Advanced Direct Tax Laws and Practice · Income Tax Implication on Specified Transactions

Tax Implications of Amalgamation, Demerger and Slump Sale

Updated 11 October 2026 · Fact-checked

Business reorganisation covers amalgamation, demerger and slump sale. Amalgamation and demerger are tax neutral only when prescribed conditions are met. Section 116 of the Income-tax Act, 2025 lets accumulated loss and unabsorbed depreciation move to the successor, subject to conditions. A slump sale is a lump-sum transfer of an undertaking, not itemised assets.

Understand Business Reorganisation: Amalgamation, Demerger and Slump Sale

A business can change shape without closing. Two companies can merge (amalgamation). One company can hive off an undertaking into another (demerger). Or a business can sell a whole undertaking for one price (slump sale). Tax law treats each differently.

The idea behind tax neutrality is simple. If the same business continues in a new shell, the law does not want tax to block the reorganisation. So when the conditions are met, the transfer of assets is not taxed as a sale, and shareholders are not taxed on swapping their old shares for new ones. If a condition fails, the relief goes and tax can apply.

Section 116 deals with the tax losses side. In an amalgamation, the accumulated loss and unabsorbed depreciation of the amalgamating company are deemed to be the loss or unabsorbed depreciation of the amalgamated company for the tax year of amalgamation. This applies only to the cases listed in section 116(1): a company owning an industrial undertaking, a ship or a hotel amalgamating with another company; a banking company with a specified bank; public sector companies with each other; and certain erstwhile public sector companies after strategic disinvestment.

Even then, section 116(4) sets conditions. The amalgamating company must have run the loss-making business for three or more years and have continuously held at least three-fourths of the book value of fixed assets it held two years before amalgamation. The amalgamated company must hold at least three-fourths of those assets for five years, continue the business for five years and meet other prescribed conditions. Breach means the loss or depreciation set off is treated as income of the amalgamated company in the year of non-compliance (section 116(5)).

A slump sale is different. It is a transfer of an undertaking for a lump sum, without values assigned to individual assets and liabilities. Its taxation sits under capital gains, so read it with the capital gains topic. Do not mix it with an itemised sale, where each asset has its own price and is taxed separately.

Key rules to remember

Amalgamation loss transfer: Accumulated loss + unabsorbed depreciation of amalgamating company → deemed loss/depreciation of amalgamated company for the year of amalgamation; Section 116(1). Only for the listed categories of amalgamation, and subject to section 116(4) conditions.
Amalgamating company conditions: Business ≥ 3 years; holds ≥ ¾ of book value of fixed assets held 2 years before amalgamation; Section 116(4)(a). Assets must be held continuously up to the date of amalgamation.
Amalgamated company conditions: Holds ≥ ¾ of book value of acquired fixed assets for 5 years; continues business for 5 years; meets prescribed conditions; Section 116(4)(b). Failure makes the set-off amount income in the year of breach (section 116(5)).
Carry forward limit: Transferred loss carried forward for not more than 8 tax years after the year the loss was first computed for the original predecessor entity; Section 116(12). Applies to amalgamations and reorganisations effected on or after 1 April 2025.
Demerger loss allocation: Directly relatable to transferred undertaking → resulting company; otherwise apportioned in the ratio of assets retained : assets transferred; Section 116(6). Government may notify conditions for genuine business purpose under section 116(7).
Slump sale: Transfer of an undertaking for a lump-sum consideration without values assigned to individual assets and liabilities; Definition stated in general terms. Check the capital gains provisions for computation.

How to solve Business Reorganisation: Amalgamation, Demerger and Slump Sale questions

Use the same order for any question on reorganisation. It keeps your answer in the provision, analysis, conclusion format.

1Identify the transaction: amalgamation, demerger, conversion or succession of a firm or proprietary concern, or slump sale.
2Check whether the facts fit a category in section 116(1) (industrial undertaking, ship, hotel, bank, public sector company) or the demerger or succession provisions.
3Test the conditions: three-year business and three-fourths asset holding for the amalgamating company; five-year holding and continuation for the amalgamated company.
4Work out the loss and depreciation that move: accumulated loss from business (excluding speculation loss) and unabsorbed depreciation that would have been allowed to the predecessor.
5For a demerger, split the loss: direct relatability first, then apportion by assets retained and transferred.
6Apply the eight-year limit for post-1 April 2025 reorganisations, counting from the year the loss first arose for the original predecessor.
7State the consequence of any breach: set-off amount becomes income in the year of non-compliance.
8Write a clear conclusion with the amount, the person who carries it and the year.

Quickest way: Four-question checklist

When to use it: Use when a question gives many facts and little time.

Who merges or splits, and does the case fall in section 116(1)?
Did the old business run three years and hold three-fourths of assets?
Will the new entity hold assets and run the business for five years?
Is the loss within eight tax years of its first computation?

Common mistakes in Business Reorganisation: Amalgamation, Demerger and Slump Sale

Allowing loss carry forward for every amalgamation.
Students assume tax neutrality covers all mergers.
Fix: Check that the case is within section 116(1) categories before moving any loss.
Mixing up the three-year and five-year tests.
Both use the three-fourths asset idea.
Fix: Three years of business and the two-years-before asset test apply to the amalgamating company. Five years of holding and continuing the business apply to the amalgamated company.
Including speculation loss in accumulated loss.
Students read it as any business loss.
Fix: The definition covers business or profession loss excluding loss in a speculation business.
Splitting demerger losses by a fixed ratio without checking direct relatability.
Apportionment feels easier.
Fix: First give directly relatable losses to the resulting company. Apportion only the rest by assets.
Treating a slump sale as a sale of itemised assets.
Both involve selling business assets.
Fix: A slump sale is a lump-sum transfer of an undertaking with no values assigned to individual assets and liabilities.
Ignoring the consequence of breach.
Students stop after finding conditions.
Fix: Add that the set-off becomes income of the amalgamated company in the year of non-compliance.

Worked examples

Example 1

Alpha Hotels Ltd, which owns a hotel, has run its business for five years. It amalgamates with Beta Ltd on 1 October 2026. Alpha's accumulated business loss is ₹40,00,000 and unabsorbed depreciation is ₹10,00,000. Alpha held continuously three-fourths of the book value of fixed assets it held two years earlier. Beta meets all five-year conditions. Can Beta claim these amounts?

Show the solution

The case is in section 116(1)(a): a company owning a hotel amalgamates with another company.
Amalgamating company tests: business for 3 or more years is met (5 years). Three-fourths asset holding is met.
Amalgamated company tests: assumed met as stated, including holding assets and continuing business for 5 years.
The amounts that move are the accumulated loss ₹40,00,000 and unabsorbed depreciation ₹10,00,000, deemed to be Beta's loss and depreciation for the tax year of amalgamation.
The amalgamation is after 1 April 2025, so the loss can be carried forward for not more than eight tax years after the year it was first computed for Alpha.

Answer: Yes. Beta can treat ₹40,00,000 as loss and ₹10,00,000 as unabsorbed depreciation, subject to the eight-year limit and continued compliance with section 116(4). If Beta breaches a condition, the amount set off becomes its income in that year.

Example 2

Gamma Ltd demerges an undertaking into Delta Ltd. Gamma's accumulated loss is ₹30,00,000, of which ₹12,00,000 is directly relatable to the transferred undertaking. The balance is not directly relatable. Assets retained by Gamma are ₹60 lakh and assets transferred to Delta are ₹40 lakh. How is the loss allocated?

Show the solution

Directly relatable loss ₹12,00,000 goes to Delta, the resulting company.
Balance loss = ₹30,00,000 − ₹12,00,000 = ₹18,00,000.
Apportion in the ratio of assets retained : transferred = 60 : 40.
Gamma share = 18,00,000 × 60 ÷ 100 = ₹10,80,000.
Delta share = 18,00,000 × 40 ÷ 100 = ₹7,20,000.
Delta's total = ₹12,00,000 + ₹7,20,000 = ₹19,20,000.

Answer: Gamma carries forward ₹10,80,000 and Delta carries forward ₹19,20,000. The total is ₹30,00,000.

Exam tips

Quote section 116 sub-section numbers for each condition, then apply facts one by one.
Always give the conclusion with a rupee figure and the entity that carries it.
Draw a short table-like list of conditions in bullets and tick each against the facts.
For slump sale questions, state first that it is a lump-sum transfer of an undertaking, then compare with itemised sale.

Practice questions from Income Tax Implication on Specified Transactions

Business Reorganisation: Amalgamation, Demerger and Slump Sale in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Business Reorganisation: Amalgamation, Demerger and Slump Sale: frequently asked questions

Do all amalgamations allow carry forward of losses?

No. Section 116(1) lists specific cases, such as a company owning an industrial undertaking, ship or hotel, certain bank mergers and certain public sector company mergers. Even then, section 116(4) conditions must be met.

What happens if the amalgamated company sells assets early?

If the conditions in section 116(4) are not met, the loss or depreciation set off earlier is deemed to be income of the amalgamated company in the year of non-compliance.

How is a demerger loss divided?

Losses directly relatable to the transferred undertaking go to the resulting company. Other losses are apportioned in the ratio of assets retained to assets transferred.

What is the difference between slump sale and itemised sale?

A slump sale transfers an undertaking for a lump sum without values assigned to individual assets and liabilities. An itemised sale prices each asset separately.