Carry forward and set off of losses and unabsorbed depreciation in business reorganisation of co-operative banks.
118(1)
In a case of a co-operative bank, where amalgamation takes place during the tax year, the accumulated business loss and unabsorbed depreciation, if any, of the predecessor co-operative bank, shall be allowed to be set off against the income of the assessee, being a successor co-operative bank for that tax year, as if the business reorganisation had not taken place and all other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation, shall apply accordingly.
118(2)
In case of a co-operative bank where demerger takes place during the tax year, and where the accumulated loss or unabsorbed depreciation––
- (a) is directly relatable to the undertaking transferred, the whole of such loss and depreciation shall be allowed to be carried forward and set off against the income of the resulting co-operative bank; and
- (b) is not directly relatable to the undertaking transferred, then such loss and depreciation shall first be apportioned between the demerged co-operative bank and the resulting co-operative bank in the same proportion in which assets of the undertaking are distributed between the demerged co-operative bank and the resulting co-operative bank, and be allowed to be carried forward and set off against their respective incomes.
118(3)
The accumulated loss shall be carried forward only up to eight tax years immediately succeeding the tax year in which such loss was first computed in the hands of the predecessor-in-business.
118(4)
The provisions of this section shall apply, if—
- (a) the predecessor co-operative bank— (i) has been engaged in the business of banking for three or more years; and (ii) has held at least three-fourths of the book value of fixed assets as on the date of the business reorganisation, continuously for two years before to the date of business reorganisation;
- (b) the successor co-operative bank,— (i) holds at least three-fourths of the book value of fixed assets of the predecessor co-operative bank acquired through business reorganisation, continuously for a minimum five years immediately succeeding the date of business reorganisation; (ii) continues the business of the predecessor co-operative bank for a minimum five years from the date of business reorganisation; and (iii) fulfils such other conditions, as prescribed, to ensure the revival of the business of the predecessor co-operative bank or to ensure that the business reorganisation is for genuine business purpose.
118(5)
The Central Government may, by notification, specify such other conditions as it may consider necessary, other than the condition referred to in sub-section (4)(b)(iii), for the purposes of ensuring that the specified business reorganisation is for genuine business purposes.
118(6)
In a case where any of the conditions referred to in sub-section (4) or (5) are not complied with, the set off of accumulated business loss or unabsorbed depreciation made in any tax year in the hands of the successor co-operative bank shall be deemed to be the income of the successor co-operative bank chargeable to tax for the year in which such conditions are not complied with.
118(7)
The period commencing from the beginning of the tax year and ending on the date immediately preceding the date of business reorganisation, and the period commencing from the date of such business reorganisation and ending with the tax year, shall be deemed to be two different tax years for the purposes of set off and carry forward of loss and allowance for depreciation.
118(8)
In this section,––
- (a) “accumulated business loss” means so much of the loss of amalgamating co-operative bank or demerged co-operative bank as referred to in section 112 in the hands of predecessor co-operative bank, which such predecessor co-operative bank would have been entitled to carry forward and set off under the said section, as if the business reorganisation had not taken place;
- (b) “amalgamated co-operative bank”, “amalgamating co-operative bank”, “amalgamation”, “business reorganisation”, “demerged co-operative bank”, “demerger”, “predecessor co-operative bank”, “successor co-operative bank” and “resulting co-operative bank” shall have the meanings respectively assigned to them in section 65;
- (c) “unabsorbed depreciation” means so much of the allowance for depreciation in the hands of amalgamating co-operative bank or demerged co-operative bank, which remains to be allowed and which would have been allowed to such banks, if the business reorganisation had not taken place
Section Summary:
This section (Section 118) deals with the treatment of accumulated business losses and unabsorbed depreciation in the context of business reorganizations (amalgamation or demerger) involving co-operative banks. It ensures that these losses and depreciation can be carried forward and set off against the income of the successor co-operative bank, provided certain conditions are met. The section aims to facilitate genuine business reorganizations while preventing misuse of tax benefits.
Key Changes:
- Carry Forward of Losses and Depreciation: The section allows the successor co-operative bank to carry forward and set off accumulated business losses and unabsorbed depreciation from the predecessor bank, subject to specific conditions.
- Time Limit for Carry Forward: Accumulated losses can only be carried forward for up to eight tax years from the year the loss was first computed.
- Conditions for Eligibility: The predecessor and successor co-operative banks must meet certain conditions, such as holding a minimum proportion of fixed assets and continuing the business for a specified period.
- Non-Compliance Penalty: If the conditions are not met, the set-off of losses or depreciation will be reversed, and the amount will be treated as taxable income in the year of non-compliance.
Practical Implications:
- For Co-operative Banks Undergoing Reorganization:
- Amalgamation: The successor bank can set off the predecessor’s losses and depreciation against its income as if no reorganization occurred.
- Demerger: Losses and depreciation directly related to the transferred undertaking are fully carried forward to the resulting bank. For losses not directly related, they are apportioned based on the distribution of assets.
- Compliance Burden: Banks must ensure they meet the conditions related to asset holding and business continuity to retain the tax benefits.
- Risk of Reversal: Non-compliance with conditions could lead to the reversal of tax benefits, resulting in additional tax liability.
Critical Concepts:
- Accumulated Business Loss: Losses incurred by the predecessor bank that could have been carried forward under Section 112 if no reorganization had occurred.
- Unabsorbed Depreciation: Depreciation that remains unclaimed by the predecessor bank and would have been allowed if no reorganization took place.
- Business Reorganization: Includes amalgamation (merger) and demerger (split) of co-operative banks.
- Apportionment of Losses: In demergers, losses not directly related to the transferred undertaking are divided between the demerged and resulting banks based on the proportion of assets distributed.
Compliance Steps:
- Documentation:
- Maintain records of accumulated losses and unabsorbed depreciation.
- Document the distribution of assets in case of demerger.
- Asset Holding:
- Ensure the predecessor bank held at least 75% of the book value of fixed assets for two years before reorganization.
- The successor bank must hold at least 75% of the acquired fixed assets for five years post-reorganization.
- Business Continuity:
- The successor bank must continue the predecessor’s business for at least five years.
- Reporting:
- Disclose details of reorganization, losses, and depreciation in tax returns.
- Monitor compliance with conditions to avoid reversal of tax benefits.
Examples:
Amalgamation Scenario:
- Bank A (predecessor) has an accumulated loss of ₹10 crore and unabsorbed depreciation of ₹2 crore. It amalgamates with Bank B (successor).
- Bank B can set off the ₹10 crore loss and ₹2 crore depreciation against its income in the year of amalgamation and subsequent years, subject to the eight-year limit.
Demerger Scenario:
- Bank X demerges, transferring an undertaking to Bank Y. The undertaking has a directly relatable loss of ₹5 crore and unabsorbed depreciation of ₹1 crore.
- Bank Y can carry forward and set off the ₹5 crore loss and ₹1 crore depreciation.
- If there is an additional loss of ₹3 crore not directly related to the undertaking, and assets are distributed 60:40 between Bank X and Bank Y, then:
- Bank X carries forward ₹1.8 crore (60% of ₹3 crore).
- Bank Y carries forward ₹1.2 crore (40% of ₹3 crore).
This section ensures that co-operative banks undergoing reorganization can retain tax benefits for genuine business purposes while preventing misuse through strict compliance requirements.