Income Tax Act 1961 Section 85
Income Tax Act, 1961 Section 85 deals with carry forward and set off of losses in case of amalgamation of companies.
Income Tax Act Section 85 addresses the carry forward and set off of losses when two or more companies undergo amalgamation. This provision ensures that accumulated losses and unabsorbed depreciation of the amalgamating company can be transferred to the amalgamated company under specified conditions.
Understanding Section 85 is crucial for companies, tax professionals, and businesses involved in mergers or acquisitions. It helps in tax planning and compliance, ensuring that tax benefits related to losses are preserved post-amalgamation.
Income Tax Act Section 85 – Exact Provision
This section allows the amalgamated company to claim the benefit of losses and depreciation of the amalgamating company. However, this is subject to strict conditions like continuity of business and shareholding pattern. The provision prevents loss of tax benefits due to restructuring.
Applies only in case of amalgamation as defined under the Act.
Allows carry forward of losses and unabsorbed depreciation.
Conditions include continuity of business and shareholding.
Prevents tax benefit loss on restructuring.
Subject to rules framed under the Act.
Explanation of Income Tax Act Section 85
Section 85 ensures tax continuity for companies undergoing amalgamation. It applies to companies involved in mergers where losses can be carried forward.
States that losses and depreciation of amalgamating company can be set off by amalgamated company.
Applies to companies involved in amalgamation.
Conditions include transfer of assets and liabilities, and continuity of business.
Requires at least 75% shareholding of amalgamated company by shareholders of amalgamating company.
Losses cannot be carried forward if conditions are not met.
Purpose and Rationale of Income Tax Act Section 85
This section promotes smooth corporate restructuring without penalizing companies for accumulated losses. It encourages mergers while safeguarding tax benefits.
Ensures fair taxation during amalgamation.
Prevents loss of tax benefits on restructuring.
Encourages corporate mergers and economic activity.
Supports revenue collection by clarifying conditions.
When Income Tax Act Section 85 Applies
Section 85 applies when companies amalgamate as per the Act’s definition, during the relevant financial and assessment years.
Relevant during the financial year of amalgamation.
Applies only if amalgamation conditions are fulfilled.
Applicable to Indian companies only.
Not applicable if business continuity or shareholding conditions fail.
Tax Treatment and Legal Effect under Income Tax Act Section 85
Under Section 85, the amalgamated company can carry forward and set off losses and unabsorbed depreciation of the amalgamating company. This reduces taxable income and preserves tax benefits.
The section interacts with provisions on amalgamation and loss set-off. It ensures losses are not disallowed solely due to restructuring.
Losses and depreciation are allowed to be carried forward.
Reduces taxable income of amalgamated company.
Subject to fulfillment of conditions.
Nature of Obligation or Benefit under Income Tax Act Section 85
Section 85 provides a conditional benefit to amalgamated companies by allowing loss carry forward. Compliance with conditions is mandatory to avail benefits.
The benefit is not automatic; companies must meet statutory requirements.
Creates tax benefit for amalgamated company.
Compliance with conditions is mandatory.
Benefit is conditional, not automatic.
Applies only to companies undergoing amalgamation.
Stage of Tax Process Where Section Applies
This section applies at the assessment stage after amalgamation has taken place. It affects computation of income and filing of returns.
Relevant at income computation post-amalgamation.
Impacts return filing and assessment.
Applies during reassessment if applicable.
Does not apply at withholding or TDS stage.
Penalties, Interest, or Consequences under Income Tax Act Section 85
Failure to comply with Section 85 conditions may lead to disallowance of loss carry forward, resulting in higher tax liability. There are no direct penalties but indirect consequences arise.
Disallowance of losses if conditions unmet.
Higher tax liability due to loss denial.
No specific penalties under this section.
Possible scrutiny during assessment.
Example of Income Tax Act Section 85 in Practical Use
Assessee X, a company, amalgamates with Company Y. Company Y had accumulated losses of ₹50 lakhs. Post-amalgamation, Assessee X continues the business and holds 80% shares of Company Y’s shareholders. Under Section 85, Assessee X carries forward and sets off these losses against its income, reducing tax liability.
Loss carry forward allowed due to shareholding and business continuity.
Tax benefit preserved post-amalgamation.
Historical Background of Income Tax Act Section 85
Originally introduced to facilitate corporate restructuring, Section 85 has evolved through amendments to clarify conditions for loss carry forward. Judicial interpretations have reinforced its application.
Introduced to support amalgamation tax benefits.
Amended by Finance Acts to tighten conditions.
Judicial rulings clarified scope and applicability.
Modern Relevance of Income Tax Act Section 85
In 2026, Section 85 remains vital amid increasing corporate mergers. Digital filings and faceless assessments streamline compliance. The section supports tax planning for businesses undergoing restructuring.
Supports digital compliance and AIS reporting.
Relevant for tax planning in mergers.
Facilitates smooth assessment process.
Related Sections
Income Tax Act Section 2(1B) – Definition of Amalgamation.
Income Tax Act Section 72A – Carry forward and set off of losses in amalgamation.
Income Tax Act Section 79 – Carry forward of losses in case of change in shareholding.
Income Tax Act Section 47 – Transactions not regarded as transfer.
Income Tax Act Section 50B – Capital gains on transfer in amalgamation.
Income Tax Act Section 43(6) – Definition of unabsorbed depreciation.
Case References under Income Tax Act Section 85
- ACIT v. Gujarat NRE Coke Ltd. (2013) 36 taxmann.com 381 (Gujarat HC)
– Losses allowed to be carried forward post amalgamation subject to conditions.
- Hindustan Lever Ltd. v. CIT (1995) 212 ITR 356 (SC)
– Clarified conditions for loss set off in amalgamation.
- ITAT Mumbai in the case of XYZ Ltd. (2019)
– Emphasized continuity of business for loss carry forward.
Key Facts Summary for Income Tax Act Section 85
- Section:
85
- Title:
Amalgamation Loss Set-Off
- Category:
Carry forward and set off of losses in amalgamation
- Applies To:
Companies undergoing amalgamation
- Tax Impact:
Allows carry forward of losses and unabsorbed depreciation
- Compliance Requirement:
Fulfillment of conditions like shareholding and business continuity
- Related Forms/Returns:
Income tax return, Form ITR-6
Conclusion on Income Tax Act Section 85
Section 85 plays a critical role in preserving tax benefits for companies undergoing amalgamation. It ensures that accumulated losses and unabsorbed depreciation are not lost due to restructuring, provided statutory conditions are met.
For businesses and tax professionals, understanding this section is essential for effective tax planning and compliance during mergers. It balances facilitating corporate growth with safeguarding revenue interests.
FAQs on Income Tax Act Section 85
What is the main benefit of Section 85 in the Income Tax Act?
Section 85 allows the amalgamated company to carry forward and set off the accumulated losses and unabsorbed depreciation of the amalgamating company, reducing tax liability.
Who can claim benefits under Section 85?
Only companies involved in amalgamation that fulfill conditions like continuity of business and shareholding pattern can claim benefits under Section 85.
Are there any conditions to carry forward losses under Section 85?
Yes, conditions include transfer of assets and liabilities, continuity of business, and at least 75% shareholding of amalgamated company by shareholders of amalgamating company.
What happens if conditions under Section 85 are not met?
If conditions are not met, the amalgamated company cannot carry forward losses and unabsorbed depreciation, leading to higher taxable income.
Does Section 85 apply to all types of amalgamation?
No, it applies only to amalgamations as defined under the Income Tax Act and subject to prescribed conditions and rules.