Section 116 of the Income Tax Act, 2025 allows the carry forward and set off of accumulated losses and unabsorbed depreciation of the amalgamating company in the hands of the amalgamated company, subject to certain conditions【116†L0】. Rule 60 of the Income Tax Rules, 2026 specifies the production test that must be satisfied【60†L0】. Understanding this test is essential for companies undertaking amalgamation.
The Statutory Framework
Section 116
Section 116 provides that where there has been an amalgamation, the accumulated loss and unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or allowance for unabsorbed depreciation of the amalgamated company【116†L0】.
Conditions for Carry Forward
The accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company unless【116†L0】:
For the amalgamating company:
- Has been engaged in the business for three or more years
- Has held continuously as on the date of amalgamation at least three-fourths of the book value of fixed assets held two years preceding the date of amalgamation
For the amalgamated company:
- Holds continuously for a minimum of five years from the date of amalgamation at least three-fourths of the book value of fixed assets acquired
- Continues the business for a minimum of five years
- Fulfils such other conditions as may be prescribed
Rule 60: The Production Test
Rule 60 specifies the production test as one of the prescribed conditions【60†L0】.
The 50% Production Requirement
The amalgamated company, owning an industrial undertaking of the amalgamating company by way of amalgamation, shall【60†L0】:
- Achieve the level of production of at least 50% of the installed capacity of the said undertaking before the end of four years from the date of amalgamation
- Continue to maintain the said minimum level of production till the end of five years from the date of amalgamation
Installed Capacity
"Installed capacity" means the capacity of production existing on the date of amalgamation【60†L0】.
Certificate Requirement
The amalgamated company shall furnish to the Assessing Officer a certificate in Form No. 29, duly verified by an accountant, with reference to the books of account and other documents showing particulars of production, along with the return of income for the relevant tax year during which the prescribed level of production is achieved and for subsequent relevant tax years falling within five years from the date of amalgamation【60†L0】.
Relaxation of Conditions
The Central Government, on an application made by the amalgamated company, may relax the condition of achieving the level of production or the period during which the same is to be achieved, or both, in suitable cases having regard to the genuine efforts made by the amalgamated company to attain the prescribed level of production and the circumstances preventing such efforts from achieving the same【60†L0】.
Consequences of Non-Compliance
If any of the conditions laid down in Section 116(4) are not complied with, 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【116†L0】.
Practical Considerations
For Amalgamating Company
- Ensure engagement in the business for three or more years
- Maintain records of fixed assets held
- Ensure compliance with the 75% book value requirement
For Amalgamated Company
- Plan for achieving 50% of installed capacity within four years
- Maintain production at the minimum level for five years
- Furnish Form 29 certificate annually
- Apply for relaxation if circumstances prevent achievement
Expert Legal Guidance
Understanding the production test for carry forward of losses in amalgamation is essential for companies undertaking amalgamation. Anuj Desai & Associates provides expert advisory services on Direct Tax Code compliance, helping companies navigate the amalgamation provisions and ensure compliance with the production test.