Corporate Restructuring, Valuation and Insolvency · Taxation and Stamp Duty Aspects of Corporate Restructuring

Carry Forward of Losses and Depreciation in Amalgamation

Updated 11 October 2026 · Fact-checked

Under section 116 of the Income-tax Act, 2025, the accumulated loss and unabsorbed depreciation of an amalgamating company become the amalgamated company's loss and depreciation for the year of amalgamation. This applies only to specified amalgamations and only if the conditions in section 116(4) are met. A carry-forward limit of eight tax years applies to amalgamations effected on or after 1 April 2025.

Understand Carry Forward of Losses and Depreciation

Normally a loss belongs to the company that suffered it. When that company merges into another and disappears, its losses would vanish with it. The general rule is that the successor cannot use them. Section 116 is a specific exception for certain amalgamations.

The section applies where there is an amalgamation of: (a) a company owning an industrial undertaking, a ship or a hotel with another company; (b) a banking company (as in section 5(c) of the Banking Regulation Act, 1949) with a specified bank; (c) one or more public sector companies with one or more other public sector companies; or (d) an erstwhile public sector company with other companies, under strategic disinvestment conditions. In these cases, the amalgamating company's accumulated loss and unabsorbed depreciation are deemed to be the loss or unabsorbed depreciation of the amalgamated company for the tax year in which the amalgamation was effected. The usual set-off and carry-forward rules then apply.

The benefit comes with anti-abuse conditions. The amalgamating company must have run the loss-making business for three or more years and must have held at least three-fourths of the book value of its fixed assets of two years before the amalgamation. The amalgamated company must then hold those assets and continue the business for five years.

If any condition is breached, the loss or depreciation already set off is deemed to be income of the amalgamated company in the year of the breach. So the benefit is clawed back.

Accumulated loss means only business loss (excluding speculation loss) that would have been eligible for carry forward and set off to the amalgamating company under section 112 had the amalgamation not occurred. Unabsorbed depreciation is the depreciation allowance that remained to be allowed to it.

For amalgamations effected on or after 1 April 2025, the losses that pass over can be carried forward for not more than eight tax years immediately following the tax year in which the loss was first computed for the original predecessor entity. The clock does not restart on amalgamation.

Key rules to remember

Eligible amalgamations: Industrial undertaking / ship / hotel company; banking company with specified bank; public sector with public sector; erstwhile public sector company (disinvestment case); Section 116(1). Outside these, the section does not give the benefit.
Effect of amalgamation: Amalgamating company's accumulated loss + unabsorbed depreciation = amalgamated company's loss/depreciation of the year of amalgamation; Then normal set-off and carry-forward rules apply.
Conditions on amalgamating company: Business for ≥ 3 years; held ≥ 3/4 of book value of fixed assets held 2 years before amalgamation, continuously up to the date of amalgamation; Section 116(4)(a).
Conditions on amalgamated company: Hold ≥ 3/4 of book value of acquired fixed assets for ≥ 5 years; continue business ≥ 5 years; meet other prescribed conditions; Section 116(4)(b). Five years run from the date of amalgamation.
Consequence of breach: Loss/depreciation set off earlier = income of amalgamated company in the year of non-compliance; Section 116(5).
Time limit: Carry forward ≤ 8 tax years after the year the loss was first computed for the original predecessor entity; Applies to amalgamations effected on or after 1 April 2025 (section 116(12)).
Strategic disinvestment: Shareholding falls below 51% (from above 51%) AND control passes to buyer; Section 116(3)(c). Amalgamation must occur within five years from the end of the tax year in which the restriction in the share purchase agreement ends; the loss is capped at the position on the date the company ceased to be a public sector company (section 116(2)).

How to solve Carry Forward of Losses and Depreciation questions

Use this order for any question on losses and depreciation in an amalgamation.

1Identify the type of amalgamation. Check whether it falls in section 116(1)(a) to (d). If it does not, say the section does not apply.
2Test the nature of the amalgamating company: does it own an industrial undertaking, a ship or a hotel? Is it a banking company merging with a specified bank? Is it a public sector case?
3State the effect: accumulated loss and unabsorbed depreciation are deemed to be those of the amalgamated company for the year of amalgamation.
4Check the amalgamating company's conditions: three years in the business, and three-fourths of fixed assets (book value) held continuously from two years before the amalgamation.
5Check the amalgamated company's conditions: five years' holding of three-fourths of acquired fixed assets, five years' continuance of business, and prescribed conditions.
6Check the loss type and the time limit. Speculation loss is excluded. For amalgamations on or after 1 April 2025, apply the eight-year limit.
7Conclude. If a condition fails, state the clawback: earlier set-off becomes income in the year of non-compliance.

Quickest way: Four-gate check

When to use it: For short case questions where you must decide quickly whether the successor keeps the losses.

Gate 1: Is it an eligible amalgamation under section 116(1)?
Gate 2: Did the amalgamating company meet the 3-year and 3/4 asset conditions?
Gate 3: Will the amalgamated company hold assets and run the business for 5 years?
Gate 4: Is the loss within the eight-year limit and of the right type?
If all four are passed, losses carry over. If one fails, losses are lost or clawed back.

Common mistakes in Carry Forward of Losses and Depreciation

Applying the section to every amalgamation.
Students remember the benefit but forget that it covers only the listed categories.
Fix: Always start by matching the facts to clauses (a) to (d) of section 116(1).
Mixing up the amalgamating and amalgamated company conditions.
Both involve three-fourths of fixed assets, so they look alike.
Fix: The amalgamating company: three years of business, three-fourths of assets held from two years before. The amalgamated company: five years of holding and of business continuance.
Counting five years from the year-end or the court order.
Students are careless about the start date.
Fix: The statute says five years from the date of amalgamation.
Carrying forward speculation loss.
Students treat all losses as the same.
Fix: Accumulated loss covers business loss only and excludes loss in a speculation business. It must also have been eligible for carry forward under section 112.
Forgetting the eight-year limit.
Older material has no such limit for these cases.
Fix: For amalgamations effected on or after 1 April 2025, count eight tax years from the year the loss was first computed for the original predecessor entity.
Saying a breach cancels the amalgamation.
Students confuse a tax consequence with a legal one.
Fix: A breach only makes the earlier set-off taxable as income in the year of non-compliance.

Worked examples

Example 1

Arjun Textiles Ltd, owning a manufacturing unit run for 6 years, amalgamates with Bharat Fabrics Ltd on 1 October 2026. It has accumulated business loss of ₹40,00,000 and unabsorbed depreciation of ₹10,00,000. It held all its fixed assets for the last two years. Bharat Fabrics will continue the business and hold all assets for 5 years. Can Bharat Fabrics claim the losses?

Show the solution

Type: Arjun Textiles owns an industrial undertaking (manufacture of goods), so section 116(1)(a) applies.
Effect: the accumulated loss of ₹40,00,000 and unabsorbed depreciation of ₹10,00,000 are deemed to be those of Bharat Fabrics for the year of amalgamation.
Amalgamating company conditions: 6 years in the business (three or more years met); all assets held (three-fourths met).
Amalgamated company conditions: it undertakes to hold the assets and continue the business for five years, and must meet any prescribed conditions.
Time limit: the amalgamation is after 1 April 2025, so the loss can be carried forward for not more than eight tax years after the year the loss was first computed for Arjun Textiles.

Answer: Yes. Bharat Fabrics can carry forward and set off ₹40,00,000 loss and ₹10,00,000 unabsorbed depreciation, subject to meeting the five-year conditions and the eight-year limit.

Example 2

Sagar Hotels Ltd has been in the hotel business for 2 years, and merges with Coastal Resorts Ltd. Sagar Hotels has an accumulated loss of ₹25,00,000. Can Coastal Resorts claim it?

Show the solution

Type: a company owning a hotel is covered by section 116(1)(a).
Check the amalgamating company's condition: it must have been engaged in the business in which the loss occurred for three or more years.
Sagar Hotels has only 2 years, so section 116(4)(a)(i) is not satisfied.
Under section 116(4), the loss is then not allowed to be set off or carried forward in the hands of the amalgamated company.

Answer: No. Coastal Resorts cannot claim the ₹25,00,000 loss, because Sagar Hotels did not run the business for three or more years.

Exam tips

Write the section 116 chain in order: eligibility, deeming, conditions, breach, time limit. Examiners reward structure.
In case questions, extract the number of years and the asset percentages from the facts, and compare them with 3 years, 3/4, 2 years and 5 years.
Mention that the five-year conditions fall on the amalgamated company and must be monitored after the scheme.
State the clawback consequence in your conclusion. It is often the missing mark.
Use the Income-tax Act, 2025 section number, not the old Act's, since the June 2027 session examines the 2025 Act.

Practice questions from Taxation and Stamp Duty Aspects of Corporate Restructuring

Carry Forward of Losses and Depreciation in other exams

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

Carry Forward of Losses and Depreciation: frequently asked questions

Which amalgamations allow carry forward of losses under the Income-tax Act, 2025?

Section 116(1) covers an amalgamation of a company owning an industrial undertaking, a ship or a hotel; a banking company with a specified bank; public sector companies with each other; and an erstwhile public sector company in certain strategic disinvestment cases.

What happens if the amalgamated company sells the assets within five years?

If it fails to hold at least three-fourths of the book value of the acquired fixed assets for five years, the loss or depreciation already set off is treated as its income in the year of non-compliance.

Is there a time limit for carrying forward these losses?

Yes, for amalgamations effected 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 entity.

Does a banking company merger qualify?

Yes, where a banking company as referred to in section 5(c) of the Banking Regulation Act, 1949 amalgamates with a specified bank, such as State Bank of India or a corresponding new bank defined in the section.