Section 118 Carry forward and set off of losses and unabsorbed depreciation in business reorganisation of co-operative banks.

Income-tax Act, 2025

At a Glance

Clause 118 (Old Version) of the Income Tax Bill, 2025 proposes rules for carry forward and set off of accumulated business losses and unabsorbed depreciation on amalgamation and demerger of co-operative banks. It affects successor, amalgamating, demerged and resulting co-operative banks, and sets eligibility conditions relating to prior banking activity, fixed asset holding thresholds and continuity of business. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hook: Clause 118 (Bill) sits within the set-off and carry-forward framework of the Income Tax Bill, 2025 and cross-refers to section 112 for the concept of losses and to section 65 for defined words concerning amalgamation/demerger/business reorganisation. The clause covers two principal events: amalgamation (where a successor bank may set-off predecessor losses) and demerger (where losses/depreciation directly or not directly relatable to transferred undertakings are treated differently). Definitions provided in the clause include "accumulated business loss", "unabsorbed depreciation" and cross-references for terms like "amalgamation" and "demerger".

Statutory Provision Mode

Text & Scope

Clause 118 applies where a co-operative bank undergoes business reorganisation by amalgamation or demerger during a tax year. Key textual elements:

• Amalgamation (sub-s. (1)): Where amalgamation occurs during the tax year, the accumulated business loss and unabsorbed depreciation of the predecessor bank may be set off against the income of the successor bank for that tax year "as if the business reorganisation had not taken place", with all other set-off/carry-forward and depreciation rules of the Act applying accordingly.
• Demerger (sub-s. (2)): If demerger occurs during the tax year-(a) losses/depreciation directly relatable to the transferred undertaking follow the undertaking to the resulting bank in full; (b) where not directly relatable, losses/depreciation must first be apportioned between demerged and resulting banks in proportion to asset distribution and then carried forward and set off against their respective incomes.
• Carry-forward limitation (sub-s. (3)): The accumulated loss may be carried forward only up to eight tax years immediately succeeding the tax year in which such loss was first computed in the hands of the predecessor-in-business.
• Eligibility conditions (sub-s. (4)): Conditions on predecessor and successor banks: predecessor engaged in banking for >=3 years and holding >=3/4 of book value of fixed assets continuously for two years prior to reorganisation; successor to hold >=3/4 of book value of predecessor's fixed assets for five years immediately succeeding reorganisation, continue the predecessor's business for minimum five years, and "fulfil such other conditions, as prescribed".
• Executive power (sub-s. (5)): Central Government may, by notification, specify other conditions (excluding those in sub-s. (4)(b)(iii)) to ensure genuineness of the reorganisation.
• Consequence of non-compliance (sub-s. (6)): If prescribed/notified conditions are not complied with, set-off of accumulated business loss or unabsorbed depreciation made in any tax year in the hands of the successor bank shall be deemed income of the successor bank chargeable to tax for the year of non-compliance.
• Treated periods (sub-s. (7)): The tax year is split into two deemed different tax years for set-off/carry-forward purposes across the date of reorganisation.
• Definitions (sub-s. (8)): Defines "accumulated business loss", cross-references meanings in s.65, and defines "unabsorbed depreciation" for the section's purposes.

Interpretation

The clause manifests legislative intent to preserve tax continuity on business reorganisation of co-operative banks: losses and unabsorbed depreciation follow the business (or the undertaking) subject to qualifying conditions intended to prevent opportunistic tax planning. The clause frames the relief "as if the business reorganisation had not taken place", signalling a substantive carry-over approach rather than fresh computation. The eight-year carry-forward cap indicates a temporal limitation on utilisation of predecessor losses.

Exceptions/Provisos

Not stated in the document: any specific carve-outs for particular types of co-operative banks, transitional provisions, or special rules for cross-border elements. The clause does provide exceptions by way of conditions: failure to comply with prescribed/notified conditions converts set-off into taxable income in the year of non-compliance.

Illustrations

• Illustration 1: A predecessor co-operative bank computes a loss in Year 1 and is amalgamated with a successor bank in Year 3. Under sub-s. (1), the successor may set off that accumulated business loss against its income for the amalgamation year as if amalgamation had not occurred, subject to the other provisions of the Act and eligibility conditions. (No numerical computation provided in the text.)
• Illustration 2: A demerger occurs where some losses are directly attributable to a transferred undertaking; per sub-s. (2)(a) the entire directly relatable loss goes to the resulting co-operative bank to carry forward and set off. (No allocation mechanics beyond asset-proportional apportionment for non-directly relatable losses are specified.)

Interplay

The clause expressly interacts with section 112 (referenced for computation/carry-forward entitlement) and section 65 (definitions for amalgamation/demerger). It also contemplates subordinate legislation ("prescribed" conditions and Central Government notifications). No mention is made of interplay with other specific notifications, rules, or circulars in the document.

Differences & Practical Impact

This section identifies textual differences between Section 118 (as enacted in the Income-tax Act, 2025) and Clause 118 (Old Version) of the Income Tax Bill, 2025 and summarises the practical impact of each change. All comparisons are limited to the two provided documents.

• Terminology - "tax year" vs "previous year"/"tax year": The enacted Section 118 (Document 1) uses the phrase "in a case where the amalgamation has taken place during the previous year" in sub-section (1), while Clause 118 (Old Version, Document 2) uses "where amalgamation takes place during the tax year".
  • Practical impact: Potential interpretive variance as "previous year" is the statutory term generally used in income-tax law; "tax year" could be read differently. The Bill (old) consistently refers to "tax year" whereas the enacted section mixes "previous year" (s.118(1)) and "tax year" elsewhere; this may affect timing and computation of losses unless harmonised elsewhere.
• Eight-year carry forward limit: Clause 118 (Old Version) contains an express eight-tax-year limitation on carrying forward accumulated loss (sub-section (3)). The enacted Section 118 (Document 1) omits this eight-year limitation entirely.
  • Practical impact: Removing the explicit eight-year cap in the enacted text potentially allows carry forward beyond eight years, subject to other provisions of the Act; this is a materially favourable change for successor banks compared with the Bill (old) if no other limiting provision applies.
• Placement and numbering of defined terms: Clause 118 (Old Version) places definitions in sub-section (8) with the label "In this section,--" and defines "accumulated business loss"; the enacted Section 118 uses sub-section (7) labelled "For the purposes of this section, --" and defines "accumulated loss", "unabsorbed depreciation", and cross-refers to meanings in section 65.
  • Practical impact: Substantively the enacted text changes the defined phrase "accumulated business loss" to "accumulated loss" and reorders/wordsmiths the definitions; the practical effect is terminological but not necessarily substantive unless other provisions in the Act use the precise term.
• Qualification language relating to prescribed/notification conditions: Both texts provide for prescribed conditions. The Old Version (Document 2) in sub-section (4)(b)(iii) uses "fulfils such other conditions, as prescribed," and sub-section (5) permits the Central Government by notification to specify other conditions "other than the condition referred to in sub-section (4)(b)(iii)". The enacted Section 118 (Document 1) mirrors this but places the "other conditions" power in sub-section (4) and states them as "other than the condition referred to in sub-section (3)(b)(iii)".
  • Practical impact: The change in cross-references (from (4)(b)(iii) to (3)(b)(iii)) follows the renumbering in the enacted text; substance appears consistent but requires careful reading to link the correct sub-clauses. No substantive alteration of the executive power is apparent from the texts provided.
• Condition sequencing and minimum periods: Both texts impose the predecessor bank having been engaged in banking for three or more years and holding 3/4 of book value continuously for two years prior; and the successor bank holding 3/4 of book value for five years and continuing the business for five years. The enacted version frames some of these as sub-section (3) and the Bill (old) frames them as sub-section (4).
  • Practical impact: Primarily numbering and drafting shifts; substantive conditions appear consistent between drafts except for the eight-year carry-forward clause omitted in the enacted text.
• Terminology around loss description: The Old Version (Document 2) consistently uses "accumulated business loss"; the enacted Section (Document 1) uses "accumulated loss".
  • Practical impact: Potential alignment issue with other sections that reference "accumulated business loss"; readers should confirm internal cross-references to avoid ambiguity.

Practical Implications

• Compliance and risk areas: Successor and resulting co-operative banks must document continuity of business and fixed asset book values to satisfy the 3/4 thresholds and prescribed conditions; failure converts previously claimed set-offs into taxable income for the year of non-compliance. Careful recordation across the two deemed tax years is necessary for correct set-off.
• Record-keeping/evidence: The clause implies need for evidence proving the predecessor's three-year engagement in banking, two-year continuity of fixed asset holding, successor's five-year continuity and five-year asset holding, and the apportionment basis where losses are not directly attributable-documentation of asset registers, valuations, transfer records and allocation methodologies will be central.

Key Takeaways

• Clause 118 permits set-off of predecessor co-operative bank losses and unabsorbed depreciation in amalgamation/demerger scenarios "as if" reorganisation had not occurred, subject to Act provisions and conditions.
• An explicit eight-tax-year carry-forward limit is contained in the Bill (old) for accumulated business loss.
• Qualification hinges on continuity conditions: predecessor's three-year banking activity and fixed asset thresholds; successor's five-year continuity and asset holding; and prescribed/notified conditions.
• Non-compliance with conditions leads to prior set-offs being treated as taxable income in the year of non-compliance.
• Demergers distinguish losses directly attributable to transferred undertakings (which travel in full) from those not directly attributable (which are apportioned by asset distribution).
• Central Government retains power to specify additional conditions by notification (excluding certain prescribed conditions).
• Deemed split of the tax year across the date of reorganisation affects set-off and carry-forward timing.

Full Text:

Section 118 Carry forward and set off of losses and unabsorbed depreciation in business reorganisation of co-operative banks.