prior to the date of amalgamation.

ii. Conditions to be fulfilled by the amalgamated company

a) The amalgamated company should hold at least 3/4th of the book value of fixed assets of the amalgamating company acquired as a result of amalgamation for a minimum period of 5 years from the effective date of amalgamation.

b) The amalgamated company continues the business of the amalgamating company for at least 5 years.

c) The amalgamated company must also fulfil such other conditions prescribed under Rule 9C for the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose –

1. The amalgamated company shall achieve the level of production of at least 50% of the installed capacity (capacity of production as on the date of amalgamation) of the said undertaking before the end of 4 years from the date of amalgamation and continue to maintain the said minimum level of production till the end of 5 years from the date of amalgamation. Central Government has the power to modify this requirement on an application made by the amalgamated company.

2. The amalgamated company shall furnish to the Assessing Officer a certificate in the prescribed form verified by a Chartered Accountant in this regard.

Consequences of non-fulfilment of specified conditions:

In case the above-specified conditions are not fulfilled, that part of carry forward of loss and unabsorbed depreciation remaining to be utilized by the amalgamated company shall lapse and such loss or depreciation as has been set off shall be treated as the income in the year in which there is a failure to fulfil the conditions.

2. Demerger

Allowability of carry forward and set-off of accumulated loss and unabsorbed loss by resulting company in case of demerger:

Where there has been a demerger of an undertaking,

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

b) if the accumulated loss or unabsorbed depreciation is not directly relatable 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 the assets is retained by the demerged company and have been transferred to the resulting company.

Conditions for availing benefits under this section:

The Central Government is empowered to notify such conditions as it considers necessary to ensure that the demerger is for genuine business purposes.

3. Re-organisation of business

Allowability of carry forward and set-off of accumulated loss and unabsorbed loss by company in case of succession:

In case of re-organisation of business, whereby a firm is succeeded by a company as per the provisions of section 47(xiii), or a sole proprietary concern is succeeded by a company as per the provisions of section 47(xiv), then the accumulated business loss and the unabsorbed depreciation of the firm / proprietary concern, as the case may be, shall be deemed to be the loss or depreciation allowance of the successor company for the previous year in which the business re-organisation took place. Other provisions of the Act relating to set-off and carry forward will apply accordingly.

Consequences of non-fulfilment of specified conditions:

If it is found that any of the conditions laid down in the corresponding sub-sections (xiii) or (xiv) of section 47 have not been complied with, the set-off of loss or allowance of depreciation made in any previous year in the hands of the successor company shall be deemed to be the income of the company chargeable to tax in the year in which the conditions have been violated.

4. Conversion of a company into LLP [Section 72A(6A)]

Allowability of carry forward and set-off of accumulated loss and unabsorbed loss by LLP in case of conversion:

In case of re-organisation of business, whereby a private company or unlisted company is succeeded by an LLP as per the provisions of section 47(xiiib), then the successor LLP would be allowed to carry forward and set off the business loss and unabsorbed depreciation of the predecessor company.

Consequences of non-fulfilment of specified conditions:

If the entity fails to fulfil the conditions specified in section 47(xiiib), the benefit of set-off of business loss/unabsorbed depreciation availed by the LLP would be deemed to be the profits and gains of the LLP chargeable to tax in the previous year in which the LLP fails to fulfil any of the conditions.

[1] As per section 2(27) of the Companies; Act, 2013, control shall include the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

[i] It means any undertaking which is engaged in –

  • the manufacture or processing of goods;
  • the manufacture of computer software;
  • the business of generation or distribution of electricity or any other form of power;
  • providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, a network of trunking, broadband network and internet services.
  • mining;
  • the construction of ships, aircraft or rail systems.

Carry Forward & Set Off of Accumulated Business Losses and Unabsorbed Depreciation in Certain Cases

[ii] It means the State Bank of India (SBI) constituted under the SBI Act, 1955 or a subsidiary bank as defined in the SBI (Subsidiary Banks) Act, 1959 or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.

[iii] It means so much of the loss of

  • the predecessor firm or
  • the proprietary concern or
  • the private company or unlisted public company or
  • the amalgamating company or
  • the demerged company, as the case may be,

under the head “Profit and gains of business or profession” (not being a loss sustained in a speculation business) which such predecessor firm or the proprietary concern or the company or amalgamating company or demerged company, would have been entitled to carry forward and set off under the provisions of section 72 if the re-organisation of business or amalgamation or demerger had not taken place.

[iv] Unabsorbed depreciation means so much of the allowance for depreciation of

  • the predecessor firm or
  • the proprietary concern or
  • the private company or unlisted public company or
  • the amalgamating company or
  • the demerged company, as the case may be,

which remains to be allowed and which would have been allowed to the predecessor firm or the proprietary concern or the company or amalgamating company or demerged company, as the case may be, under the provisions of this Act, if the re-organisation of business or amalgamation or demerger had not taken place

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