Sections 79 & 72A in Corporate Restructuring: A Comparative Study with Income Tax Bill 2025

Preamble

This study explores the implications and evolving interpretations of Section 72A and Section 79 of the Income Tax Act, 1961, with particular attention to the amendments proposed in the Income Tax Bill, 2025. Section 72A facilitates the carry-forward of losses and unabsorbed depreciation in cases of amalgamations, aiming to incentivise corporate restructuring and the revival of sick units. Conversely, Section 79 imposes restrictions on the carry-forward of losses in cases of substantial changes in shareholding in closely held companies, serving as an anti-abuse measure. The proposed amendments aim to bring clarity and tighten the conditions for availing tax benefits. Section 72A's amendment restricts the carry-forward period of business losses post-amalgamation to the remaining part of the original eight-year window, preventing the indefinite extension of tax benefits. Section 79's corresponding provision in the new Bill redefines beneficial ownership and confirms that once the 51% continuity condition is breached, the right to set off losses is permanently lost. Through the analysis of key case laws and judicial interpretations, this paper underscores the legislative intent to balance the facilitation of genuine corporate restructuring with the prevention of tax avoidance schemes, ensuring more robust and equitable tax compliance mechanisms.

Section 79 of the Income-tax Act, 1961 deals with the set-off and carry forward of losses in case of a change in shareholding of a company. It primarily applies to closely held companies, restricting them from carrying forward losses if there is a substantial change in ownership.

Section 79 - Restrictions on Carry Forward of Losses in Certain Companies

Section 79 imposes restrictions on the carry-forward and set-off of losses in cases where there is a change in shareholding of a closely held company (i.e., a company in which the public is not substantially interested).

Key Provisions

1. Shareholding Requirement:
   • If 51% or more of the voting power changes hands, the company cannot carry forward past losses.
   • Exception: Eligible start-ups (under Section 80-IAC) can carry forward losses even if ownership changes, provided all original shareholders continue to hold shares.
2. Exemptions:
   • Changes due to death of a shareholder or gift to relatives do not trigger restrictions.
   • Amalgamations or demergers involving foreign companies are exempt if 51% of shareholders remain the same.
   • Companies undergoing restructuring under the Insolvency and Bankruptcy Code, 2016 are also exempt.

On the other hand, Section 119 of the proposed Income-tax Bill, 2025 introduces new administrative powers for tax authorities, allowing them to issue directions and relax provisions in certain cases to ensure smooth tax administration.

The Proposed Bill carries two major changes in the corresponding Section 119 from the existing Income Tax Act, 1961

1. There is an amendment in the language from "person who beneficially held shares of the company' to ' beneficial owner shares of the company'. Many a time a question that has often come up before the Indian judiciary is whether beneficial ownership can be said to have remained unchanged if the registered owner of shares, holding more than 49% of the voting power, has changed. There are contrary view being taken in the different High courts for the beneficial ownership. One interpretation is taken in Mumbai High Tribunal in the case of Tainwala Trading and Investments C. Limited Vs ACIT [2012] 22 taxmann.com 68 (Mum)] in relation to Section 79 is that a person is said to be a beneficial owner of shares when they are held by someone else on his behalf, meaning thereby that the registered owner is different from the actual owner. This is aligned with the view of Delhi Bench of the Tribunal in case of ACIT vs WSP Consultants India Private Limited [[2022] 140 taxmann.com 65 (Delhi-Tribunal)].

2. Conditions under which losses can be carried forward and set off against future income. Under the existing framework, this benefit of carry forward and set off is available if at least 51% of the voting power is beneficially held by same share holders who held the shares on the last day of the year in which the loss was incurred. There was ambiguity regarding whether the right to carry forward and set off losses would be restored if the shareholding was subsequently restructured to meet 51% threshold in any future years of setting off such loss. The Mumbai bench of the Tribunal in Sodexo India Services Private Limited Vs. PCIT (TS-79-ITAT-2023 (Mum)], held that Section 79 of Income Tax Act, 1961 gets attracted in the year in which set off is claimed and not in the year when the shareholding of the company changes.

The Proposed Bill clarifies that once there is a change in shareholding beyond 49% compared to the year in which the loss was originally incurred, the right to carry forward and set off the loss is permanently lost. This means that even if the shareholding is later restored to meet the 51% requirement, the ability to utilize the carry-forward loss is not reinstated.

As per Section 119 3 (a), in case of change in shareholding of a company, not being a company in which public are substantially interested, during any tax year, loss brought forward from any preceding tax year shall not be allowed to be set off against the income of the said tax year and subsequent tax years unless the following conditions are satisfied:--

If the beneficial owners of shares of the company carrying at least 51% of voting power, as on the last day of tax year in which loss was incurred, shall continue to be the beneficial owner of shares carrying at least 51% of voting power, as on the last day of the tax year in which such change in shareholding takes place

Section 72A of the Income-tax Act, 1961 deals with the carry-forward and set-off of accumulated losses and unabsorbed depreciation in cases of amalgamation or business reorganization. It allows certain companies undergoing mergers to continue benefiting from tax losses, provided they meet specific conditions.

Section 116 of the proposed Income-tax Bill, 2025, introduces new provisions related to corporate restructuring, aiming to streamline tax benefits while preventing misuse. The amendments seek to restrict the indefinite carry-forward of losses, ensuring they are utilized within a defined period.

The proposed changes could impact mergers and acquisitions, particularly in cases involving distressed assets.

Section 72A - Carry Forward and Set-Off of Losses in Amalgamation

Section 72A provides tax benefits to companies undergoing amalgamation, demerger, or business reorganization. It allows the carry-forward and set-off of accumulated losses and unabsorbed depreciation of the amalgamating company by the amalgamated company, subject to certain conditions.

Key Provisions

1. Eligible Companies: The section applies to companies engaged in industrial activities, banking, shipping, or hotel businesses.
2. Conditions for Availing Benefits:
   • The amalgamating company must have been engaged in business for at least three years before amalgamation.
   • The amalgamated company must continue the business of the amalgamating company for at least five years.
   • The amalgamated company must fulfil prescribed conditions related to employment and asset retention.
3. Restrictions:

• Losses and depreciation can only be carried forward if the amalgamation is genuine and not for tax avoidance.
• Special provisions apply to public sector companies undergoing strategic disinvestment.

Section 72 A: Proposed amendment in Finance Bill 2025

At Present, before the proposed amendment, IT Act provides that the unabsorbed business losses can be carried forward for eight financial years succeeding the year in which the loss is incurred. In the case of amalgamation, IT Act provides that subject to the satisfaction of certain conditions, the unabsorbed business losses of the amalgamating company shall be regarded as the business loss of the amalgamated company for the year in which the amalgamation is effected while this helps in incentivizing the revival of loss making business, it could also potentially lead to unintended evergreening of losses from the income tax point of view.

Finance Bill 2025 has proposed to end the fresh life of eight years for carried forward of business losses by providing that in case of amalgamation, unabsorbed business losses will be allowed for only the remainder period, i.e the period remaining out of the eight years from the year in which the business loss is incurred. This is proposed to apply to any amalgamation which is effected on or after 1st April 2025.

Conclusion

The analysis of Sections 72A and 79 of the Income Tax Act, 1961, along with the proposed revisions in the Income Tax Bill, 2025, reveals a deliberate shift towards refining the tax benefits associated with corporate restructuring. Section 72A has traditionally enabled the revival of distressed businesses by allowing the carry-forward of business losses and unabsorbed depreciation in cases of genuine amalgamations. However, the current amendment introduces a critical limitation: such losses can now only be carried forward for the remaining portion of the original eight-year period, even post-amalgamation. This move prevents the indefinite postponement of tax liabilities and curbs the evergreening of losses.

Similarly, Section 79, which governs the carry-forward of losses amid shareholding changes, has been a source of judicial debate due to the ambiguity between registered and beneficial ownership. The updated provision in the 2025 Bill addresses this by emphasizing beneficial ownership and disallowing loss carry-forward if continuity in beneficial holding drops below 51%, even temporarily. This clarity strengthens anti-abuse provisions and aligns judicial interpretations under a unified statutory framework.

Collectively, these amendments represent the government's intention to support genuine business reorganizations while simultaneously preventing tax avoidance. The jurisprudence evolving around these sections demonstrates an increasing judicial focus on substance over form, particularly in the evaluation of beneficial ownership. As corporate India adapts to these reforms, careful planning will be essential to ensure compliance and the optimal use of available tax provisions. This balance between facilitation and regulation underscores a maturing and more nuanced Indian tax regime.

Disclaimer: This document is intended solely for academic and informational purposes and does not constitute legal, financial, or professional tax advice. While every effort has been made to ensure the accuracy of the content based on the prevailing provisions of the Income Tax Act, 1961 and the proposed Income Tax Bill, 2025, the author does not assume any responsibility for errors, omissions, or any consequences arising from the use of this information. Readers are advised to consult qualified tax professionals or legal advisors before making any decisions based on the contents of this paper. Legislative changes or judicial rulings may alter the interpretations discussed herein.

Reference: Income Tax Act, 1961, Income Tax Bill 2025. Finance Bill 2025 and Various Articles published in Journals.