Section 116: accumulated losses and unabsorbed depreciation on amalgamation, demerger and business reorganisation

Amalgamations covered

The carry-over of accumulated loss and unabsorbed depreciation applies to an amalgamation of: (a) a company owning an industrial undertaking, a ship, or a hotel with another company; (b) a banking company (as referred to in Section 5(c) of the Banking Regulation Act, 1949) with a specified bank; (c) one or more public sector company with one or more other public sector company; or (d) an erstwhile public sector company with another company, where the share purchase agreement under strategic disinvestment restricted immediate amalgamation and the amalgamation is carried out within five years from the end of the tax year in which that restriction ends.

In these cases, the accumulated loss and unabsorbed depreciation of the amalgamating company is deemed to be that of the amalgamated company for the tax year in which the amalgamation was effected, and the Act's ordinary set-off and carry-forward provisions then apply.

Cap for strategic-disinvestment amalgamations

Where the amalgamation is of an erstwhile public sector company under clause (d) above, the loss and depreciation deemed to carry over cannot exceed the accumulated loss and unabsorbed depreciation of that company as on the date it ceased to be a public sector company due to the strategic disinvestment.

Conditions for the amalgamating and amalgamated companies

The carry-over of accumulated loss and unabsorbed depreciation to the amalgamated company is available only if both sides meet conditions:

• The amalgamating company has been engaged in the loss/depreciation-generating business for three or more years, and has held at least three-fourths of the book value of its fixed assets continuously for two years before the amalgamation.
• The amalgamated company holds at least three-fourths of the book value of the fixed assets acquired from the amalgamating company continuously for a minimum of five years from the date of amalgamation.
• The amalgamated company continues the amalgamating company's business for a minimum of five years from the date of amalgamation.
• The amalgamated company fulfils such other prescribed conditions as ensure revival of the business, or that the amalgamation is for a genuine business purpose.

Consequence of non-compliance

If any of these conditions is not complied with, the set-off of loss or depreciation allowance already given to the amalgamated company in any tax year is deemed to be the amalgamated company's income chargeable to tax for the year in which the non-compliance occurs.

Demerger

In a demerger, the accumulated loss and unabsorbed depreciation of the demerged company that is directly relatable to the undertaking transferred to the resulting company is allowed to be carried forward and set off in the hands of the resulting company.

Loss and depreciation not directly relatable to the transferred undertaking is apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertaking have been retained versus transferred, and carried forward accordingly in each company's hands.

The Central Government may, by notification, specify conditions to ensure a demerger is for genuine business purposes.

Conversion of firm or proprietary concern into a company

Where a firm is succeeded by a company (meeting the conditions in Section 70(1)(zd)) or a proprietary concern is succeeded by a company (meeting the conditions in Section 70(1)(zf)), the accumulated loss and unabsorbed depreciation of the predecessor firm/concern is deemed to be that of the successor company for the tax year of the reorganisation, subject to those Section 70(1) conditions continuing to be met. If any condition is not complied with, the set-off already allowed is deemed to be the successor company's income for the year of non-compliance.

Conversion of company into LLP

Where a private company or unlisted public company is succeeded by an LLP meeting the conditions in Section 70(1)(ze), the accumulated loss and unabsorbed depreciation of the predecessor company is deemed to be that of the successor LLP for the tax year of the reorganisation, subject to those conditions being met. Non-compliance similarly triggers a deemed-income consequence for the successor LLP.

Eight-year carry-forward cap from the original predecessor

For amalgamations or reorganisations effected on or after 1 April 2025, a loss forming part of the accumulated loss of the predecessor entity that is deemed to be the successor's loss can be carried forward for not more than eight tax years immediately succeeding the tax year in which the loss was first computed for the original predecessor entity.

Key definitions

"Accumulated loss" means so much of the loss of the relevant predecessor entity (excluding speculation-business loss) under "Profits and gains of business or profession" as would have been eligible for carry forward and set off under Section 112, had the reorganisation not occurred.

"Industrial undertaking" is defined broadly to include manufacturing/processing of goods, computer software manufacture, generation or distribution of electricity or other power, telecommunication services, mining, and construction of ships, aircraft or rail systems.

"Unabsorbed depreciation" means so much of the predecessor entity's depreciation allowance as remains to be allowed and would have been allowed had the reorganisation not occurred.

Frequently asked questions