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

Dhruv Textiles Ltd amalgamated with Sagar Mills Ltd in a case covered by section 116(1) of the Income-tax Act, 2025. Dhruv had been running its business for four years and had held all its fixed assets for the two preceding years. After the amalgamation, Sagar Mills continued the business but sold fixed assets so that it held only 60% of the book value of the fixed assets acquired from Dhruv, within three years of the amalgamation. What is the tax consequence?

The set-off already claimed is treated as the income of Sagar Mills, the amalgamated company, in the year the condition is breached. The company must hold at least three-fourths of the book value of the acquired fixed assets for five years, and holding only 60% falls short.

  1. AThe loss set off earlier is deemed income of Sagar Mills for the year of non-complianceCorrect
  2. BNothing, as Sagar needs to hold only 50% of the book value
  3. CThe loss set off is deemed income of Dhruv Textiles in the year of amalgamation
  4. DThe loss is simply carried forward without any set-off in later years but earlier set-off is retained

Explanation

The amalgamated company must continuously hold at least three-fourths of the book value of the acquired fixed assets for five years. 60% is below 75%, so the condition is breached. Under section 116(5), the loss set off in earlier years is deemed to be income of the amalgamated company for the year in which the non-compliance occurs.

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