Impact of Accumulated losses as per IT in case of Amalgamation

Under Section 72A of the Income Tax Act, 1961, when an amalgamation occurs, the accumulated business losses and unabsorbed depreciation of the amalgamating company (the transferor) are deemed to be the losses and depreciation of the amalgamated company (the transferee).

Filing and Disclosure Requirements

The amalgamating company and the amalgamated company must handle the ITR filings carefully to reflect this transfer:

• Amalgamating Company's ITR:

  • The amalgamating company should file its return of income for the period ending on the date of amalgamation.

  • It should not carry forward these losses to any subsequent year, as they are now being transferred to the amalgamated company.

  • Ensure all necessary details regarding the transfer of assets and liabilities as per the approved scheme of amalgamation are maintained in the records, as this will be required for assessment and verification.

• Amalgamated Company's ITR:

  • The amalgamated company must claim these losses in its own return of income.

  • In the ITR (typically ITR-6 for companies), there are specific schedules for "Carry forward and set-off of losses" (e.g., Schedule CYLA and Schedule CFL). You should report the brought-forward losses of the amalgamating company under the relevant heads, ensuring they are adjusted for the period since they were first computed.

  • Crucial Compliance: To claim these benefits, the amalgamated company must ensure it meets the conditions stipulated in Section 72A(2), such as:

    • Continuing the business of the amalgamating company for a minimum of 5 years.

    • Holding at least 75% of the book value of the fixed assets of the amalgamating company for at least 5 years.

Important Note on Recent Amendments

As per the 2025 amendments, there has been a rationalization of these provisions. The carry-forward of accumulated losses is now limited to 8 assessment years from the year in which the loss was first computed for the original predecessor entity. This prevents the "evergreening" of losses beyond the standard 8-year limit provided under Section 72 of the Act.

Summary

• Mechanism: Under Section 72A, losses and unabsorbed depreciation transfer from the amalgamating to the amalgamated entity.

• ITR Filing: The amalgamating company stops the carry-forward in its final return; the amalgamated company includes these in its own return (Schedule CFL/CYLA).

• Compliance: You must maintain strict compliance with business continuity and asset-holding conditions (minimum 5 years) to avoid the losses being treated as taxable income.

• Time Limit: Note that the carry-forward is restricted to 8 total years from the year of original computation.