Budget 2025: Mergers not to be used for evergreening of losses

– Barsha Dikshit and Neha Malu | resolution@vinodkothari.com

The provisions related to the carry forward and set-off of business losses in the context of corporate restructuring have been a critical aspect of corporate taxation. The Budget 2025[1] proposes certain amendments concerning carry forward of losses in cases of amalgamation, pursuant to which mergers shall not be used for evergreening of losses. That is to say, the benefit of carry forward shall be limited to eight years from the onset of losses, and not eight years from the merger.

Analysis of the relevant provisions of IT Act, 1961

With respect to set off and carry forward of losses existing provision of section 72A and 72AA of the IT Act, 1961 provides that accumulated loss of the amalgamating entity or predecessor entity shall be deemed to be the loss of the amalgamated entity or the successor entity for the previous year in which amalgamation or business re-organisation has been effected or brought into force.

Further, section 72 (3) of the IT Act, 1961 provides that no loss (other than loss from speculation business) under the head “Profits and gains from business or profession” shall be carried forward for more than 8 assessment years immediately succeeding the assessment years for which the loss was first computed.

A key point of ambiguity has been whether the carry-forward period of losses resets for a fresh period of eight years from the appointed date of amalgamation or business reorganization.

ITAT Mumbai in the matter of Supreme Industries Ltd. v DCIT[2] held as follows:

Having gone through both the provisions of Sections 72A and 32A, of the Act we are of the view that Section 72A deals with carry forward and set off of accumulated business loss and unabsorbed depreciation allowance in case of amalgamation. According to this Section, accumulated business loss and unabsorbed. depreciation allowance of the amalgamating company shall be deemed to be the loss or as the case may be of the amalgamated company for the previous year in which amalgamation was affected and other provisions of this Act relating to set off of and carry forward of loss allowance for depreciation shall apply accordingly. Mean-ing thereby the amalgamated company would get the original period for its carry forward and set off.

Proposal in the present Budget

Pursuant to the present Budget, in section 72A, sub-section (6B) is proposed to be inserted providing as follows:

(6B) Where any amalgamation or business reorganisation, as the case may be, is effected on or after the 1st April, 2025, any loss forming part of the accumulated loss of the predecessor entity under subsection (1), (6) or (6A), being–

(a) the amalgamating company; or

(b) the firm or proprietary concern; or

(c) the private company or unlisted public company,

as the case may be, which is deemed to be the loss of the successor entity, being–

(i) the amalgamated company; or

(ii) the successor company; or

(iii) the successor limited liability partnership,

as the case may be, shall be carried forward in the hands of the successor entity for not more than eight assessment years immediately succeeding the assessment year for which such loss was first computed for original predecessor entity.

Therefore, the new provision explicitly clarifies that the benefit of carry forward of business losses following a merger or acquisition will be restricted to 8 years from the onset of the loss, rather than from the date of the merger. This change aims to curb the practice of ‘evergreening’ of losses, where companies might structure mergers to extend the time period within which losses can be utilized.

In light of the new provisions, companies involved in mergers or acquisitions should carefully evaluate their tax positions and loss-carry forward claims. Specifically, businesses considering such transactions must ensure that the losses they are looking to set off against future profits were incurred within the last 8 years. Losses older than this will no longer qualify for carry forward post-merger, reducing the potential tax benefit of such losses in a merger scenario.

Stance in case of demergers

In case of demerger, the existing provision of sec 72A (4) will continue to apply. Notably, demergers do not constitute evergreening, as the vintage of the loss does not shift to the year of demerger under this provision of law.

Other proposals in relation to mergers:

In addition to the above, the requirements and procedures for speedy approval of company mergers are proposed to be rationalized.

Further, in the context of fast-track mergers, the scope is proposed to be widened and the process be made simpler.

It is to be noted that presently, fast track mergers are permissible when entered into between any of the following class of companies:

  1. Two or more small companies;
  2. Between a holdco and its WOS;
  3. Two or more start-up companies; or
  4. One or more start-up co with one or more small co.

The proposed changes would likely include relaxing or expanding these categories, which could make it easier for more types of companies to merge quickly without undergoing the full, time-consuming regulatory process. However, the exact impact will be evaluated once the exact details of the proposals are notified.

See also: Key Highlights of the Budget 2025

[1] https://www.indiabudget.gov.in/

[2] 2007 17 SOT 476 (Mum ITAT)

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *