CBDT has made amendments to Section 72A of the Income Tax Act, 1962 in order to ensure favourable tax treatment in relation to amalgamation of an erstwhile PSU which ceases to be a PSU due to strategic disinvestment of the Public Sector Undertakings (PSUs).
The provisions of Section 72A provide with the list whereby set off and carryforward of accumulated losses and unabsorbed depreciation of the amalgamating company is allowed by the amalgamated company, subject to certain conditions. Such provisions act as an incentive to the industries specified therein in the sense that such beneficial provisions make sure that loss making companies get amalgamated by others for the sake of revival and do not shut down. A comparison of Section 72A before and after the amendment has been drawn below:
| PRE-Amendment | Post-Amendment |
| Where there has been an amalgamation of- (a) a company owning an industrial undertaking or a ship or a hotel with another company; or (b) a banking company referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a specified bank; then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly. | Where there has been an amalgamation of- (a) a company owning an industrial undertaking or a ship or a hotel with another company; or (b) a banking company referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a specified bank; or (c) one or more public sector company or companies with one or more public sector company or companies; or (d) an erstwhile public sector company with one or more company or companies, if the share purchase agreement entered into under strategic disinvestment restricted immediate amalgamation of the said public sector company and the amalgamation is carried out within five year from the end of the previous year in which the restriction on amalgamation in the share purchase agreement ends, then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly. Provided that the accumulated loss and the unabsorbed depreciation of the amalgamating company, in case of an amalgamation referred to in clause (d), which is deemed to be the loss or, as the case may be, the allowance for unabsorbed depreciation of the amalgamated company, shall not be more than the accumulated loss and unabsorbed depreciation of the public sector company as on the date on which the public sector company ceases to be a public sector company as a result of strategic disinvestment. |
From the comparison drawn above, it is apparent that the amendment has lead to the inclusion of amalgamation of the erstwhile PSUs in the above list.
Further, now onwards the provisions of Section 79 will not apply to an erstwhile PSU which becomes so on account of strategic disinvestment. As per the provisions of Section 79 carry forward and set off of losses is disallowed if the shareholders of a private company who held atleast 51% of the shareholding on the last date of the financial year to which such losses pertain, hold less than 51% on the last date of the financial year in which such loss is to be carried forward.
The provisions of the aforementioned section read as –
“Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place during the previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year, unless on the last day of the previous year, the shares of the company carrying not less than fifty-one per cent. of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent. of the voting power on the last day of the year or years in which the loss was incurred“.
The above relaxation in relation to erstwhile PSU is available which ceased to be a PSU due to strategic disinvestment. Thus, losses of any year preceeding the year of disinvestment including the year of such disinvestment will be allowed to be carried forward without any restriction i.e. carry forward will be allowed even if a change in shareholding has taken place during the previous year in such erstwhile PSU such that shareholders holding atleast 51% of the shareholding on the last day of the previous year to which the loss relates, cease to hold the same percentage and end up holding less than 51% of the voting power on the last day of the previous year to which the loss is to be carried forward. However, such relaxation will cease from the financial year in which the ultimate holding company of the erstwhile PSU immediately after completion of the strategic disinvestment, cease to hold directly or indirectly atleast 51% of the voting power of the erstwhile PSU.
For the sake of simplicity, incentives under the Income Tax Act have been provided in case of amalgamation of an erstwhile PSU which became so by reason of its strategic disinvestment.
