The carry forward of accumulated losses is a significant tax attribute in a scheme of amalgamation or demerger. Section 79 of the Income-tax Act, 1961 restricts the carry forward of losses where there is a change in the shareholding of the company. The section is relevant to a scheme because the amalgamation or demerger may result in a change in the shareholding of the transferor or the transferee company.
The Section 79 Restriction
Section 79 provides that where a change in the shareholding of a company takes place in a previous year, the loss incurred in an earlier year shall not be carried forward unless the shareholding of the beneficial owners of at least fifty-one per cent of the voting power is maintained. The restriction applies to a company in which the public is not substantially interested.
The Exception for a Scheme
The section contains an exception for a change in shareholding pursuant to a scheme of amalgamation or demerger. The exception is available where the scheme is sanctioned by the NCLT, and it allows the carry forward of the losses despite the change in shareholding. The exception is designed to facilitate genuine restructuring, and it is subject to the conditions prescribed by the section.
The Practical Considerations
The company must examine the shareholding pattern before and after the scheme, and it must determine whether the change triggers Section 79. Where the exception applies, the company must retain the documentary evidence of the scheme and the NCLT order. The company should also consider the interaction with Section 72A, which provides for the carry forward of accumulated losses in an amalgamation, subject to additional conditions.
Call to Action
Anuj Desai & Associates advises companies on the Section 79 carry forward of losses in an NCLT scheme—from the shareholding analysis and the exception to the Section 72A conditions and the documentation. If your scheme involves accumulated losses, we can help you assess the tax position.
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