1.0 Tax Planning is a constant tassel between the Taxman and the Tax planners in the grand scheme of taxation. For years, businesses have exploited the strategy of amalgamation as a tool to transform dust-covered losses into fresh tax shields. But with the Finance Bill 2025, the curtain has fallen on this performance. So, let’s dissect the rise and fall of Section 72A and 72AA “Tax loss time machine” and explore what changes the amendments have brought in.
2.0 The Art of Fiscal Magic under section 72A and 72AA:
2.1 Under Section 72 of the Income Tax Act, 1961 business are allowed to carry forward their business losses for a maximum period of eight assessment years from the end of assessment year in which such loss was first computed. This provision acted as a cushion for the enterprises against cyclical downturns and depressions.
2.2 The logic is sound: losses today could offset the profits tomorrow, fostering reinvestment in the economy.
2.3 Enter the Loophole: amalgamation. When Company A (steeped in losses) merged with Company B (flush with profits), the merged entity now could reset the eight-year clock on those losses.
3.0 The Loophole: A case of Merger Magic:
3.1 Consider this hypothetical: In 2015, ABCLosses Ltd. incurred losses due to a market slump. By 2022, with only two years left to utilize them, the company merged with XYZ Profits Ltd. Under Section 72A, XYZ Profits Ltd. could now offset its profits against ABCLosses Ltd. losses for afresh 8 years.
3.2 This strategy has become a staple in corporate India’s playbook. Amalgamations were no longer just about synergies; they were strategic tax planning. The grandfathering of Tax losses by granting another 8 years to carry forward the losses afresh to the amalgamated company essentially granted a 16-year tax holiday to companies; which was not the intention of the Taxman with the introduction of Section 72A and 72AA on the legislature.
4.0 Finance Bill 2025: The Taxman Strike back
4.1 The Finance Bill 2025 drops the hammer with the amendments under Sections 72A and 72AA. Gone are the days of perpetual loss recycling. Amendments to Section 72A and 72AA as proposed in the Finance Bill 2025 is reproduced below:
In section 72A of the Income-tax Act, with effect from the 1st April, 2026:
after sub-section (6A), the following sub-section shall be inserted, namely:–– “(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.”; (ii) in sub-section (7), after clause (aa), the following clause shall be inserted, namely:–– ‘(ab) “original predecessor entity” means predecessor entity in respect of the first amalgamation under sub-section (1) or first business reorganisation under sub-section (6) or (6A).’.
In section 72AA of the Income-tax Act, with effect from the 1st April, 2026, ––
the following proviso shall be inserted, namely:–– “Provided that where any scheme of such amalgamation is brought into force on or after the 1st April, 2025, any loss forming part of the accumulated loss of the predecessor entity, being–– (a) the banking company or companies; or (b) the amalgamating corresponding new bank or banks; or (c) the amalgamating Government company or companies, as the case may be, which is deemed to be the loss of the successor entity, being–– (i) the banking institution or company; or (ii) the amalgamated corresponding new bank or banks; or (iii) the amalgamated Government company or companies, 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.”; (ii) in the Explanation, after clause (vii), the following clause shall be inserted, namely: –– ‘(viii) “original predecessor entity” means predecessor entity in respect of the first amalgamation.’.
4.2 Intent of the Taxman for the proposed changes as stated in the Memorandum explaning the Bill 2025:
Rationalisation of provisions related to carry forward of losses in case of amalgamation:
Section 72A and 72AA of the Act provide provisions relating to carry forward and set-off of accumulated loss and unabsorbed depreciation allowance in cases of amalgamation or business reorganization as specified therein. 2. Section 72A and 72AA provide that accumulated loss of the amalgamating entity or predecessor entity shall be deemed to be the loss of the amalgamated entity or the successor entity for the previous year in which amalgamation or business reorganisation has been effected or brought into force. Further, section 72 of the Act provides that no loss (other than loss from speculation business) under the head “Profits and gains from business or profession” shall be carried forward for more than 8 assessment years immediately succeeding the assessment years for which the loss was first computed. 3. In order to bring clarity and parity with the provisions of section 72 of the Act, it is proposed to amend section 72A and section 72AA of the Act to provide that any loss forming part of the accumulated loss of the predecessor entity, which is deemed to be the loss of the successor entity, shall be eligible to be carried forward for not more than eight assessment years immediately succeeding the assessment year for which such loss was first computed for original predecessor entity. The proposed amendment is aimed to prevent evergreening of the losses of the predecessor entity resulting from successive amalgamations and also to ensure that no carry forward and set off of accumulated loss is allowed after eight assessment years from the immediately succeeding the assessment year for which such loss was first computed for original predecessor entity. 3. The aforesaid amendments shall apply to any amalgamation or business re-organisation which is effected on or after 01.04.2025. 4. These amendments will take effect from the 1st day of April, 2026.
To give an outline of the above, the Government has essentially made the timeline for losses to stay fixed. Now, the losses can only be carried forward by the amalgamated company for a period of 8 years from the end of the Assessment Year in which such loss was first computed by the predecessor entity.
5.0 Implications on M&A industry:
It is relevant to note that since the change is only applicable to amalgamations or business reorganisations effected on or after 1st April, 2025 it won’t affect the amalgamations already effected, meaning the amendment is a prospective amendment instead of being a retrospective one. Hence, the losses that have already been transferred will continue as afresh in the amalgamated companies for the relevant time period of 8 years.
5.1 Implications of the Amendment:
Faster Merger Approval:
The amendment essentially eliminates carry forward of tax losses which was a big point of resistance and opposition of the tax department against the petition of merger and amalgamation in the NCLT. Thus, enabling faster mergers and speedy approvals of the same.
Merger and business reorganisation to become less lucrative?
Set-off of losses of the predecessor entity with the profits of the amalgamated company was the ace of the strategy. Limiting the time period of the carry forward and set off loses for the amalgamated company is bound take make this ace lose its value in the corporate strategy.
Some unanswered questions:
The amendment affects the Amalgamations and business reorganisations effected after 1st April, 2025, then the date of effect would be the appointed day or the effective day. In case where the appointed day is before 1st April, 2025 and effective date is after 1st April, 2025 would such cases be also covered under this amendment?
6.0 Conclusion:
The proposed amendment is a very welcome change as it streamlines the intent of exchequer with the provisions relating to carry forward and setting off business losses and also disallows unintended benefits to the companies through schemes of Mergers and Acquisition.
Author Bio
