Section 116 — Treatment of accumulated losses and unabsorbed depreciation in amalgamation or demerger, etc. Successor to s.72A of the 1961 Act.
Section 116 is in Chapter VII — Set Off or Carry Forward and Set Off of Losses, which runs from section 108 to section 121.
Sub-section (1) carries the accumulated loss and unabsorbed depreciation of an amalgamating company to the amalgamated company for the year of amalgamation, in four cases: a company owning an industrial undertaking, ship or hotel; a banking company under section 5(c) of the Banking Regulation Act, 1949 amalgamating with a specified bank; public sector companies with one another; and an erstwhile public sector company, where the share purchase agreement under strategic disinvestment restricted immediate amalgamation and the amalgamation happens within five years from the end of the tax year that restriction ends. Sub-section (2) caps the last of these at the public sector company's figures as on the date it ceased to be one, and sub-section (3) defines "strategic disinvestment" as a sale of government or public sector shareholding resulting both in reduction below 51% and transfer of control to the buyer, the reduction limb applying only where the holding exceeded 51% before the sale.
Sub-section (4) overrides sub-sections (1) to (3) with conditions on both sides. The amalgamating company must have carried on the business in which the loss occurred for three or more years, and must have held continuously as on the date of amalgamation at least three-fourths of the book value of the fixed assets it held two years before. The amalgamated company must hold at least three-fourths of the book value of the fixed assets acquired in the scheme and continue the amalgamating company's business, each continuously for a minimum of five years, and must fulfil such other prescribed conditions. Sub-section (5) makes breach a charge rather than a reversal: the set off or allowance already made is deemed income of the amalgamated company for the year of non-compliance.
Sub-section (6) deals with demerger — figures directly relatable to the undertakings transferred go to the resulting company, and anything not directly relatable is apportioned in the proportion in which the assets have been retained and transferred. Sub-section (7) lets the Central Government notify conditions to ensure a demerger is for genuine business purposes.
Sub-sections (8) to (11) apply the same deeming to a firm or proprietary concern succeeded by a company under section 70(1)(zd) or (zf), and to a private or unlisted public company succeeded by a limited liability partnership under section 70(1)(ze), with breach of those conditions making the set off or allowance income of the successor in the year of non-compliance.
Sub-section (12) caps the life of the transferred loss: for any amalgamation under sub-section (1) or reorganisation under sub-section (8) or (10) effected on or after 1 April 2025, it may be carried forward for not more than eight tax years immediately succeeding the tax year for which it was first computed for the original predecessor entity. Sub-section (13) defines "accumulated loss" as business loss excluding speculation loss which would have been eligible for carry forward under section 112 in the predecessor's own hands, and defines "industrial undertaking", "original predecessor entity", "specified bank" and "unabsorbed depreciation".
A loss belongs to the business that incurred it, and a merger could otherwise be used to sell a loss to a profitable buyer with no revival of the failed business. The section lets the loss travel, but only where the transferee keeps the assets and continues the business for five years, and sub-section (5) makes a later breach recoup the benefit as income rather than merely withdrawing it. Sub-section (12) closes the other abuse — a loss that renewed its eight-year life at each reorganisation.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Window for an erstwhile public sector company amalgamation | Five years | From the end of the tax year in which the share purchase agreement's restriction on amalgamation ends | Sub-section (1)(d) |
| Cap on the loss and depreciation passing on strategic disinvestment | The accumulated loss and unabsorbed depreciation as on the date the company ceased to be a public sector company | For a sub-section (1)(d) amalgamation only, measured as on the date the company ceased to be a public sector company | Sub-section (2) |
| Shareholding reduction constituting strategic disinvestment | Below 51% | Only where the government or public sector holding exceeded 51% before the sale, and control also passes to the buyer | Sub-section (3)(c)(i)(A) and (c)(ii) |
| Minimum period the amalgamating company must have carried on the business | Three or more years | The business in which the accumulated loss occurred or the depreciation remains unabsorbed | Sub-section (4)(a)(i) |
| Fixed assets the amalgamating company must have held on the date of amalgamation | At least three-fourths of the book value | Of the fixed assets it held two years preceding that date, held continuously | Sub-section (4)(a)(ii) |
| Fixed assets the amalgamated company must retain | At least three-fourths of the book value, for a minimum of five years | Of the fixed assets of the amalgamating company acquired in the scheme, held continuously | Sub-section (4)(b)(i) |
| Period for which the business must be continued | A minimum of five years from the date of amalgamation | The amalgamated company must continue the business of the amalgamating company | Sub-section (4)(b)(ii) |
| Outer limit for carrying forward a transferred loss | Not more than eight tax years | From the tax year for which the loss was first computed for the original predecessor entity; amalgamations and reorganisations effected on or after 1 April 2025 | Sub-section (12) |
The eight-year clock in sub-section (12) decides most planning: it runs from the year the loss was first computed for the original predecessor entity, defined in sub-section (13)(c) as the predecessor in the first amalgamation or first reorganisation, so a second restructuring does not restart it. Sub-section (4) is a continuing obligation, not an entry test — the three-fourths holding and continuation of business must last five years, and sub-section (5) turns a breach in year four into taxable income of year four equal to the set off already taken. The two ownership tests are measured differently: the amalgamating company's against fixed assets held two years before the amalgamation, the amalgamated company's against the assets acquired in the scheme. On the demerger side there is no five-year condition in the section; sub-section (6) splits by direct relatability first and by asset proportion for the residue, with genuineness left to notification under sub-section (7).
A company with Rs. 60 crore of accumulated business loss, in a manufacturing business carried on for six years, amalgamates into another on 1 June 2026. The loss is deemed the amalgamated company's for that year. If it was first computed for the amalgamating company in tax year 2021-22, sub-section (12) allows carry forward only up to tax year 2029-30, and not eight fresh years from the merger. If in the fourth year after the amalgamation the amalgamated company sells enough of the acquired fixed assets to fall below three-fourths of their book value, sub-section (5) makes the set off already taken income of that fourth year.
It is worked in the loss schedules of the successor's return for the year of amalgamation or reorganisation, and examined in its scrutiny assessment for each of the five following years, where an Assessing Officer testing the sub-section (4) conditions can raise a demand under sub-section (5). A demerged and a resulting company meet sub-section (6) when they split the carried-forward figures between their returns.
shall be carried forward for not more than eight tax years immediately succeeding the tax year for which such loss was first computed for the original predecessor entity
the set off of loss or allowance of depreciation made in any tax year in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which the non-compliance occurs
See the full 1961 to 2025 concordance.
All of them are in the Rules 2026 index.
See the circulars index.
See the notifications index.