When a company undergoes an amalgamation or merger, the ability to carry forward its business losses and unabsorbed depreciation is not automatic. Instead, these benefits can be preserved only if certain conditions—designed to ensure continuity—are met. Here’s a simple breakdown:

Key Points:

1. Continuity of Business and Shareholding:

   • Mandatory Conditions:
     For the losses and depreciation of the amalgamating or merging company to be carried forward by the resulting entity, there must be a continuity of business. This typically means that the merged entity continues the same business as that of the transferor.
   • Shareholding Criterion:
     A significant condition is that there must be a continuity in shareholding. In many cases, at least 50% of the loss-making company’s share capital (or voting power) should be preserved in the merged entity. If this “continuity of shareholding” condition is not met, the benefits of carry forward are disallowed.

2. Applicable Provisions:

   • The general rules for carrying forward business losses and unabsorbed depreciation are set out in Section 72 of the Income Tax Act, 1961.
   • Specific restrictions in the context of amalgamations/mergers have been clarified through judicial decisions and CBDT notifications. These emphasize that without the requisite continuity conditions, the losses and depreciation cannot be transferred to the amalgamated or merged entity.

3. Practical Implications:

   • If Conditions Are Met:
     The merged entity can set off these losses and unabsorbed depreciation against its future business income, thus reducing its taxable income.
   • If Conditions Are Not Met:
     The losses and depreciation of the transferor company will be lost, and the amalgamated entity cannot claim them.

The Income Tax Act allows different types of losses to be carried forward for a specified number of years. Here’s a breakdown:

1. Business Losses

• Carried forward for: 8 assessment years
• Set-off allowed against: Only business income (cannot be set off against other heads of income).
• Condition: The return of income must be filed within the due date under Section 139(1).

2. Speculation Losses (from intra-day trading or derivatives)

• Carried forward for: 4 assessment years
• Set-off allowed against: Only speculation profits.

3. Capital Losses (from the sale of assets, securities, or shares)

• Carried forward for: 8 assessment years
• Set-off allowed against:
  • Short-Term Capital Loss (STCL): Can be set off against both short-term and long-term capital gains.
  • Long-Term Capital Loss (LTCL): Can be set off only against long-term capital gains.

4. Losses from House Property

• Carried forward for: 8 assessment years
• Set-off allowed against: Income from house property in future years.

5. Unabsorbed Depreciation

• Carried forward for: Indefinite years
• Set-off allowed against: Any head of income except salary.