The Income-Tax, Act, 1961 generally frowns upon trafficking in losses so much so that normally loss suffered by A cannot be carried forward, much less set off, by B. But Section 72A not only relaxes this thaw, but extends the normal aggregate carry forward period of losses, which is eight years, to encourage amalgamations in larger national interest.
Among others, the banking sector could be a potential beneficiary of this regime, provided the amalgamated company is either the State Bank of India or its subsidiaries or any nationalised bank. Being an omnibus section catering as much to industrial undertakings as to banks, some of the conditions prescribed, while being appropriate for the former just do not make sense for the latter.
For example, one of the conditions subject to which the tax benefit is available is that the amalgamated company should for a period of five years refrain from disposing of at least three-fourths of the book value of fixed assets acquired in the scheme of amalgamation.
Again, one of the conditions is the amalgamating company should have held for a minimum of two years at least three-fourths of the book value of assets being transferred. The accent on fixed assets, more particularly prevention of stripping thereof, which is perfectly justified in the context of industrial undertaking, is out of place in the context of the banking sector for which fixed assets are not the pillars of their edifice.
The amalgamated company loses the tax benefit should it fail to comply with the conditions prescribed in the section. In the event, if the amalgamated banking company disposes of fixed assets beyond 25 per cent during the initial five years, the loss of the amalgamating company which it has hitherto set off would be deemed to be its income in the year in which such a breach was committed.
Asset stripping, which is often the primary aim of takeover tycoons, can hardly be the aim of state-controlled banks. But there seems to be an existential paradox as far as Section 72A is concerned in the context of the banking sector now that an alternative mechanism contained in Section 72AA is available to it. This section gives a no-holds-barred leg up to bank mergers devoid of the stifling conditionalities prescribed by Section 72A but only if the merger is conceived and sanctified by the Central Government.
Banks in the M&A game should elicit Central Government support for its merger schemes, especially if they are driven by profiting from losses of the merging company. But in either case, the amalgamation should conform to the definition of the term given in Section 2(1B) which requires all assets and liabilities of the amalgamating company to be taken over by the amalgamated company and, more importantly, requires at least 75 per cent of the shareholders in terms of value in the amalgamating company to become the shareholders in the amalgamated company.
The takeover of United Western Bank by IDBI, loosely described as amalgamation, would fail this crucial test, as what IDBI proposes to do with the shareholders of the former is to buy them off at Rs 28 per share and not make them shareholders in it. But IDBI need not lose sleep over it in case United Western has not brought any loss to the table.
(The author is a Delhi-based chartered accountant.)