18 February 2021
One Pvt ltd company which is having Business loss of 2 Cr, and this company want to merge with another Pvt Ltd company having a profit. First company ( Loss Company ) has only trading business ( Not done any manufacturing in past ). As per Sec 72A Loss of Company only merged if it is covered under industrial undertaking defination.
So, My question is if above two company will merge then can loss of above company carried forward by merged company ?
06 July 2024
Under Section 72A of the Income Tax Act, 1961, the carry forward and set off of accumulated business losses and unabsorbed depreciation in case of amalgamation or merger are subject to certain conditions. These conditions include:
1. **Industrial Undertaking Requirement**: For losses to be carried forward and set off after amalgamation, the amalgamated company must continue the business of the amalgamating company, which should be an industrial undertaking. An industrial undertaking typically involves activities related to manufacturing or production.
2. **Nature of Activities**: The loss company (Pvt Ltd company with business loss) you mentioned is involved in trading and not manufacturing. Generally, trading activities may not qualify as an industrial undertaking for the purpose of Section 72A unless there is specific clarification or case law stating otherwise.
3. **Profit-making Company**: The company into which the loss company wants to merge should be a profit-making entity.
Given the scenario you described:
- **Loss Company**: It has a business loss of ₹2 crore and is engaged in trading activities (not manufacturing). - **Profit-making Company**: It is profitable and intends to merge with the loss company.
If the loss company does not qualify as an industrial undertaking under Section 72A (due to its trading nature), the losses of the loss company may not be eligible to be carried forward and set off by the amalgamated company (profit-making company) after the merger.
**Key Considerations:** - It's crucial to review the specific definitions and case law interpretations regarding industrial undertakings under Section 72A. - Consulting with a tax advisor or chartered accountant familiar with mergers and amalgamations under Indian tax laws would provide precise guidance based on the latest regulations and judicial interpretations. They can assess the feasibility of carrying forward losses in your specific case.
In summary, while the merger may proceed for business reasons, the tax implications regarding the carry forward of losses should be carefully evaluated based on the nature of the business activities involved and the applicability of Section 72A.
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