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.

The Income Tax Act, 1961, allows taxpayers to adjust losses against income from other sources to reduce taxable income. The process is divided into two steps:

1. Intra-Head Adjustment (Same Head of Income) – Section 70

Losses under one source of income can be set off against income from another source under the same head of income.

✅ Examples:

• Loss from business A can be set off against profit from business B.
• Loss from one house property can be set off against income from another house property.
• Short-term capital loss (STCL) can be set off against short-term or long-term capital gains.

🚫 Exceptions:

• Speculation loss can be set off only against speculation income.
• Long-term capital loss (LTCL) can be set off only against long-term capital gains.
• Loss from owning race horses can be set off only against income from race horses.

2. Inter-Head Adjustment (Different Heads of Income) – Section 71

If a loss remains after intra-head adjustment, it can be set off against income from another head in the same financial year.

✅ Examples:

• Business loss can be set off against salary, house property, or capital gains.
• House property loss can be set off against salary, business, or other income (up to ₹2 lakh per year).

🚫 Restrictions:

• Speculation losses cannot be set off against any other head of income.
• Capital losses can only be set off against capital gains.
• Loss from race horses cannot be set off against other incomes.
• Business losses cannot be set off against salary income.

3. Carry Forward of Losses (If Not Fully Adjusted)

If a loss cannot be fully set off in the current year, it can be carried forward for set periods and adjusted in future years as per income tax provisions.

📌 Important Rules:
✅ The income tax return must be filed on time to carry forward losses.
✅ Losses can be set off only as per rules defined in the Act.

This helps taxpayers optimize tax liability and minimize tax burden legally.

Yes, losses can also be clubbed under the Income Tax Act, 1961, in cases where income is required to be clubbed as per Section 64. This typically happens in situations where income from one person (such as a spouse, minor child, or specified relative) is added to another person’s income.

When Can Losses Be Clubbed?

1️⃣ Income from Transferred Assets (Section 64)

• If an individual transfers an asset (without adequate consideration) to their spouse or minor child, the income from that asset is clubbed with the individual’s income.
• If the asset generates a loss, that loss must also be clubbed in the same manner.

2️⃣ Minor Child’s Income (Section 64(1A))

• If a minor child earns income, it is generally clubbed with the parent’s income.
• If the child’s income results in a loss, that loss can also be clubbed with the parent’s income and set off accordingly.
• Exception: If the child has a disability under Section 80U, their income/loss is not clubbed.

3️⃣ Partnership Firm or HUF Cases

• If an individual transfers an asset to a partnership firm or HUF where they have a substantial interest, the profit/loss from that asset is clubbed with their income.

Example Scenario

🔹 A father gifts ₹5 lakh to his minor child, who invests it in stocks and incurs a loss of ₹50,000. Since the child’s income is clubbed with the parent’s income, the loss is also clubbed, and the parent can use it for set-off.

🔹 A husband transfers a property to his wife without consideration. If the wife incurs a rental loss, the husband must club that loss with his income.

If you have transferred a commercial property to your wife without any consideration (i.e., as a gift), the rental income received by her will not be taxed in her hands but will be clubbed with your income under Section 64(1)(iv) of the Income Tax Act, 1961.

How the Rental Income is Taxed?

🔹 Clubbing of Income: Since the transfer was made without adequate consideration, the rental income will be added to your taxable income and taxed as “Income from House Property” in your hands.

🔹 Standard Deduction: Under Section 24(a), you can claim a 30% deduction on the rental income as a standard deduction.

🔹 Interest on Loan Deduction: If there is an outstanding home loan on the property, you can claim a deduction under Section 24(b) for the interest paid on the loan.