Introduction
The enactment of the Income-tax Act, 2025 (‘The new act’) marks a historical movement and a structural shift in India’s direct tax law, replacing the long-standing Income-tax Act, 1961 with effect from 1 April 2026. While the aim of the new act is to have a more simplified, standardised and user friendly and give a compliance ease to taxpayers and professionals, one of the critical areas of transition relates to smooth sail through of the corporate restructuring transactions like amalgamations that were undertaken under the Income Tax Act, 1961 (‘old Act’) but continue to have tax consequences in subsequent years.
This article aims to discuss the key transition issues concerning the carry forward and set-off of accumulated losses and unabsorbed depreciation under section 72A of the old Act, especially where post‑amalgamation conditions are violated after the new Act comes into force.
Carry Forward and Set-off of Losses and Depreciation in Amalgamation – Substantive Conditions – Continuity of Section 72A
The Income-tax Act, 2025 substantially carries forward the well‑established conditions for allowing carry forward and set‑off of accumulated losses and unabsorbed depreciation in cases of amalgamation. However, in order to retain such benefits, the amalgamated company must comply with the following conditions:
1. Achieve at least 50% of installed production capacity of the amalgamating company’s undertaking within four years from the date of amalgamation.
2. Continue to maintain this minimum production level until the end of five years from the date of amalgamation.
3. Furnish a certificate in Form No. 29, duly verified by an accountant, along with the return of income for:
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- the year in which the prescribed production level is first achieved, and
- each subsequent year falling within the five-year period.
For this purpose, “installed capacity” is defined as the production capacity existing on the date of amalgamation, thereby preventing post‑merger manipulation of capacity.
Power to Relax Conditions
Recognising genuine business challenges, the law empowers the Central Government to relax the required level of production, the time period for achieving such production, or both, where the amalgamated company can demonstrate genuine efforts and circumstances beyond its control that prevented compliance.
The Critical Transition Issue: Violation of conditions after 1 April 2026
One of the most important transition issue that might arise where an amalgamation is completed before 1 April 2026, accumulated losses or depreciation are set off under section 72A of the Income-tax Act, 1961, but the prescribed conditions are violated in a later year, i.e., a tax year beginning on or after 1 April 2026. This situation has been specifically addressed through the CBDT FAQs on Interplay and Transition.
FAQ 8.6 issued under the transition framework provides following clarity: where a violation occurs in FY 2026–27 or thereafter, the consequences are governed by the Income-tax Act, 2025, and not by the repealed 1961 Act. In this regard, section 536(2)(o) of the Income‑tax Act, 2025, which governs the transition from the old Act to the new Act, provides that:
- if any loss or unabsorbed depreciation was set off before 1 April 2026 under section 72A of the 1961 Act, and
- the post‑amalgamation conditions are subsequently not complied with,
then the amount so set off shall be deemed to be the income of the amalgamated (or successor) entity in the tax year in which the violation occurs.
This deemed income is taxed under the Income-tax Act, 2025, without reopening earlier assessments.
The operation of section 72A (old Act) and section 536(2)(o) (new Act) can be understood through the following illustration.
Facts:
Event Date: Amalgamation approved1 October 2024 between Company A and Company B
Company A – Amalgamating company
Accumulated business loss: ₹8 crore
Unabsorbed depreciation: ₹2 crore
Total eligible amount under section 72A (IT Act, 1961): ₹10 crore by meeting statutory conditions.
Company B – Amalgamated company
Company B is allowed to set off ₹10 crore against its profits in FY 2024‑25 and FY 2025‑26
under the Income Tax Act, 1961.
Condition Violated After 1 April 2026:
In FY 2026‑27, Company B sells a substantial portion of the plant and machinery acquired from Company A. As a result, it fails to maintain the prescribed level of assets, thereby violating the conditions of section 72A.
In this case, since the violation occurs in FY 2026‑27, i.e., after the new Act comes into force, section 536(2)(o) of the Income‑tax Act, 2025 will be applicable and accordingly the amount so set off shall be deemed to be the income of the amalgamated or successor entity in the year of violation ie Company B in the present case. Thus, ₹10 crore will be considered to be deemed business income in FY 2026‑27 and accordingly will be taxed in the hands of Company B under the Income‑tax Act, 2025.
It is noteworthy that there will be no reopening of FY 2024‑25 or FY 2025‑26 assessments. The tax impact arises only in FY 2026‑27. Thus, the transition mechanism ensures that legitimate restructuring benefits are not disturbed retrospectively, but non‑compliance is penalised prospectively under the new law.
Based on the above, it is evident that the benefits granted under the 1961 Act are protected under the new Act, but compliance obligations survive into the new Act. Further, monitoring and claw‑back mechanism for post‑2026 violations is firmly embedded in the new Act and lastly companies involved in amalgamations before 1 April 2026 must track production benchmarks and asset continuity well beyond the transition date.
Conclusion
The Income-tax Act, 2025 adopts a measured and balanced transition approach for amalgamations. While it respects vested rights and elections made under the old law, it ensures that future non‑compliance is decisively addressed within the framework of the new statute. For taxpayers, the key lies not merely in structuring transactions before 1 April 2026, but in long-term compliance planning under the new Act.
References:
- Income Tax Act, 1961
- Income Tax Act, 2025
- CBDT FAQs on interplay and transition
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