Budget: Amendment in carry forward of losses-

 

1. Sec 72:

Section 72 of the Income Tax Act 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.

2. Sec 72A:

Section 72A and 72AA of the Income Tax Act provide 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 reorganisation has been effected or brought into force.

3. Amendment:

In order to bring clarity and parity with the provisions of section 72 of the Act, it is proposed to amend section 72A and section 72AA of the Act to provide that any loss forming part of the accumulated loss of the predecessor entity, which is deemed to be the loss of the successor entity, shall be eligible to be carried forward for not more than eight assessment years immediately succeeding the assessment year for which such loss was first computed for original predecessor entity.

4. Rationale:

The proposed amendment is aimed to prevent evergreening of the losses of the predecessor entity resulting from successive amalgamations and also to ensure that no carry forward and set off of accumulated loss is allowed after eight assessment years from the immediately succeeding the assessment year for which such loss was first computed for original predecessor entity.

5. Practical example why this amendment is proposed:

If X Company had a loss and carried forward the same from 2016 and suddenly in 2023 it got merged with Y Company, Y company was eligible to further carry forward losses for further 8 years.

This is called as evergreening of losses. This kind of amalgamation abuses the benefits provided in Sec 72A and Sec 72AA to carry forward the  business losses pursuant to an amalgamation.

With the proposed amendment, the Government has essentially made the timeline for losses to stay fixed. Now, the losses can only be carried forward by the amalgamated company for a period of 8 years from the end of the Assessment Year in which such loss was first computed by the predecessor entity.

6. Point to note: The change is only applicable to amalgamations or business reorganisations effected on or after 1st April, 2025. So it will not impact the amalgamations already affected.