Carry Forward of Losses and Depreciation in Amalgamation

Understand Tax Treatment of Amalgamating and Amalgamated Companies

Key rules to remember

Eligible cases (section 116(1))

Industrial undertaking / ship / hotel company amalgamating with another company; banking company with a specified bank; public sector companies with public sector companies; erstwhile public sector company in strategic disinvestment case

Listed cases only. Relief is deemed loss or depreciation of the amalgamated company for the tax year of amalgamation. For the strategic disinvestment case, the amalgamation must be within five years from the end of the tax year in which the restriction in the share purchase agreement ends.

Conditions on the amalgamating company (section 116(4)(a))

Business in which loss/depreciation arose carried on for ≥ 3 years; ≥ 3/4 of book value of fixed assets held 2 years before amalgamation held continuously up to the date of amalgamation

Both conditions must be met.

Conditions on the amalgamated company (section 116(4)(b))

Hold ≥ 3/4 of book value of acquired fixed assets for ≥ 5 years from amalgamation; continue the business for ≥ 5 years; fulfil other prescribed conditions

All must be met. Under section 116(5), non-compliance with any condition in section 116(4), on either company, makes the loss or depreciation already set off income of the amalgamated company in the year of non-compliance.

Time limit on carry forward (section 116(12))

Accumulated loss carried forward ≤ 8 tax years after the tax year the loss was first computed for the original predecessor entity

For amalgamations on or after 1 April 2025. Section 116(12) caps only the loss forming part of the accumulated loss; unabsorbed depreciation is not covered by that cap. The eight years run from the tax year the loss was first computed for the original predecessor entity, so years elapsed before the amalgamation count.

Meaning of accumulated loss

Business loss (excluding speculation loss) that would have been eligible for carry forward under section 112 to the amalgamating company

Capital loss and speculation loss are not included.

Industrial undertaking (section 116(13)(b))

Manufacture or processing of goods; computer software; power generation or distribution; telecom services; mining; construction of ships, aircraft or rail systems

Trading or pure service business generally does not fit unless listed.

Strategic disinvestment (section 116(3)(c))

Sale of shareholding that reduces government or public sector holding to below 51% (it must have exceeded 51% before) and transfers control to the buyer

Loss claim is limited to the loss and depreciation of the public sector company on the date it ceases to be one (section 116(2)).

How to solve Tax Treatment of Amalgamating and Amalgamated Companies questions

1. 1Check whether the amalgamation is one of the cases in section 116(1). Identify whether the amalgamating company owns an industrial undertaking, ship or hotel.
2. 2Check the conditions on the amalgamating company: business for three or more years, and three-fourths of fixed assets (book value) held continuously from two years before the amalgamation.
3. 3Check the conditions on the amalgamated company: three-fourths of assets held and business continued for five years, plus prescribed conditions.
4. 4Separate the loss. Keep only business loss (not speculation) and unabsorbed depreciation. Drop capital loss and speculation loss.
5. 5Apply the eight-year limit of section 116(12) to the accumulated loss only, counting from the tax year the loss was first computed. Lapse any loss older than that. Unabsorbed depreciation is not covered by the section 116(12) cap.
6. 6Set off in the amalgamated company's hands under the normal order and record what is carried forward.
7. 7If a breach of any section 116(4) condition is given, add the set off amount to the amalgamated company's income in the year of non-compliance.

Quickest way: Four-gate check

Common mistakes in Tax Treatment of Amalgamating and Amalgamated Companies

• Treating every amalgamation as eligible to carry forward losses.

  Students remember the tax neutrality of amalgamation and assume the loss benefit follows.

  Fix: Section 116(1) lists specific cases. Check the type of company first.

• Carrying forward capital losses or speculation losses of the amalgamating company.

  The word loss is read broadly.

  Fix: Accumulated loss means business loss excluding speculation loss. Unabsorbed depreciation is separate.

• Mixing up the three-year and five-year tests.

  Both use three-fourths and numbers of years.

  Fix: Amalgamating company: three years of business and assets held from two years before. Amalgamated company: five years of holding assets and continuing business after amalgamation.

• Restarting the eight-year clock from the date of amalgamation.

  The deemed loss is for the year of amalgamation, so students count from there.

  Fix: For amalgamations on or after 1 April 2025 the eight years run from the tax year the loss was first computed for the original predecessor entity.

• Taxing the breach in the amalgamating company's hands.

  The loss originally belonged to the amalgamating company, so students assume the tax follows it.

  Fix: Section 116(5) applies if any condition in section 116(4) is not complied with. The set off amount becomes income of the amalgamated company, in the year of non-compliance. The amalgamating company has ceased to exist and is not taxed.

Worked examples