Carrying Forward Losses in Amalgamations Under Section 72A

Every serious merger or acquisition in India runs a Section 72A test early in the diligence. The reason is money. A target company that has burned cash for years usually carries a substantial pool of accumulated business losses and unabsorbed depreciation. Under the general rule, those losses die with the company when it merges. Section 72A is the exception that keeps them alive by transferring them to the amalgamated company, where they can shield future profits from tax. For a loss-heavy target, this loss pool is often worth more than any operating asset on the balance sheet, and it drives whether a deal is done as an amalgamation, a slump sale, or an asset purchase.

This guide explains exactly how Section 72A works, the conditions on both companies, the Rule 9C compliance that most acquirers underestimate, and what happens if a condition is breached after the deal closes.

What Section 72A Does

The default position under the Income Tax Act is unforgiving. When Company A merges into Company B, Company A ceases to exist. Its right to carry forward and set off its own business losses under set-off and carry forward of losses is personal to Company A, and there is no general provision that lets Company B step into those losses. Without Section 72A, the accumulated loss pool of the amalgamating company would simply lapse on the appointed date.

Section 72A(1) rewrites that outcome for qualifying amalgamations. It provides that the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, the allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected. Once this deeming happens, the ordinary rules for set-off and carry forward apply as though the amalgamated company had incurred these losses itself.

Two consequences flow from the word "deemed for the previous year in which the amalgamation was effected":

• For amalgamations effected on or after 1 April 2025, the inherited business loss does not get a fresh eight-year period. The Finance Act 2025 amended Section 72A so that each loss can be carried forward only for the balance of the eight assessment years counted from the year it was first computed for the original amalgamating company. A loss that was already six years old in the amalgamating company's hands has only two more years of life. (For amalgamations effected before 1 April 2025, the loss was treated as a loss of the year of amalgamation and got a fresh eight-year period.) The same rule continues in Section 116(12) of the Income Tax Act, 2025.
• The inherited unabsorbed depreciation carries no time limit at all. Under Section 32(2), unabsorbed depreciation can be carried forward and set off indefinitely, so the eight-year limit is relevant only to the business loss component.

Accumulated loss here means the business loss (not speculation loss) that the amalgamating company would have been entitled to carry forward under Section 72 had the amalgamation not taken place. Unabsorbed depreciation means the depreciation allowance that remains unabsorbed and would have been allowed to the amalgamating company. Capital losses and speculation losses are outside Section 72A and do not transfer.

Which Amalgamations Qualify Under Section 72A(1)

Section 72A does not apply to every merger. The amalgamating company must fall into one of the specified categories:

• A company owning an industrial undertaking or a ship or a hotel, amalgamating with another company;
• A banking company amalgamating with a specified bank (under Section 45 of the Banking Regulation Act framework);
• One or more public sector companies engaged in the operation of aircraft, amalgamating with one or more public sector companies in a similar business.

The most common category by far is the "industrial undertaking" limb. An industrial undertaking is broadly a business of manufacturing or processing goods, generation or distribution of electricity or any other form of power, mining, construction of ships, or the provision of telecommunication services. Pure trading companies, investment holding companies, and many service businesses do not own an industrial undertaking, which means their accumulated losses will not pass under Section 72A even in a genuine merger. This is a frequent and expensive surprise in diligence.

Beyond amalgamations, Section 72A also covers:

• Demergers under Section 72A(4), discussed in its own section below;
• Business reorganisations under Section 72A(6) and (6A): the succession of a firm or proprietary concern by a company meeting the conditions of Section 47(xiii) or (xiv), and the conversion of a private company or unlisted public company into an LLP meeting the conditions of Section 47(xiiib), each subject to its own conditions. (Amalgamation of banking companies and business reorganisation of co-operative banks are dealt with separately under Sections 72AA and 72AB.)

Conditions on the Amalgamating Company: Section 72A(2)(a)

The transferor (the loss-making company) must satisfy two conditions measured up to the date of amalgamation. These test whether the business was real and substantial rather than a shell assembled to sell losses.

The three-year business test prevents a company from acquiring a dormant loss company and merging it purely for the tax attribute. The 75% fixed-asset continuity test prevents the transferor from stripping out its assets in the run-up to the merger while keeping only the losses. Both are asset-and-substance tests: the loss must be attached to a living business.

Conditions on the Amalgamated Company: Section 72A(2)(b) and Rule 9C

The transferee (the company that inherits the losses) carries the heavier compliance burden, and it runs for five years after the deal. Section 72A(2)(b) sets the statutory conditions, and Rule 9C prescribes the operational thresholds.

A few practitioner points that decide whether the benefit survives an assessment:

• The 50% capacity condition is the one acquirers forget. If the acquired plant runs below half its installed capacity for the relevant years, the set-off is at risk unless a relaxation is granted on genuine grounds (Rule 9C provides for the Central Government to relax the condition where it is satisfied the failure was for reasons beyond the company's control).
• Form 62 is not optional paperwork. It must be filed along with the return of income, backed by an accountant's certificate drawn from the books and production records. Missing or late Form 62 is a straightforward hook for the Assessing Officer to deny the carry-forward.
• The five-year holding and continuity conditions are forward-looking obligations. They are tested year by year, so a disposal of acquired plant in year four can unwind a benefit already claimed in years one to three.

Consequence of Breaching a Condition: Section 72A(3)

Section 72A is a conditional benefit granted upfront and clawed back on default. Under Section 72A(3), if any condition in Section 72A(2) is not complied with, the set-off of loss or allowance of depreciation already made in the hands of the amalgamated company is deemed to be the income of the amalgamated company chargeable to tax in the previous year in which the condition is breached.

In plain terms, the company may have set off Rs 6 crore of inherited loss in years one and two, reducing its tax. If it then fails the capacity test or sells the acquired assets in year three, that Rs 6 crore is added back as deemed income of year three and taxed then, along with the usual interest exposure. The benefit is provisional until the full five-year runway is complete. This is why acquirers should model the Section 72A conditions as covenants, monitor them annually, and reduce their exposure to a reversal by keeping the acquired undertaking operating at genuine capacity.

Demerger: Section 72A(4)

A demerger splits one undertaking out of a company into a separate "resulting company." Section 72A(4) governs how losses and depreciation follow the split:

• Directly relatable losses go with the undertaking. Accumulated loss and unabsorbed depreciation that are directly relatable to the undertaking transferred to the resulting company are allowed to be carried forward and set off in the hands of the resulting company.
• Common losses are apportioned by asset ratio. Where the loss or depreciation is not directly relatable to the transferred undertaking, it is apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertaking have been retained by the demerged company and transferred to the resulting company.

Unlike the amalgamation route, the demerger provisions in Section 72A(4) do not impose the Rule 9C 50% capacity condition or the Form 62 requirement, though the demerger itself must satisfy the definition in Section 2(19AA) to qualify. The Central Government may notify further conditions under Section 72A(5). Because the loss allocation turns on the asset ratio, the way assets are carved between the demerged and resulting entities directly determines how much of the loss pool each keeps. That allocation should be settled in the scheme of arrangement, not left to be argued at assessment.

Interaction With Section 79 and MAT

Two other provisions sit alongside Section 72A, and both are commonly overlooked.

Section 79: change in shareholding of closely held companies. For a company in which the public are not substantially interested (a closely held company), Section 79 restricts carry-forward of losses when shareholding changes by more than 49% of the voting power compared with the year the loss was incurred. Section 72A operates as a specific enabling provision for amalgamations, so it overrides the general Section 79 bar for losses that pass through a qualifying merger. Two caveats matter in practice. First, Section 79 does not apply to unabsorbed depreciation at all, since depreciation is governed by Section 32(2), not Section 72. Second, once the losses become the amalgamated company's own losses, a later change in that company's shareholding could attract Section 79 in its own right if it is closely held.

MAT under Section 115JB. Setting off Section 72A losses against normal taxable income does not switch off the minimum alternate tax (MAT) under Section 115JB. MAT is computed on book profit, and the book-profit computation allows only the deduction of the lower of brought-forward book loss or unabsorbed depreciation as per the books of account, which is a different figure from the income-tax loss carried under Section 72A. A company that has wiped out its normal tax liability using inherited losses can still face MAT at 15% of book profit for FY 2025-26. From tax year 2026-27, the Finance Act 2026 cuts the MAT rate to 14% but makes MAT paid under the old regime a final tax, with no new MAT credit. The cash outflow is real and must be modelled into any deal that relies on a large 72A loss pool.

Worked Example: Company A Amalgamates Into Company B

Facts. Company A owns an industrial undertaking (a components manufacturing plant) and has run it for seven years. It carries an accumulated business loss of Rs 10 crore and unabsorbed depreciation of Rs 4 crore. Company B, a profitable manufacturer, absorbs Company A in a scheme of amalgamation effective in FY 2025-26 (AY 2026-27). Company A had held more than 75% of the book value of its fixed assets continuously for the two years before the merger, so the transferor conditions in Section 72A(2)(a) are met.

Step 1: The loss pool transfers, with its original expiry dates. On the appointed date, the Rs 10 crore business loss and Rs 4 crore unabsorbed depreciation are deemed to be Company B's own for FY 2025-26. Because the amalgamation is effected after 1 April 2025, each slice of the business loss keeps the eight-year life counted from the year Company A first incurred it, so Company B should map the expiry year of each slice before relying on it.

Step 2: Company B sets off against its profits. Suppose Company B earns business income of Rs 6 crore in FY 2025-26. It first sets off Rs 6 crore of the inherited business loss, reducing taxable business income to nil. The remaining Rs 4 crore business loss and the full Rs 4 crore unabsorbed depreciation carry forward. In FY 2026-27, business income of Rs 7 crore absorbs the Rs 4 crore residual business loss, then the Rs 3 crore balance is reduced by unabsorbed depreciation, leaving Rs 1 crore of depreciation to carry further.

Step 3: MAT check. Even in the years where normal tax is nil, Company B tests its book profit under Section 115JB. If book profit is positive after the limited book-loss adjustment, it pays MAT at 15% (plus surcharge and cess) for FY 2025-26 and banks the MAT credit. For FY 2026-27, if Company B stays in the old regime, MAT is 14% and is a final tax with no new credit (Finance Act 2026). The 72A set-off shelters normal tax, not MAT.

Step 4: The five-year compliance runway. For the benefit to stand, Company B must, through to FY 2030-31: hold at least 75% of the book value of Company A's acquired fixed assets, continue the components business, run the acquired plant at 50% or more of installed capacity (reached before the end of four years), and file Form 62 with the accountant's certificate alongside each year's return. If Company B closes the plant or sells the machinery in FY 2028-29, the Rs 13 crore already set off in FY 2025-26 and FY 2026-27 (Rs 10 crore business loss plus Rs 3 crore unabsorbed depreciation) becomes deemed income of FY 2028-29 under Section 72A(3), and the tax saved is reversed with interest.

The lesson from the example is that Section 72A is a five-year commitment, not a one-time entry on the appointed date. The tax value is real, but it is earned by keeping the acquired business genuinely operational.

---

This guide is based on Section 72A of the Income Tax Act, 1961 (including sub-sections (1), (2), (3), (4) and (5) and the Explanation defining accumulated loss and unabsorbed depreciation), Rule 9C of the Income Tax Rules prescribing the 50% installed-capacity condition and Form No. 62, Section 32(2) on unabsorbed depreciation, Section 72 on carry-forward of business loss, Section 79 on change in shareholding of closely held companies, Section 115JB (MAT), and Section 2(19AA) defining a demerger. Provisions and thresholds are subject to amendment; confirm the current position against incometaxindia.gov.in before structuring any transaction.

Frequently Asked Questions

Can a loss-making trading company's losses be carried forward after it merges into another company?

Usually not under Section 72A. The benefit is available only where the amalgamating company owns an industrial undertaking, a ship or a hotel, or falls into specified banking or public sector aircraft categories. Pure trading, investment and many service companies do not qualify, so their accumulated business losses lapse on amalgamation even if the merger is genuine.

For how many years can the amalgamated company carry forward inherited losses?

For amalgamations effected on or after 1 April 2025, the Finance Act, 2025 limits the carry forward of inherited business losses to the balance of the original eight years, counted from the year the amalgamating company first incurred each loss. Unabsorbed depreciation has no time limit under Section 32(2). Older amalgamations were treated as starting a fresh eight-year period.

What conditions must the loss-making company meet before the merger?

Under Section 72A(2)(a), the amalgamating company must have carried on the business in which the loss arose for at least three years, and must have continuously held at least 75% of the book value of its fixed assets for two years before the date of amalgamation. These tests ensure the losses belong to a real operating business rather than a dormant shell.

What happens if the amalgamated company sells the acquired plant within five years?

The benefit is clawed back. Under Section 72A(3), if a condition such as holding 75% of the acquired fixed assets for five years, continuing the business, or reaching 50% of installed capacity is breached, the loss and depreciation already set off are treated as income of the amalgamated company in the year of the breach and taxed then.

Do capital losses of the amalgamating company pass under Section 72A?

No. Section 72A covers only the accumulated business loss, other than speculation loss, and unabsorbed depreciation of the amalgamating company. Capital losses and speculation losses do not transfer to the amalgamated company and lapse on the merger. This should be factored into deal valuation during diligence.