Statutory Background
Sections 72A and 72AA of the Income-tax Act, 1961 allow a merged or reorganised company to use the accumulated losses and unabsorbed depreciation of the predecessor, subject to certain conditions. These provisions were originally intended to support genuine business reorganisations and the revival of financially stressed companies.
Objective of the Amendment
The Finance Bill, 2025, aims to curb the practice of “evergreening” of losses, where companies repeatedly use mergers and reorganisations as a tool to extend the benefit of loss carry-forwards far beyond the intended period.
Key Changes Introduced
- A new sub-section (6B) has been inserted in Section 72A, applicable to all mergers or business reorganisations taking place on or after 1 April 2025.
- Losses and unabsorbed depreciation of the transferor entity can now be carried forward by the successor only for the balance of the original 8-year period starting from when the loss was first recorded in the books of the original predecessor entity.
- The phrase original predecessor entity has been defined to mean the company that first incurred the loss in the earliest merger or reorganisation.
Effective Date
The revised framework will apply from the assessment year 2026-27 onwards, in respect of reorganisations completed on or after 1 April 2025.
Position Before the Amendment
- Earlier, a merged entity could effectively get a fresh 8-year window to utilise losses, even if the predecessor had already exhausted some part of its period.
- Additionally, in the year of amalgamation, such losses could be set off not only against business income but also under other heads of income due to the deeming provisions.
- While this created tax advantages, it also led to structures driven more by tax planning than by commercial necessity, raising concerns of misuse.
Legal Position After the Amendment
- The carry-forward clock no longer resets at the time of merger. The successor must abide by the original computation date of the loss.
- For example, if the predecessor has already availed five years out of eight, the successor will only have the remaining three years to claim set-off.
- This removes the possibility of obtaining a “second life” for old losses and aligns the provision more closely with the general rule under Section 72.
- Importantly, the inter-head set off in the year of amalgamation remains available.
Fiscal Significance
- The change safeguards the tax base by preventing companies from exploiting mergers as a tax shield.
- It places all taxpayers on an equal footing, reducing the advantage enjoyed by entities structuring deals purely for tax reasons.
- Businesses will now need to justify reorganisations on genuine commercial grounds, not merely tax savings.
- On the flip side, entities that had factored in extended tax benefits into their projections may face lower post-merger savings and must reassess deal valuations.
Compliance Considerations
- Companies planning M&A after April 2025 must thoroughly check the loss history of the transferor, including the year when losses were first booked.
- Deal due diligence will need to include careful verification of how many years of benefit are still left.
- Successors must maintain robust records to demonstrate compliance, as disputes may arise over computation dates and eligibility.
- Transitional cases—where deals are close to finalisation around the effective date—require special care to avoid unintended loss of benefit.
Comparative Perspective
- Similar safeguards exist in many tax regimes globally, where loss carry-forwards are capped or ring-fenced to stop abuse.
- Indian courts have also taken a strict approach in the past when continuity of business, shareholding, or statutory conditions were not met. This amendment simply adds a new statutory limit.
Likely Challenges
- Losses that are more than a decade old may become practically unusable after successive reorganisations, weakening the financial rationale for some mergers.
- The measure could discourage restructuring in industries where revival of sick units depends partly on tax incentives.
- Tracking the “first” amalgamation and identifying the “original predecessor” across multiple reorganisations may be complex, giving rise to litigation.
Conclusion
The 2025 amendment to Sections 72A and 72AA is a policy shift towards discipline in corporate tax restructuring. It ensures that tax relief for carried-forward losses is available only within the intended time frame and cannot be refreshed endlessly through reorganisations. While it may narrow the tax incentives driving certain mergers, it preserves fairness in the system and strengthens the integrity of India’s corporate tax framework. Businesses and advisors must now approach reorganisations with a sharper focus on commercial viability, backed by meticulous tracking of tax history and compliance records.