The finance ministry has approved a key amendment in the Income Tax Act that will allow the state-run carriers Air India and Indian Airlines to carry forward unabsorbed depreciation once they are merged.

"Based on a cabinet note received from the civil aviation ministry, the finance ministry is amending Section 72A of the Income Tax Act. But this is applicable only for the planned merger of Air India and Indian Airlines," an official said.

"However, it has not been found feasible to extend the benefits of this section to amalgamations of private airlines," the official added. "The proposal is only meant to act as a catalyst for the merger of the two state-run carriers."

As per current provisions of the Income Tax Act, merged companies in the airline business are not allowed to carry forward their tax and unabsorbed depreciations for setting up a merged entity.

The civil aviation ministry argued that this crucial provision deterred mergers and acquisitions in the airline business and had also wanted this amendment to extend to other carriers for at least five years.

"We made the proposal since we feel it will sustain consolidations and help the aviation industry's growth in the coming years. We had also said that similar benefit was extended to the telecom sector earlier," a senior official, who did not wish to be identified, said.

The finance ministry, however, feels it is not feasible and has also turned down another proposal on the crucial issue of tax on lease rentals.

There will be no further extension of this benefit under Section 10(15A) of the Income Tax Act, even though most airline operators who lease their aircraft felt its withdrawal would impact their costs and financial viability.