Honorable Finance Minister of India presented her record 8th consecutive budget in Lok Sabha. Honoring her commitment from the last budget, she also announced the introduction of a new income tax bill in Parliament in next few days.
The budget's overarching theme focused on regulatory and policy changes aimed at easing the burden on taxpayers. During the budget speech, specific emphasis was placed on rationalising merger provisions in India through introduction of procedures which is likely to be aimed at reducing regulatory hurdles. Furthermore, the scope of fast-track mergers is also proposed to be expanded, enabling a greater number of companies to benefit from a streamlined and less regulated process.
In light of the above, the Finance Bill 2025 also introduced crucial amendments to Section 72A and Section 72AA of the Income-tax Act, 1961 (“Act”), significantly impacting the carry forward and set-off of accumulated losses in cases of amalgamation and business reorganisation. This change aligns with the broader objective of rationalizing tax provisions and preventing the indefinite extension of tax benefits through successive amalgamations.
Section 72A and Section 72AA of the Act specifically governs the carry forward and set-off of accumulated losses and unabsorbed depreciation in cases of mergers, demergers, and business reorganisation. It allows the successor entity to carry forward and set-off of accumulated losses and unabsorbed depreciation of the predecessor entity, subject to compliance with specified conditions.
Earlier, Section 72A and Section 72AA allowed the successor entity to carry forward the accumulated losses of the predecessor entity for a fresh period of 8 years from the year in which amalgamation takes place. This effectively meant that accumulated losses could be perpetuated beyond the standard 8 years limitation period applicable under Section 72 of the Act. Therefore, these provisions, while intended to facilitate business reorganizations, was sometimes misused to "evergreen" losses indefinitely through successive amalgamation.
In order to bring parity with other provisions of the Act, the newly introduced provisions under Section 72A and Section 72AA will ensure that the accumulated losses in case of amalgamation and business reorganisation can now be carried forward only for 8 years from the date they were first computed by the original predecessor entity. These amended provisions under section 72A will be applicable to any amalgamation or business reorganisation that is effected on or after April 1, 2025, and similarly for Section 72AA these amended provisions will be applicable to any scheme of amalgamation which is brought into force on or after the 1st April 2025.
In scheme of amalgamations, two key dates are defined: the "Appointed Date" and the "Effective Date." The Appointed Date is a date from which the business of the predecessor entity is deemed to transfer to the successor entity. The Effective Date is when the amalgamation is legally recognised, after obtaining all necessary regulatory approvals.
It is pertinent to note that in a particular case, the Supreme Court ruled that the date an amalgamation is considered to take effect is the Appointed Date specified in the court-approved scheme.
In this context, ongoing amalgamation schemes which are already filed with the National Company Law Tribunal for their approval, with an Appointed Date before April 1, 2025, may still qualify to carry forward the predecessor entity's accumulated losses for an additional eight years. However, the merger process also requires an affirmative no objection certificate from tax authorities. Therefore, the interpretation of these provisions by tax authorities will be crucial in determining the eligibility under the amended provisions. It will be interesting to see how tax authorities address these situations, especially considering the Supreme Court's interpretation of the Appointed Date.
The recent amendments underscore the Government's commitment to creating a transparent and straightforward tax system, aimed at reducing litigation and minimizing regulatory obstacles.
A version of this article was published by The Times of India on February 10 2025. The same can be read here
Co-Authored with Nitin Batra, Associate Director, M&A and PE Tax, KPMG in India
