[Opinion] Gaps in ITA 2025 from an M&A Perspective

Anil Chachra – [2026] 185 taxmann.com 952 (Article)

1. Introduction

The Income-tax Act, 2025 (“ITA, 25”) has replaced the Income-tax Act, 1961 (“ITA, 61”) and the same has been implemented from April 1, 2026. The stated objective was to comprehensive review of the ITA, 1961 to concise, lucid, easy to read and understand the law. Tax Year 2026-27 is the first year of ITA, 25. No major policy related changes have been made in ITA, 25. There are certain ‘Gaps’ which the government had not address in the ITA, 1961. While reviewing the ITA, 25 it appears that the existed gaps has not been addressed in the ITA, 2025 as well. In this write up the author will address, what are the gaps exist which are supposed to be incorporated in the new tax law keeping in view of the current economy requirement.

2. Analysis

2.1 Fast Track Merger/Demerger u/s 233 of the Companies Act, 2013

[Section 2(19AA) of ITA, 1961 to section 2(35) of ITA, 2025]

The definition of ‘demerger’ under the ITA, 1961 is in relation to companies means the transfer pursuant to a scheme of arrangement under section 391 to 394 of the Companies Act, 1956. Corresponding section under ITA, 2025 is 2(35), wherein the demerger in a scheme of arrangement u/s 230 to 232 of companies Act, 2013 meaning there by the tax neutral demerger will be confined to section 230 to 232 of the companies Act, 2013. A demerger u/s 233 of the companies Act applies to small companies, holding/wholly-owned subsidiaries, start-ups, and certain other prescribed classes [without NCLT approval and through Registrar and official liquidators] falls outside this definition. The consequence is that the demerged company, the resulting company, and the shareholders all shall lose tax neutrality. Further, any payout to shareholders as part of the arrangement will be characterised as deemed dividend under Section 2(22) of the 1961 Act at the applicable rate of tax which can be up to 30% [highest slab] depending on the effective tax bracket. In effect, the fast-track route, for all practical purposes, is taxable demerger.

The Gap which was there in ITA, 1961 is still there in ITA, 2025 by not including the demerger u/s 233 of the companies act under the definition of demerger. By not including the demerger under the fast-track route u/s 233 leading to demerger as taxable event.

2.2 Carry Forward of Loss and Depreciation – ‘Restricted Definition of Industrial Undertaking’ Not Expended in ITA, 2025

[Section 72A of ITA, 1961 vis a vis Section 116 of ITA, 2025]

Where there has been an amalgamation the accumulated loss and unabsorbed depreciation of the amalgamating company shall be deemed to be loss or, allowance for unabsorbed depreciation of the amalgamated company u/s 72A of the ITA, 1961 and the other provisions of the Act relating to set off and carry forward of loss and other provisions of the Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly. The accumulated loss and unabsorbed depreciation are allowed to be carry forward by amalgamated company is applicable only to the company owning an industrial undertaking or a ship or a hotel with another company.

The rationale for carry forward loss and unabsorbed depreciation was to encourage loss making entity to get merge with profit making entity via Merger and Acquisition route. The section was introduced when the manufacturing and PSU segment was dominated in India. Now under the current economy, services sectors relating to NBFCs, financial sectors, technologies company, start- up companies which are contributing significantly in the India’s GDP are excluded from the sectors who cannot avail of the carry forward loss benefits u/s 72A.

The result for the excluded sectors is that M&A involving loss-making entities in these sectors is structurally less attractive, since the accumulated losses and depreciation which could otherwise have been allowed to be set off against future profits of the amalgamated entity, would get lapse due to Merger/amalgamation.

ITA 2025 is not the reshape of the old law. It has just change in the language in simple way and change in numbering and have not touched upon the ‘current need’ of the economy which is arising keeping in view of the current scenario by not included the service sectors as mentioned above which they are contributing in a significant way to the Indian economy. It has not expended the definition of the industrial undertaking or not included the other sectors, keeping the limit of carry forward of loss and depreciation in a restricted manner u/s 116 of ITA, 2025.

There is a considerable gap in the ITA 2025 as start – up companies/other service sector who are in to losses want to get merge with another entity; the losses and the depreciation cannot be carry forward by the amalgamated company due to exclusion u/s section 72A/116 of the Act.

2.3 Carry Forward and Set Off of Losses in Case of Certain Companies – Genuine Change in Ownership due to Group Restructuring Has Not Been Defined/Clarified

[Section 79 of IT Act vis a. vis 119 of ITA, 2025]

Section 79 of ITA,1961, [Corresponding to section 119 of ITA, 2025] restricts the carry-forward and set off losses if there is a change in voting power [beneficial ownership] exceeding 51%. The aim of the provision is to prevent the loss- making companies to get the undue advantage of carry forward and set off of losses. In the case of intra-group restructurings: mergers, demergers, and holding company reorganisations frequently result in changes to the shareholding pattern at the entity level, even though the ultimate beneficial ownership remains same. A person/promoter who holds 80% of Company X, which in turn holds 100% of Company Y, may restructure such that the promoter directly holds 100% of Company Y. The beneficial owner has not changed. The shareholding at the Company B level has. Under Section 79 of the 1961 Act, the losses of Company Y stand extinguished on a principal basis. No exception has been made for genuine group restructurings where the beneficial owner remains the same.

Even in ITA, 2025, no exception has been made for the genuine group restructurings from the beneficial ownership provisions.