Set-off and Carry-forward of Losses in Amalgamation of Banks, Government Companies, and Cooperative Banks
Introduction
In cases of amalgamation involving banking companies, government general insurance companies, or cooperative banks, the successor entity can carry forward and set off the accumulated losses and unabsorbed depreciation of the predecessor entity, provided specific conditions are fulfilled.
Amalgamation of Banking Companies/Institutions or Government Companies
Applicability
The provisions apply to the amalgamation of:
- One or more banking company with other banking institutions under a Central Government-sanctioned scheme.
- One or more banking company with any other banking institution or other company following strategic disinvestment within five years from the disinvestment year.
- Corresponding new banks merging with other corresponding new banks under a Central Government scheme.
- Government companies engaged in the general insurance business with any other Government company engaged in similar business under a sanctioned scheme by Central Government.
Key Points
- Losses and unabsorbed depreciation of the predecessor are treated as those of the successor in the year of amalgamation.
- These are set off first against the successor’s business profits, with any balance adjusted under general provisions relating to set-off and carry forward of losses.
Carry-forward Period
- Losses: Allowed for 8 years from the amalgamation year.
- Depreciation: Indefinitely carried forward.
However, amalgamations effective on or after April 1, 2025, the successor can carry forward the losses for 8 assessment years starting from the year immediately following the year in which the loss was first incurred by the original predecessor entity.
Definitions
Strategic Disinvestment: Involves reducing government shareholding below 51% and transferring control to a buyer.
Original predecessor entity: means predecessor entity in respect of the first amalgamation.
Amalgamation of Cooperative Banks
Where amalgamation of a co-operative bank has taken place during the previous year and certain conditions are satisfied, the successor Co-operative bank is allowed to set off the accumulated loss and unabsorbed depreciation of the predecessor co-operative bank as if the amalgamation had not taken place. (i.e., for unexpired period).
Eligibility Criteria
- Predecessor Co-operative Bank Conditions:
o Engaged in banking for at least three years.
o Held at least 75% of the book value of fixed assets for two years before amalgamation.
- Successor Co-operative Bank Conditions:
o Must continue the predecessor’s business for at least five years.
o Retain at least 75% of predecessor’s fixed assets for five years after amalgamation.
o The successor co-operative bank is required to comply with additional conditions prescribed to ensure that the amalgamation is for genuine business purposes of revival of the business of the predecessor Co-operative bank.
Consequences of Non-compliance
If conditions are not met, previously set-off losses and unabsorbed depreciation are added to the successor’s income for the non-compliance year.
Demerger of Cooperative Banks
In case of a co-operative bank’s reorganisation through demerger, the accumulated loss and unabsorbed depreciation shall be carried forward and set off in the following manner.
Treatment of Losses
- Directly Attributable Losses:
o Entire loss and unabsorbed depreciation attributable to the transferred undertaking are carried forward by the resulting cooperative bank.
- Common Losses:
o Allocated between the demerged and resulting banks in proportion to asset distribution.