24 Feb 2025
Partners: Himanshu Sinha and Aditi Goyal, Senior Associate: Aishwarya Palan, Associate: Kanupriya Sharma
The Finance Bill, 2025 proposes changes to how accumulated business losses can be carried forward in cases of mergers and business reorganisations. These changes aim to prevent the indefinite carry-forward of business losses through successive mergers and business reorganisation.
Section 72 of the Income Tax Act, 1961 (ITA) currently allows business losses (excluding speculation losses) to be carried forward for up to eight years following the year in which the losses were first incurred. Sections 72A and 72AA of the ITA govern carry-forward and set-off of accumulated losses and unabsorbed depreciation in specified cases of amalgamation and business reorganisation. These provisions currently allow the amalgamated (or successor) entity to carry forward and utilise the accumulated losses of the amalgamating (or predecessor) entity for a period of eight years following the year in which the amalgamation or business reorganisation is effected. This has allowed entities to reset the clock on their losses, effectively extending the period during which they can offset them. This practice, known as ‘evergreening’, has been a concern because it lets entities keep extending the benefit of their losses indefinitely through frequent reorganisation.
The proposed amendments aim to prevent this evergreening by ensuring that the losses of the predecessor entity can only be carried forward for a maximum period of eight years from the year in which those losses were originally incurred— no matter how many times the entity is merged or reorganised. This change will prevent taxpayers from using business reorganisation to extend their loss carry-forward period beyond the original eight-year limit.
The proposed amendments will apply to amalgamations and business reorganisations effected on or after 1 April 2025. An ambiguity in this regard is the applicability of these amendments on ongoing amalgamation schemes where the appointed date (from which the amalgamation is deemed) is before 1 April 2025 and the effective date (when the amalgamation is approved) is after 1 April 2025.
While the proposed amendments seek to curb the misuse of tax laws, they may reduce the attractiveness of distressed deals and discourage genuine buyers from investing in stressed companies that require extended turnaround periods. Businesses undergoing or planning reorganisations must carefully evaluate the potential impact of these changes.
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