Direct Tax Laws and International Taxation · Business Restructuring

Business Reorganisation Involving Cooperative Banks and Others: Tax Provisions

Updated 11 October 2026 · Fact-checked

Section 116 of the Income-tax Act, 2025 lets accumulated loss and unabsorbed depreciation pass to the amalgamated company in specified cases, including a banking company merging with a specified bank. To solve a question, identify the case, test the conditions in sub-section (4), then apply the eight-year limit where relevant.

Understand Business Reorganisation Involving Cooperative Banks and Others

When companies merge or split, the main tax worry is what happens to the business losses and unabsorbed depreciation of the company that disappears. Normally a loss belongs to the entity that suffered it. Section 116 makes an exception for specified restructurings, so the loss can be used by the successor.

Sub-section (1) lists the cases of amalgamation covered: a company owning an industrial undertaking, a ship or a hotel with another company; a banking company (as in section 5(c) of the Banking Regulation Act, 1949) with a specified bank; one or more public sector companies with other public sector companies; and an erstwhile public sector company after strategic disinvestment, within the stated time. In these cases the accumulated loss and unabsorbed depreciation of the amalgamating company are deemed to be those of the amalgamated company for the tax year of amalgamation.

Specified bank means the State Bank of India or a corresponding new bank constituted under the 1970 or 1980 bank nationalisation Acts. So a public sector bank merging into another bank is covered only if the receiving bank fits this meaning. Note that this section does not mention cooperative banks. Do not assume any benefit for them from this section; answer only on the text.

The benefit is not automatic. Sub-section (4) sets conditions on both companies. If they are broken later, sub-section (5) taxes the loss that was set off as income of the amalgamated company in the year of default. For amalgamations and reorganisations on or after 1 April 2025, sub-section (12) limits carry forward to eight tax years from the year the loss was first computed for the original predecessor.

The section also covers demergers (sub-section 6), succession of a firm or proprietary concern by a company (sub-section 8), and a private or unlisted public company succeeded by an LLP (sub-section 10).

Key rules to remember

Covered amalgamations: Industrial undertaking / ship / hotel company; banking company with specified bank; PSU with PSU; erstwhile PSU after disinvestment; Sub-section (1). Loss and unabsorbed depreciation become those of the amalgamated company for the year of amalgamation.
Amalgamating company conditions: Business for 3 or more years; holds at least 3/4 of book value of fixed assets held 2 years before amalgamation, continuously till the date; Sub-section (4)(a).
Amalgamated company conditions: Holds at least 3/4 of book value of acquired fixed assets for 5 years; continues the business for 5 years; meets other prescribed conditions; Sub-section (4)(b). Period runs from the date of amalgamation.
Consequence of default: Loss/depreciation set off earlier = income of the amalgamated company in the year of non-compliance; Sub-section (5).
Eight-year limit: Carry forward ≤ 8 tax years after the year the loss was first computed for the original predecessor; Sub-section (12), for events on or after 1 April 2025.
Demerger losses: Directly relatable: to resulting company. Otherwise: split in ratio of assets retained to assets transferred; Sub-section (6).
Strategic disinvestment: Government/PSU holding above 51% falls below 51% and control passes to buyer; Sub-section (3)(c). Loss cap: PSU loss on the date it ceases to be a PSU (sub-section 2).

How to solve Business Reorganisation Involving Cooperative Banks and Others questions

Use the same sequence for any question on loss carry forward after a bank or other special reorganisation.

1Identify the type of event: amalgamation, demerger, or business succession (firm, proprietorship, LLP).
2Match it to a covered case in the section. For banks, check that the receiving bank is a specified bank.
3Work out the accumulated loss (business loss excluding speculation) and unabsorbed depreciation of the predecessor that would have been eligible for carry forward.
4Test the amalgamating company conditions: three years of business, three-fourths of fixed assets held for two years.
5Test the amalgamated company conditions: three-fourths of assets held and business continued for five years, plus prescribed conditions.
6If any condition fails, add back the loss already set off as income in the year of default.
7Apply the eight-year carry forward limit if the event is on or after 1 April 2025, and state the final amount available.

Quickest way: Four-gate check

When to use it: Short case questions asking whether a loss can be carried forward by the successor.

Gate 1: Is the event a listed case? If not, no transfer of loss under this section.
Gate 2: Did the old company run the business three years and keep three-fourths of assets?
Gate 3: Will the new company keep the assets and business for five years?
Gate 4: Is the loss within eight years of first computation? If all gates are passed, loss is allowed; if a gate fails later, it is taxed as income.

Common mistakes in Business Reorganisation Involving Cooperative Banks and Others

Assuming every bank merger qualifies
Students read 'banking company' and stop.
Fix: Check that the receiving bank is a specified bank, as defined in the section.
Applying the five-year holding to the amalgamating company
Mixing the two sets of conditions.
Fix: Three-year and two-year tests are on the amalgamating company; five-year tests are on the amalgamated company.
Treating the whole fixed asset base as the test
Ignoring the fraction.
Fix: The test is at least three-fourths of book value, not all assets.
Forgetting the add-back on default
Students stop at the allowance of the loss.
Fix: State that earlier set-off becomes income in the year of non-compliance.
Including speculation loss in accumulated loss
Treating all business loss alike.
Fix: Accumulated loss excludes speculation business loss.
Claiming a rule for cooperative banks from this section
The topic title mentions them.
Fix: Base answers on the text; this section names no cooperative bank rule.

Worked examples

Example 1

Alpha Ltd, which owns an industrial undertaking, amalgamates with Beta Ltd. Alpha had run the business for 5 years and held 90% of the book value of fixed assets it had two years earlier. Beta holds 80% of the acquired assets' book value for 5 years and continues the business. Alpha's accumulated loss is ₹40,00,000. Is it available to Beta?

Show the solution

Event: amalgamation of a company owning an industrial undertaking, so it is a covered case.
Alpha: business for 5 years, which is at least 3 years. Condition met.
Alpha: 90% of assets held, which is at least 75%. Condition met.
Beta: 80% of assets held for 5 years, which is at least 75%. Beta continues the business for 5 years. Conditions met.
Prescribed conditions are assumed to be met.

Answer: Yes. The ₹40,00,000 accumulated loss is deemed Beta's loss for the year of amalgamation, subject to the eight-year carry forward limit.

Example 2

Gamma Ltd amalgamated with Delta Ltd on 1 October 2025, both being unlisted companies owning hotels. Delta set off ₹12,00,000 of Gamma's loss in the first year. In the third year Delta sold 40% of the book value of the acquired fixed assets, leaving 60%. What is the tax effect?

Show the solution

Event is a hotel company amalgamation, a covered case.
Delta must hold at least 75% of acquired assets' book value for five years.
After the sale Delta holds 60%, below 75%, within five years, so the condition is breached.
Under sub-section (5), the loss already set off is deemed income of Delta for the year of non-compliance.

Answer: ₹12,00,000 is taxed as Delta's income in the year the assets were sold (the year of non-compliance).

Exam tips

Write the four conditions on the amalgamating and amalgamated company separately; examiners reward the split.
Quote the 'specified bank' meaning in any bank merger question.
Always state the consequence of default and the eight-year limit.
In case-based MCQs, check percentages against the three-fourths threshold and periods against three and five years.

Practice questions from Business Restructuring

Business Reorganisation Involving Cooperative Banks and Others: frequently asked questions

Does a public sector bank merger get loss carry forward?

A banking company merging with a specified bank is covered by sub-section (1)(b). Public sector companies merging with each other are also covered. Conditions in sub-section (4) must still be met.

What is a specified bank?

It means the State Bank of India or a corresponding new bank constituted under the 1970 or 1980 bank nationalisation Acts, as the section defines.

How long can the loss be carried forward?

For events on or after 1 April 2025, the loss can be carried forward for not more than eight tax years after the year it was first computed for the original predecessor.

What happens if the amalgamated company sells assets early?

If conditions in sub-section (4) are breached, loss or depreciation already set off is treated as income of the amalgamated company in the year of non-compliance.