Merger of Sick Companies and Section 72a of The Income Tax Act
Healthy companies absorb sick companies for tax benefits, apart from other incentives.
Sick companies not only have accumulated losses but also unabsorbed depreciation and investment allowance, not availed of, due to absence of profits. As part and parcel of the rehabilitation scheme under the old Section 72A of the Income Tax(IT) Act BIFR used to allow such accumulated losses, unabsorbed depreciation and investment allowance, not availed, of the taken over sick company to be set off against the profits of the newly formed company, in order to reduce its tax liability. Here specific approval of BIFR in the scheme for such set off of loss would be necessary since the loss suffering company lost its existence by virtue of the merger.
In reverse mergers where the sick company takes over healthy companies, it can carry forward its accumulated losses to be set off against the future profits of the resulting company to reduce tax liability. Here specific provision in the scheme for such set off of loss was not required because the loss suffering company continues to exist. This tax savings route without calling for any approval is was of the main incentives for reverse mergers.
With effect from 1st April, 2000 the old Section 72A of the IT Act was replaced by another provision removing the condition for approval of the BIFR or specified authority for such set off and carry of losses and setting down the conditions to be fulfilled for availing of such tax concessions by the amalgamating and amalgamated companies.
