The Commissioner has issued a s.263 notice saying the transferor companies had not been in business for three years, so the losses we took over cannot be carried forward. Our arrangement was a demerger, not an amalgamation. Does the three-year condition apply?
No. The three-year condition is in s.72A(2), which governs amalgamation. A demerger is governed by s.72A(4), which contains no such condition. The Madras High Court held that a revision order built on the wrong sub-section, and which merely remitted the matter to the assessing officer for enquiry, did not satisfy the requirement that the order sought to be revised be erroneous.
Decided by the High Court (Dr. Anita Sumanth J and Mummineni Sudheer Kumar J) on 2025-12-02, reported as T.C.A. No. 602 of 2013 (Madras High Court), assessment year 2007-08. It bears on section 72A, section 263, section 2(19AA), section 2(1B), section 260A of the Income Tax Act 1961, in Revision & Rectification, How Tax Law Is Read and Assessment & Scrutiny matters.
Two points, and both are usable. On the substance, s.72A(4) apportions the demerged company's accumulated loss and unabsorbed depreciation between the demerged and the resulting company — carried forward in the resulting company's hands where directly relatable to the undertakings transferred, and otherwise apportioned in the same proportion as the assets of the undertakings have been retained and transferred — and it does that without importing the s.72A(2) conditions about three years of engagement in the business, three-fourths of the book value of fixed assets and five years of continued business. Officers do import them, and this is the answer. On procedure, this is a clean illustration of the limits of s.263: the Commissioner had the company court's orders showing a demerger, the assessee had pointed out the error in reply, and instead of identifying the error or articulating a remaining doubt the Commissioner remitted for enquiry, which the Court called a mere roving enquiry. The judgment does not decide anything about how the 'directly relatable' test works in practice — it holds only that the sub-section has no conditions of the s.72A(2) kind.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The Madras High Court, by order dated 28 July 2008 in Company Petition Nos. 146 to 149 of 2008, sanctioned a scheme of demerger vesting the manufacturing division of Tangible Textiles Private Limited and the manufacturing division of Cotton Base Clothing India Private Limited with the assessee, and by order dated 15 September 2009 in Company Petition Nos. 201 and 202 of 2009 sanctioned a scheme of demerger between Essorpe Mill Limited and the assessee. The assessee's assessment for assessment year 2007-08 was completed on 18 December 2009, the order containing nothing to indicate that the assessing authority had taken note of those schemes. The Commissioner issued a notice under s.263 on 14 February 2012 calling for a response on the treatment of the unabsorbed depreciation and unabsorbed business losses of the three entities, proceeding on the basis that the arrangement was one of amalgamation and that carry forward was incorrect because s.72A(2) required the amalgamating entities to have been in existence for a minimum of three years. The assessee replied that the arrangement was a demerger, so that s.72A(2) was inapplicable and s.72A(4) governed, which contains no minimum period condition. The three entities had in fact been in business for less than three years. By order dated 27 March 2012 the Commissioner, having noted the reply, did not answer the point but remitted the issue to the assessing officer for examination. The Tribunal set that order aside on 22 November 2012 and the Revenue appealed under s.260A.
The questions of law were answered in favour of the assessee and against the Revenue and the appeal was dismissed with no costs. The arrangement was a demerger under s.2(19AA) and not an amalgamation under s.2(1B), which was the fundamental error committed by the Commissioner (para 11). The shortfall against the three-year requirement was not fatal because the applicable provision was s.72A(4), not s.72A(2), and there is no condition under s.72A(4) of the kind found in s.72A(2) (paras 14 and 15). In the light of the language of s.72A and the absence of a condition under sub-section (4), there appeared to be no error in the assessment order, and the direction under s.263 amounted to a mere roving enquiry, so the 'error' condition was not satisfied (para 17).
The Court began from Malabar Industrial Co. Ltd. v CIT, [2000] 243 ITR 83 (SC), that the twin conditions in s.263 — that the order be both erroneous and prejudicial to the interests of the Revenue — must be satisfied concurrently, so the question was whether the Commissioner's order addressed an issue that was erroneous as well as prejudicial (para 9). It identified the arrangement from its own earlier sanctioning orders as a demerger (paras 10 and 11), set out s.72A(2) and the relevant part of s.72A(4), and compared them, finding no condition in sub-section (4) of the kind in sub-section (2) (paras 12 to 15). Since the assessee had furnished the company court's orders and its reply had plainly engaged the Commissioner's attention — his order mentioning both demerger and amalgamation — it was incumbent on him to identify the error before directing the assessing officer to intervene, or at least to articulate his remaining doubts in the order, instead of which the matter was simply placed before the assessing officer for enquiry (paras 16 and 17).
On a comparison of sub-sections (2) and (4) of Section 72A extracted supra, we find that there is no condition under sub-section (4) of Section 72A as unlike in sub-Section (2) of Section 72A.
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Handle my notice → Ask a CA on WhatsAppNo. The three-year condition is in s.72A(2), which governs amalgamation. A demerger is governed by s.72A(4), which contains no such condition. The Madras High Court held that a revision order built on the wrong sub-section, and which merely remitted the matter to the assessing officer for enquiry, did not satisfy the requirement that the order sought to be revised be erroneous. This was decided by the High Court (Dr. Anita Sumanth J and Mummineni Sudheer Kumar J) and bears on section 72A, section 263, section 2(19AA), section 2(1B), section 260A of the Income Tax Act 1961. It is reported as T.C.A. No. 602 of 2013 (Madras High Court), assessment year 2007-08. Two points, and both are usable. On the substance, s.72A(4) apportions the demerged company's accumulated loss and unabsorbed depreciation between the demerged and the resulting company — carried forward in the resulting company's hands where directly relatable to the undertakings transferred, and otherwise apportioned in the same proportion as the assets of the undertakings have been retained and transferred — and it does that without importing the s.72A(2) conditions about three years of engagement in the business, three-fourths of the book value of fixed assets and five years of continued business. Officers do import them, and this is the answer. On procedure, this is a clean illustration of the limits of s.263: the Commissioner had the company court's orders showing a demerger, the assessee had pointed out the error in reply, and instead of identifying the error or articulating a remaining doubt the Commissioner remitted for enquiry, which the Court called a mere roving enquiry. The judgment does not decide anything about how the 'directly relatable' test works in practice — it holds only that the sub-section has no conditions of the s.72A(2) kind. If it applies to you, the first step is this: Fix the character of the arrangement first from the sanctioning order: s.2(1B) amalgamation or s.2(19AA) demerger. Everything else follows from that.
The Madras High Court, by order dated 28 July 2008 in Company Petition Nos. 146 to 149 of 2008, sanctioned a scheme of demerger vesting the manufacturing division of Tangible Textiles Private Limited and the manufacturing division of Cotton Base Clothing India Private Limited with the assessee, and by order dated 15 September 2009 in Company Petition Nos. 201 and 202 of 2009 sanctioned a scheme of demerger between Essorpe Mill Limited and the assessee. The assessee's assessment for assessment year 2007-08 was completed on 18 December 2009, the order containing nothing to indicate that the assessing authority had taken note of those schemes. The Commissioner issued a notice under s.263 on 14 February 2012 calling for a response on the treatment of the unabsorbed depreciation and unabsorbed business losses of the three entities, proceeding on the basis that the arrangement was one of amalgamation and that carry forward was incorrect because s.72A(2) required the amalgamating entities to have been in existence for a minimum of three years. The assessee replied that the arrangement was a demerger, so that s.72A(2) was inapplicable and s.72A(4) governed, which contains no minimum period condition. The three entities had in fact been in business for less than three years. By order dated 27 March 2012 the Commissioner, having noted the reply, did not answer the point but remitted the issue to the assessing officer for examination. The Tribunal set that order aside on 22 November 2012 and the Revenue appealed under s.260A. The matter was decided on 2025-12-02 by the High Court (Dr. Anita Sumanth J and Mummineni Sudheer Kumar J). On those facts the High Court held as follows. The questions of law were answered in favour of the assessee and against the Revenue and the appeal was dismissed with no costs. The arrangement was a demerger under s.2(19AA) and not an amalgamation under s.2(1B), which was the fundamental error committed by the Commissioner (para 11). The shortfall against the three-year requirement was not fatal because the applicable provision was s.72A(4), not s.72A(2), and there is no condition under s.72A(4) of the kind found in s.72A(2) (paras 14 and 15). In the light of the language of s.72A and the absence of a condition under sub-section (4), there appeared to be no error in the assessment order, and the direction under s.263 amounted to a mere roving enquiry, so the 'error' condition was not satisfied (para 17).
The Court began from Malabar Industrial Co. Ltd. v CIT, [2000] 243 ITR 83 (SC), that the twin conditions in s.263 — that the order be both erroneous and prejudicial to the interests of the Revenue — must be satisfied concurrently, so the question was whether the Commissioner's order addressed an issue that was erroneous as well as prejudicial (para 9). It identified the arrangement from its own earlier sanctioning orders as a demerger (paras 10 and 11), set out s.72A(2) and the relevant part of s.72A(4), and compared them, finding no condition in sub-section (4) of the kind in sub-section (2) (paras 12 to 15). Since the assessee had furnished the company court's orders and its reply had plainly engaged the Commissioner's attention — his order mentioning both demerger and amalgamation — it was incumbent on him to identify the error before directing the assessing officer to intervene, or at least to articulate his remaining doubts in the order, instead of which the matter was simply placed before the assessing officer for enquiry (paras 16 and 17). In the words reproduced by the source cited on this page: "On a comparison of sub-sections (2) and (4) of Section 72A extracted supra, we find that there is no condition under sub-section (4) of Section 72A as unlike in sub-Section (2) of Section 72A." The decision followed or applied Malabar Industrial Co. Ltd. v. C.I.T., [2000] 243 ITR 83 (SC) — applied.
It was decided by the High Court on 2025-12-02 and is reported as T.C.A. No. 602 of 2013 (Madras High Court), assessment year 2007-08. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 72A, section 263, section 2(19AA), section 2(1B), section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The questions of law were answered in favour of the assessee and against the Revenue and the appeal was dismissed with no costs. The arrangement was a demerger under s.2(19AA) and not an amalgamation under s.2(1B), which was the fundamental error committed by the Commissioner (para 11). The shortfall against the three-year requirement was not fatal because the applicable provision was s.72A(4), not s.72A(2), and there is no condition under s.72A(4) of the kind found in s.72A(2) (paras 14 and 15). In the light of the language of s.72A and the absence of a condition under sub-section (4), there appeared to be no error in the assessment order, and the direction under s.263 amounted to a mere roving enquiry, so the 'error' condition was not satisfied (para 17). It arises in Revision & Rectification, How Tax Law Is Read and Assessment & Scrutiny matters, on section 72A, section 263, section 2(19AA), section 2(1B), section 260A of the Income Tax Act 1961, and was decided by Dr. Anita Sumanth J and Mummineni Sudheer Kumar J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. In the reply to a s.263 notice, put the company court or tribunal orders on record and say in terms that the sub-section relied on is the wrong one — as happened here, that reply is what defeated the revision. If the Commissioner passes an order that neither identifies the error nor articulates his remaining doubt but simply remits for enquiry, appeal on the 'error' limb, citing Malabar Industrial Co. Ltd. v CIT, [2000] 243 ITR 83 (SC) for the requirement that both limbs be satisfied concurrently. For the loss itself, work out under s.72A(4) which part is directly relatable to the undertakings transferred and which is not, and be ready with the asset-based ratio for the part that is not.
Searched for later treatment; none was found. That is not the same as a source affirming it. Two searches, nothing found. The citedby search on the doc id is empty. A name search returns 112 results, and the only decisions in this company's tax line are earlier: the Madras High Court judgment of 12 January 2015, the Supreme Court daily order of 27 July 2015 in the Revenue's appeal from it, and Chennai Tribunal orders of 2017 and 2021. Nothing after 2 December 2025 considers this judgment. No later decision has adopted, doubted or distinguished the holding that the three-year condition sits in s.72A(2), which governs amalgamation, and has no counterpart in s.72A(4), which governs demerger. Whether the Revenue has taken the matter further could not be established; nothing appeared. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The extract of s.72A(4) in para 14 of the judgment begins directly at clause (a) and does not reproduce the opening words of the sub-section, so a reader should take the full text of s.72A(4) from the statute rather than from this extract. The judgment was delivered on 2 December 2025 in an appeal admitted on 7 November 2013 against a Tribunal order of 22 November 2012. Five substantial questions were admitted; the Court answered them together in favour of the assessee on the 'error' limb of s.263 without separately taking up question 5 on s.2(1B). The names of two of the three demerged entities appear as 'Tangible Textiles Private Limited' and 'Cotton Base Clothing India Private Limited' and the third as 'Essorpe Mill Limited'. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The questions of law were answered in favour of the assessee and against the Revenue and the appeal was dismissed with no costs. The arrangement was a demerger under s.2(19AA) and not an amalgamation under s.2(1B), which was the fundamental error committed by the Commissioner (para 11). The shortfall against the three-year requirement was not fatal because the applicable provision was s.72A(4), not s.72A(2), and there is no condition under s.72A(4) of the kind found in s.72A(2) (paras 14 and 15). In the light of the language of s.72A and the absence of a condition under sub-section (4), there appeared to be no error in the assessment order, and the direction under s.263 amounted to a mere roving enquiry, so the 'error' condition was not satisfied (para 17).
TaxSphere, “CIT v Eastman Exports Global Clothing Pvt Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-eastman-exports-72a-4-demerger-no-three-year-condition/ (validity last checked 2026-09-07)
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The NCLT has sanctioned our scheme and the order calls it an amalgamation. The Assessing Officer says it is not an amalgamation for income-tax and has refused section 47 and section 72A. Can he do that?
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Which transfers in an amalgamation or a demerger are outside section 45, and what cost and holding period do the shares in the transferee company carry afterwards?
