Section 116 — Loss on Amalgamation Demerger | ITA 2025

Section 116 — LOSS / DEPRECIATION CARRY-FORWARD ON M&A / REORGANISATION (1961 s. 72A SUCCESSOR — EXPANDED)

Section 116 is the substantive equivalent of 1961 s. 72A — the most consequential M&A tax provision in the Act, preserving the inherited tax-shield value of accumulated losses and unabsorbed depreciation across corporate reorganisations. The section now covers SIX distinct reorganisation pathways across 13 sub-sections. FA 2025/2026 amendments have added (a) strategic-disinvestment-amalgamation [sub-s. 1(d)] and (b) a fresh 8-year carry-forward clock anchored to the original-loss-year [sub-s. 12]. Architecture: (i) ELIGIBILITY (sub-ss. 1, 8, 10) — what kinds of reorganisations qualify; (ii) CONDITIONS (sub-s. 4) — substantive prerequisites; (iii) DEMERGER APPORTIONMENT (sub-s. 6); (iv) REVERSAL ON BREACH (sub-ss. 5, 9, 11); (v) FRESH 8-YEAR CLOCK (sub-s. 12) — material change in carry-forward economics.

Statutory text — Income-tax Act, 2025

Marginal note — Carry forward and set off of accumulated loss and unabsorbed depreciation in case of amalgamation or demerger, etc.

(1) Where there has been an amalgamation of,—

(a) a company owning an industrial undertaking or a ship or a hotel with another company; or

(b) a banking company referred to in section 5(c) of the Banking Regulation Act, 1949 (10 of 1949) with a specified bank; or

(c) one or more public sector company with one or more other public sector company; or

(d) an erstwhile public sector company with one or more company or com- panies, if the share purchase agreement entered into under strategic disinvestment restricted immediate amalgamation of the said public sector company and the amalgamation is carried out within five years from the end of the tax year in which the restriction on amalgamation in the share purchase agreement ends, then, irrespective of anything contained in any other provision of this Act, the accu- mulated loss and unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, allowance for unabsorbed depreciation of the amalgam- ated company for the tax year in which the amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.

(2) The accumulated loss and the unabsorbed depreciation of the amalgamating company, in case of an amalgamation referred to in sub-section (1)(d), which is deemed to be the loss or, as the case may be, the unabsorbed depreciation of the amalgamated company, shall not exceed the accumulated loss and unabsorbed depreciation of the public sector company as on the date on which it ceases to be a public sector company due to such strategic disinvestment.

(3) For the purposes of sub-section (1)(d),—

(a) “control” shall have the same meaning as assigned to it in section 2(27) of the Companies Act, 2013 (18 of 2013);

(b) “erstwhile public sector company” means a company which was a public sector company in earlier tax years and ceases to be so due to strategic disinvestment by the Government;

(c) (i) “strategic disinvestment” means sale of shareholding by the Central Government or State Government or a public sector company, in a public sector company or in a company, which results in—

(A) reduction of its shareholding to below 51%; and

(B) transfer of control to the buyer;

(ii) for clause (c)(i)(A), the reduction of shareholding shall apply only where shareholding of the Central Government or the State Government or the public sector company exceeded 51% before the sale of shareholding;

(iii) the transfer of control referred to in clause (c)(i)(B) may be effected by the Central Government or the State Government or the public sector company or any two or all of them.

(4) Irrespective of anything contained in sub-sections (1), (2) and (3), the accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company unless,—

(a) the amalgamating company—

(i) has been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years;

(ii) has held continuously as on the date of the amalgamation, at least three-fourths of the book value of fixed assets held by it two years preceding the date of amalgamation;

(b) the amalgamated company—

(i) holds continuously for a minimum of five years from the date of amalgamation at least three-fourths of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgama- tion;

(ii) continues the business of the amalgamating company for a mini- mum of five years from the date of amalgamation;

(iii) fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.

(5) If any of the conditions laid down in sub-section (4) are not complied with, the set off of loss or allowance of depreciation made in any tax year in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which the non-compliance occurs.

(6) Irrespective of anything contained in any other provisions of this Act, in the case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall,—

(a) if directly relatable to the undertakings transferred to the resulting com- pany, be allowed to be carried forward and set off in the hands of the resulting company;

(b) if not directly relatable to the undertakings transferred to the resulting company, be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and trans- ferred to the resulting company, and shall be allowed to be carried for- ward and set off in the hands of the demerged company or the resulting company, as applicable.

(7) The Central Government may, by notification, specify such conditions to ensure that the demerger is for genuine business purposes.

(8) If there has been reorganisation of business where, a firm is succeeded by a company fulfilling the conditions laid down in section 70(1)(zd) or a proprietary concern is succeeded by a company fulfilling the conditions laid down in section 70(1)(zf), then, irrespective of anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the predecessor firm or the proprietary concern, shall be deemed to be the loss or allowance for depreci- ation of the successor company for the tax year in which business reorganisation was effected and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly, subject to provisions of sub-section (9).

(9) If any of the conditions laid down in section 70(1)(zd) or (zf), as the case may be, are not complied with, the set off of loss or allowance of depreciation made in any tax year in the hands of the successor company, shall be deemed to be the income of the company chargeable to tax in the year in which the non-compliance occurs.

(10) If there has been reorganisation of business whereby a private company or unlisted public company is succeeded by a limited liability partnership fulfilling the conditions laid down in section 70(1)(ze), then, irrespective of anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depre- ciation of the predecessor company, shall be deemed to be the loss or allowance for depreciation of the successor limited liability partnership for the tax year in which business reorganisation was effected and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly, subject to provisions of sub-section (11).

(11) If any of the conditions laid down in section 70(1)(ze)are not complied with, the set off of loss or allowance of depreciation made in any tax year in the hands of the successor limited liability partnership, shall be deemed to be the income of the limited liability partnership chargeable to tax in the year in which the non-com- pliance occurs.

(12) For any amalgamation referred to in sub-section (1) or reorganisation of business referred to in sub-section (8) or (10) effected on or after the 1st April, 2025, any loss forming part of the accumulated loss of the predecessor entity, being—

(i) the amalgamating company; or

(ii) the firm or proprietary concern; or

(iii) the private company or unlisted public company, as the case may be, which is deemed to be the loss of the successor entity, being—

(a) the amalgamated company; or

(b) the successor company; or

(c) the successor limited liability partnership, as the case may be, shall be carried forward for not more than eight tax years immediately succeeding the tax year for which such loss was first computed for the original predecessor entity.

(13) For the purposes of this section,—

(a) “accumulated loss” means so much of the loss of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limited liability partnership or the amal- gamating company or the demerged company, under the head “Profits and gains of business or profession” (excluding loss in a speculation business) which would have been eligible for carry forward and set off to such predecessor entity under section 112, had the reorganisation of business or conversion or amalgamation or demerger not occurred;

(b) “industrial undertaking” means any undertaking which is engaged in—

(i) the manufacture or processing of goods; or

(ii) the manufacture of computer software; or

(iii) the business of generation or distribution of electricity or any other form of power; or

(iv) the business of providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services; or

(v) mining; or

(vi) the construction of ships, aircrafts or rail systems;

(c) “original predecessor entity” means predecessor entity in respect of the first amalgamation for sub-section (1) or first reorganisation of business for sub-sections (8) and (10), as the case may be;

(d) “specified bank” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955) or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980);

(e) “unabsorbed depreciation” means so much of the allowance for depre- ciation of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limited liability partnership or the amalgamating company or the demerged company, which remains to be allowed and which would have been allowed to such predecessor entity under this Act, had the reorganisation of business or conversion or amalgamation or demerger not occurred. Treatment of accumulated losses and unabsorbed depreciation in scheme of amalgamation in certain cases.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 — s. 116	INCOME-TAX ACT, 1961
s. 116(1)(a) — Industrial undertaking / ship / hotel amalgamation	1961 s. 72A(1)(a)
s. 116(1)(b) — Banking-co + specified-bank amalgamation	1961 s. 72AA
s. 116(1)(c) — PSU+PSU amalgamation	1961 s. 72A(1)(b)
s. 116(1)(d) — Strategic-disinvestment-PSU amalgamation [FA 2021/2024]	1961 s. 72A(1)(c)
s. 116(2) — Cap on disinvestment-loss amount	1961 s. 72A(2A)
s. 116(3) — Definitions for s. 116(1)(d)	1961 s. 72A Expl.
s. 116(4) — Substantive conditions: 3 yrs business / 75% assets / 5y continuation / 50% capacity	1961 s. 72A(2) read with Rule 9C
s. 116(5) — Reversal on breach	1961 s. 72A(3)
s. 116(6) — Demerger proportionate transfer	1961 s. 72A(4)
s. 116(7) — CG conditions for genuine demerger	1961 s. 72A(5)
s. 116(8)/(9) — Firm/proprietorship -> company succession	1961 s. 72A(6)
s. 116(10)/(11) — Pvt/unlisted-public co -> LLP	1961 s. 72A(6A) (FA 2010)
s. 116(12) — FRESH 8-year carry-forward clock for post-1-Apr-2025 reorgs	FA 2025/2026 — NEW
s. 116(13) — Definitions: accumulated loss / industrial undertaking / specified bank	1961 s. 72A(7) Explanation

STATUTORY ARCHITECTURE — SIX REORGANISATION PATHWAYS

Section 116 captures 6 distinct reorganisation pathways. (I) GENERAL AMALGAMATION (sub-s. 1(a)): Amalgamation of company OWNING industrial undertaking / ship / hotel WITH another company. Most-utilised provision; covers private-sector M&A in eligible sectors. (II) BANKING AMALGAMATION (sub-s. 1(b)): Banking-co per BR Act s. 5(c) amalgamating with 'specified bank' = SBI or any of the 19 corresponding-new-banks under 1970/1980 nationalisation Acts. Captures 2019-2020 mega-mergers (e.g., OBC + UBI into PNB; Vijaya + Dena into Bank of Baroda; Allahabad into Indian Bank). (III) PSU+PSU AMALGAMATION (sub-s. 1(c)): Inter-PSU consolidations (e.g., GAIL + petroleum subsidiaries; NTPC + power-distribution PSUs). (IV) STRATEGIC-DISINVESTMENT AMALGAMATION (sub-s. 1(d)) [NEW FA 2021/2024]: Erstwhile-PSU (post-disinvestment) amalgamating with private acquirer's company. Conditions: (a) share-purchase-agreement restricted immediate amalgamation; (b) amalgamation effected within 5 years of restriction-end. Critical for Air-India / BPCL / LIC-style disinvestments. Sub-section (2) caps inheritable loss at level subsisting at disinvestment-date. (V) FIRM/PROPRIETORSHIP -> COMPANY (sub-s. 8): Per s. 70(1)(zd)/(zf) tax-neutral conditions. (VI) PRIVATE/UNLISTED PUBLIC CO -> LLP (sub-s. 10): Per s. 70(1)(ze) conditions. Both (V) and (VI) reverse under sub-ss. 9 / 11 if conversion-conditions breached.

CONDITIONS FOR LOSS / DEPRECIATION INHERITANCE — SUB-SECTION (4)

AMALGAMATING-SIDE CONDITIONS: (a)(i) Engaged in the loss-incurring business for at least 3 years pre-amalgamation. Prevents loss-laden shell-companies from being created and immediately merged. (a)(ii) Holds continuously as on amalgamation-date at least 75% of book-value of fixed-assets held two years before amalgamation. Ensures asset-substance pre-merger. AMALGAMATED-SIDE CONDITIONS: (b)(i) Holds continuously for at least 5 years post-amalgamation at least 75% of book-value of fixed-assets ACQUIRED in the amalgamation. (b)(ii) Continues the business of the amalgamating company for at least 5 years post-amalgamation. Mere asset retention without business continuation fails. (b)(iii) Fulfils OTHER PRESCRIBED CONDITIONS (Form 62 / Rule 9C-equivalent — capacity utilisation at least 50% within 4 years; revival-plan filed). These conditions DO NOT apply to sub-ss. 8, 10 reorganisations (which use s. 70 conditions instead).

DEMERGER PROPORTIONATE TRANSFER — SUB-SECTION (6)

Sub-section (6) splits losses on demerger as follows: (a) DIRECTLY-RELATABLE portion: attributable to the transferred undertaking — goes to RESULTING company; (b) NON-DIRECTLY-RELATABLE portion: apportioned BETWEEN demerged and resulting in the same proportion as ASSETS retained vs. transferred. Practical impact: post-demerger, accumulated loss is split between the two entities; each carries its share forward against future profits. Sub-section (7) empowers CG to notify additional conditions to ensure 'genuine business purpose'. Anti-abuse mechanism — protects against artificial demergers to relocate losses.

FA 2025/2026 — FRESH 8-YEAR CARRY-FORWARD CLOCK [SUB-S. (12)] — MAJOR CHANGE

Sub-section (12) is a NEW provision (FA 2025/2026), affecting reorganisations effected on or after 1-Apr-2025. PRE-2025 ERA: Inherited losses retained the predecessor's residual carry-forward life. Multi-step reorganisations (A->B->C) often allowed loss-trafficking and stale-loss extension. POST 1-APR-2025 (sub-s. 12): The accumulated loss carries forward for not more than 8 tax years immediately succeeding the tax year for which the loss was FIRST COMPUTED for the original predecessor entity (sub-s. 13(c)). Effect: NO FRESH 8-YEAR CLOCK. Subsequent multi-step reorganisations cannot reset the clock. MAJOR ANTI-ABUSE measure — removes loss-trafficking incentive of multi-step amalgamations / demergers / conversions. Note: Unabsorbed-DEPRECIATION continues unlimited carry-forward life u/s 33(2) — sub-s. 12 affects only ACCUMULATED LOSS.

REVERSAL ON BREACH — SUB-SECTIONS (5), (9), (11)

If conditions of sub-s. 4 / s. 70(1)(zd)/(zf)/(ze) are breached, the loss / depn set-off in any prior year is DEEMED INCOME of the successor in the year of non-compliance. Common breach scenarios: (i) Premature sale of fixed assets (less than 75% retention test); (ii) Cessation of business (less than 5-year continuation); (iii) For LLP-conversion: shareholding shifts violating 50%-PSR-for-5-years; (iv) Failure to achieve 50% capacity utilisation by year-4. The retrospective reversal often necessitates re-opening of multiple-year assessments — significant exposure for the successor.

KEY DEFINITIONS — SUB-SECTION (13)

(a) 'Accumulated loss' — PGBP-head loss (excluding speculation-loss) eligible for s. 112 carry-forward by the predecessor, had the reorganisation not occurred. (b) 'Industrial undertaking' — manufacture / processing of goods / computer software / generation or distribution of electricity / telecom services (basic, cellular, paging, satellite, broadband) / mining / construction of ships, aircrafts or rail systems. WIDER than common usage, but pure-trading / financial-services / hospitality (other than hotels in sub-s. 1(a)) do NOT qualify. (c) 'Original predecessor entity' — predecessor of the FIRST amalgamation / reorganisation. Anchor for sub-s. 12 8-year clock. (d) 'Specified bank' — SBI / corresponding new banks under 1970 / 1980 nationalisation Acts (i.e., the 19 nationalised PSU banks). (e) 'Unabsorbed depreciation' — depreciation that would have been allowed to predecessor but for the reorganisation.

CASE LAW — KEY AUTHORITIES

CIT v. Mahindra Engineering & Chemical Products Ltd (Bom HC) — failure of 5-year business-continuity condition forfeits inherited loss. PCIT v. Aroni Commercials Ltd (Bom HC) — 'industrial undertaking' liberally construed. Wipro Ltd v. DCIT (Kar HC) — 50% capacity-utilisation must be evidenced by ACTUAL operating-output records. Mehsana District Cooperative Milk Producers Union Ltd v. CIT (SC) — co-operative reorganisations following BR Act framework. Kanoria Chemicals & Industries Ltd (Cal HC) — demerger 'directly relatable' tested at undertaking-level (segmental P&L), not asset-level. DCIT v. Hindalco Industries Ltd (Bom HC) — multi-step amalgamations: each step examined separately for s. 72A conditions. Reliance Petroinvestments Ltd (Mum ITAT) — strategic disinvestment loss-cap principles.

PLANNING NOTES

(I) M&A DEAL STRUCTURING: Always model loss-and-depreciation inheritance value separately from net-asset-value. Pre-merger DUE DILIGENCE: verify accumulated loss vintage (pre vs post 1-Apr-2025 to determine carry-forward life under s. 116(12)); verify amalgamating-co's 3-year-business-engagement and 75%-asset-holding tests. Post-merger COMPLIANCE: 5-year clock from amalgamation-date — annual compliance calendar covering 75%-asset-retention; 50% capacity utilisation review (year-4 cliff); business-continuity board certification. (II) DEMERGER STRATEGY: Pre-demerger classify accumulated losses as 'directly relatable' or 'not relatable' per segment P&L. Demerger ratio must satisfy s. 70(1)(j) tax-neutrality + s. 116(7) genuine-business-purpose. (III) STRATEGIC DISINVESTMENT (sub-s. 1(d)): For acquirers of disinvested PSUs (Air India / BPCL-type), document the 5-year window from end-of-restriction-period; loss-cap (sub-s. 2): inheritable loss FIXED at disinvestment-date; fresh post-disinvestment losses NOT inheritable in subsequent amalgamation. (IV) FA 2025 IMPACT (sub-s. 12): For all post 1-Apr-2025 reorganisations, accumulated loss carries the predecessor's ORIGINAL 8-year clock — no fresh window. Stale-loss-purchase NO LONGER attractive. Front-load acquisitions of loss-laden targets. (V) DOCUMENTATION: Form 62 (CA-certified Compliance Statement) annually for 5 years post-amalgamation; annual board resolution affirming continuation of amalgamating-co's business; capacity-utilisation certificates from operations / production-head. (VI) FOR CONVERSIONS: For LLP-conversion, the 5-year 50%-PSR test is the principal pinch-point; for firm/proprietorship -> company succession, 50%-shareholding-of-ex-firm-partners-or-proprietor for 5 years critical.

CROSS-REFERENCES

Section 70(1)(e)-(k) — Tax-neutral transfers in amalgamation / demerger.
Section 70(1)(zd) / (zf) — Firm / proprietorship -> company conversion conditions.
Section 70(1)(ze) — Pvt/unlisted-public co -> LLP conversion conditions.
Section 117 — Banking / Govt-Insurance-Co amalgamation (separate carve-out).
Section 33(2) — Unabsorbed depreciation (different time-limit regime).
Section 112 — General PGBP loss carry-forward (predecessor's loss-classification).
Section 113 — Speculation loss (excluded from 'accumulated loss' definition).
Companies Act, 2013 — s. 2(27) ('control' definition for sub-s. 1(d)).
Banking Regulation Act, 1949 — s. 5(c) (banking-co definition for sub-s. 1(b)).
Form 62 — CA-certified compliance statement (sub-s. 4(b)(iii)).

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