Section 72A of ITA, 1961 : Section 72A: Provisions Relating To Carry Forward And Set-Off Of Accumulated Loss And Unabsorbed Depreciation Allowance In Amalgamation Or Demerger, Etc

Explanation using Example

Imagine that XYZ Manufacturing Ltd., which owns a factory producing electronics, has been incurring losses for the past four years. The company has accumulated a significant amount of loss and unabsorbed depreciation on its books. Now, XYZ Manufacturing Ltd. decides to amalgamate with ABC Electronics Ltd., a profitable company in the same industry.

According to Section 72A of the Income-tax Act, 1961, the accumulated loss and unabsorbed depreciation of XYZ Manufacturing Ltd. can be carried forward to ABC Electronics Ltd. post-amalgamation. This means that ABC Electronics Ltd. can set off these losses against its future profits, thereby reducing its taxable income.

However, for this benefit to apply, certain conditions must be met:

• XYZ Manufacturing Ltd. must have been engaged in its business for at least three years prior to the amalgamation.
• XYZ Manufacturing Ltd. must have held at least three-fourths of its fixed assets continuously for two years before amalgamation.
• After amalgamation, ABC Electronics Ltd. must continue to hold at least three-fourths of the acquired fixed assets for five years and continue the business for the same duration.

If ABC Electronics Ltd. fails to meet these conditions within the specified time frames, the set off of losses that were claimed will be reversed and treated as income, subject to tax in the year the conditions were breached.