Section 118 — Carry forward and set off of losses and unabsorbed depreciation in business reorganization of co-operative banks. Successor to s.72AB of the 1961 Act.
Section 118 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) lets a successor co-operative bank, where an amalgamation has taken place during the tax year, set off the accumulated loss and unabsorbed depreciation of the predecessor co-operative bank as if the amalgamation had not taken place, the rest of the Act's set off and depreciation provisions applying accordingly.
Sub-section (2) handles a demerger: accumulated loss or unabsorbed depreciation directly relatable to the undertaking transferred goes in whole to the resulting co-operative bank, while what is not directly relatable is apportioned between the demerged and the resulting bank in the same proportion in which the assets of the undertaking are distributed, each carrying forward and setting off its share against its own income.
Sub-section (3) sets the conditions. The predecessor must have been engaged in banking for three or more years and have held at least three-fourths of the book value of its fixed assets as on the date of the reorganisation continuously for two years before that date. The successor must hold at least three-fourths of the book value of the acquired fixed assets continuously for a minimum five years immediately succeeding that date, continue the predecessor's business for a minimum five years, and fulfil such other conditions as may be prescribed. Sub-section (4) lets the Central Government notify further conditions for genuine business purpose.
Sub-section (5) is the clawback: if any condition in sub-section (3) or notified under sub-section (4) is not complied with, the set off already made in any tax year in the successor's hands is deemed to be its income chargeable to tax for the year of non-compliance. Sub-section (6) splits the year of reorganisation into two deemed tax years for set off and depreciation. Sub-section (7) defines "accumulated loss" by reference to section 112 in the predecessor's hands, borrows the reorganisation vocabulary from section 65, and defines "unabsorbed depreciation".
Losses and unabsorbed depreciation ordinarily die with the entity that incurred them, which would make the consolidation of co-operative banks costly. The section lets them survive, but only for a reorganisation that is real and durable — hence the predecessor's banking history and asset test and the successor's five-year obligations. Sub-section (5) makes the relief conditional rather than final.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Predecessor's minimum banking history | Three or more years | The predecessor co-operative bank must have been engaged in the business of banking for that period | Sub-section (3)(a)(i) |
| Predecessor's fixed asset holding test | At least three-fourths of the book value of fixed assets, held continuously for two years | Book value as on the date of the business reorganisation, held for the two years before that date | Sub-section (3)(a)(ii) |
| Successor's fixed asset holding test | At least three-fourths of the book value of the acquired fixed assets, held continuously for a minimum five years | Fixed assets of the predecessor acquired through the reorganisation, for the five years immediately succeeding the date of reorganisation | Sub-section (3)(b)(i) |
| Successor's business continuity obligation | A minimum five years | Continuing the business of the predecessor co-operative bank from the date of business reorganisation | Sub-section (3)(b)(ii) |
| Apportionment of loss not directly relatable to the transferred undertaking | The same proportion in which the assets of the undertaking are distributed | Between the demerged co-operative bank and the resulting co-operative bank | Sub-section (2)(b) |
On an amalgamation the whole of the predecessor's accumulated loss and unabsorbed depreciation moves across; on a demerger only the directly relatable part moves in whole, the rest being split by the asset distribution ratio. The five-year obligations are what fail in practice, and sub-section (5) does not merely stop future set off — it makes the set off already taken the income of the year of breach, so the cost lands in one later year. Sub-section (7)(a) limits accumulated loss to what the predecessor itself could have carried forward under section 112.
A co-operative bank with an accumulated loss of Rs. 40 crore, having carried on banking for eight years and met the three-fourths asset test, amalgamates into another co-operative bank, which sets the Rs. 40 crore off as if the amalgamation had not happened. If in the fourth year the successor sells enough of the acquired fixed assets to fall below three-fourths of their book value, sub-section (5) deems the set off already made to be its income chargeable to tax in that year.
You meet it when a co-operative bank claims a predecessor's brought-forward loss in its return after an amalgamation or demerger, and later in an assessment order for a year in which a five-year condition is found broken and the earlier set off is brought back under sub-section (5).
the set off of accumulated business loss or unabsorbed depreciation made in any tax year in the hands of the successor co-operative bank shall be deemed to be the income of the successor co-operative bank chargeable to tax for the year in which such conditions are not complied with
holds at least three-fourths of the book value of fixed assets of the predecessor co-operative bank acquired through business reorganisation, continuously for a minimum five years immediately succeeding the date of business reorganisation
See the full 1961 to 2025 concordance.