Treatment of accumulated losses and unabsorbed depreciation in scheme of amalgamation in certain cases

117(1)

Irrespective of anything contained in section 2(6)(a) to (c) or section 116, where there has been an amalgamation of,—

• (a) one or more banking company with— (i) any other banking institution under a scheme sanctioned and brought into force by the Central Government under section 45(7) of the Banking Regulation Act, 1949; or (ii) any other banking institution or a company following a strategic disinvestment, wherein the amalgamation occurs within five years from the end of the tax year during which such disinvestment is carried out; or
• (b) one or more corresponding new bank or banks with any other corresponding new bank under a scheme brought into force by the Central Government under section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or under section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or both; or
• (c) one or more Government company or companies with any other Government company under a scheme sanctioned and brought into force by the Central Government under section 16 of the General Insurance Business (Nationalisation) Act, 1972, the accumulated loss and unabsorbed depreciation of such banking company or companies or amalgamating corresponding new bank or banks or amalgamating Government company or companies, shall be deemed to be the loss or, allowance for depreciation of the banking institution or company or amalgamated corresponding new bank or amalgamated Government company for the tax year in which the scheme of amalgamation was brought into force and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.

117(2)

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— (i) the banking company or companies; (ii) the amalgamating corresponding new bank or banks; or (iii) the amalgamating Government company or companies, as the case may be, which is deemed to be the loss of the successor entity, being—

• (a) the banking institution or company; or
• (b) the amalgamated corresponding new bank or banks; or
• (c) 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 tax years immediately succeeding the tax year for which such loss was first computed for original predecessor entity.

117(3)

In this section,—

• (a) “accumulated loss” means so much of the loss of the amalgamating banking company or companies or amalgamating corresponding new bank or banks or amalgamating Government company or companies under the head “Profits and gains of business or profession” (excluding losses of a speculation business) which such amalgamating company or companies would have been entitled to carry forward and set off under section 112 had the amalgamation not occurred;
• (b) “banking company” shall have the same meaning as assigned to it in section 5(c) of the Banking Regulation Act, 1949;
• (c) “banking institution” shall have the same meaning as assigned to it in section 45(15) of the Banking Regulation Act, 1949;
• (d) “corresponding new bank” shall have the same meaning as assigned to it in section 2(d) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or section 2(b) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980;
• (e) “general insurance business” shall have the same meaning as assigned to it in section 3(g) of the General Insurance Business (Nationalisation) Act, 1972;
• (f) “Government company” means a Government company as defined in section 2(45) of the Companies Act, 2013, engaged in the general insurance business and established under section 4 or 5 or 16 of the General Insurance Business (Nationalisation) Act, 1972;
• (g) “original predecessor entity” means predecessor entity in respect of the first amalgamation;
• (h) “strategic disinvestment” shall have the meaning assigned to it in section 116(3)(c);
• (i) “unabsorbed depreciation” means the allowance for depreciation of the amalgamating banking company or companies or amalgamating corresponding new bank or banks or amalgamating Government company or companies which remains to be allowed and which would have been allowed to such entity, had the amalgamation not occurred.

Explanation

Section Summary:

This section deals with the treatment of accumulated losses and unabsorbed depreciation in cases of amalgamation involving banking companies, corresponding new banks, or government companies. It ensures that these losses and depreciation allowances are carried forward and treated as losses or depreciation of the amalgamated entity (the successor entity) for tax purposes. The section applies to amalgamations sanctioned by the Central Government under specific banking and insurance laws.

Key Changes:

1. Carry Forward of Losses and Depreciation: The section allows the accumulated losses and unabsorbed depreciation of the amalgamating entity (predecessor) to be treated as losses or depreciation of the amalgamated entity (successor) in the year the amalgamation scheme is implemented.
2. Time Limit for Carry Forward: For amalgamations occurring on or after April 1, 2025, the accumulated losses can only be carried forward for a maximum of eight tax years from the year the loss was first computed for the original predecessor entity.
3. Applicability to Specific Entities: The section specifically applies to:
   • Banking companies amalgamating under the Banking Regulation Act, 1949.
   • Corresponding new banks amalgamating under the Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970 and 1980.
   • Government companies amalgamating under the General Insurance Business (Nationalisation) Act, 1972.

Practical Implications:

1. Tax Benefits for Amalgamated Entities: The amalgamated entity can benefit from the accumulated losses and unabsorbed depreciation of the amalgamating entity, which can be set off against future profits, reducing taxable income.
2. Time-Bound Utilization: For amalgamations after April 1, 2025, the successor entity must utilize the carried-forward losses within eight years, ensuring timely tax planning.
3. Strategic Disinvestment: In cases of strategic disinvestment, the amalgamation must occur within five years from the end of the tax year in which the disinvestment is carried out for the benefits to apply.

Critical Concepts:

1. Accumulated Loss: Refers to business losses (excluding speculative losses) that the amalgamating entity could have carried forward under Section 112 if the amalgamation had not occurred.
2. Unabsorbed Depreciation: Depreciation allowances that remain unclaimed by the amalgamating entity and would have been allowed if the amalgamation had not taken place.
3. Strategic Disinvestment: Defined under Section 116(3)(c), it refers to the sale of a substantial portion of government-owned shares in a company to private entities, often as part of economic reforms.

Compliance Steps:

1. Documentation: Maintain records of accumulated losses and unabsorbed depreciation of the amalgamating entity.
2. Reporting: Ensure that the losses and depreciation are correctly reported in the tax returns of the amalgamated entity for the year the amalgamation scheme is implemented.
3. Time-Bound Utilization: For amalgamations after April 1, 2025, track the eight-year limit for carrying forward losses to avoid losing the tax benefit.

Examples:

1. Scenario 1: Banking Company A amalgamates with Banking Institution B under a scheme sanctioned by the Central Government. Company A has an accumulated loss of ₹10 crore and unabsorbed depreciation of ₹5 crore. Post-amalgamation, Institution B can treat these as its own losses and depreciation, reducing its taxable income by ₹15 crore in the year of amalgamation.
2. Scenario 2: Government Company X amalgamates with Government Company Y on April 1, 2026. Company X had accumulated losses of ₹20 crore first computed in the tax year 2020-21. Company Y can carry forward these losses but must utilize them by the tax year 2028-29 (eight years from 2020-21).

This section simplifies the tax treatment of losses and depreciation in amalgamations, ensuring continuity of tax benefits while introducing time-bound utilization for future amalgamations.