Carry forward and set off of losses and unabsorbed depreciation in business reorganisation of co-operative banks
[Section-118 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 118(1) of Income Tax Act 2025
118(1) In a case of a co-operative bank, where amalgamation takes place during the tax year, the accumulated business loss and unabsorbed depreciation, if any, of the predecessor co-operative bank, shall be allowed to be set off against the income of the assessee, being a successor co-operative bank for that tax year, as if the business reorganisation had not taken place and all other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation, shall apply accordingly.
Section 118(2) of Income Tax Act 2025
118(2) In case of a co-operative bank where demerger takes place during the tax year, and where the accumulated loss or unabsorbed depreciation––
- (a) is directly relatable to the undertaking transferred, the whole of such loss and depreciation shall be allowed to be carried forward and set off against the income of the resulting co-operative bank; and
- (b) is not directly relatable to the undertaking transferred, then such loss and depreciation shall first be apportioned between the demerged co-operative bank and the resulting co-operative bank in the same proportion in which assets of the undertaking are distributed between the demerged co-operative bank and the resulting co-operative bank, and be allowed to be carried forward and set off against their respective incomes.
Section 118(3) of Income Tax Act 2025
118(3) The accumulated loss shall be carried forward only up to eight tax years immediately succeeding the tax year in which such loss was first computed in the hands of the predecessor-in-business.
Section 118(4) of Income Tax Act 2025
118(4) The provisions of this section shall apply, if—
- (a) the predecessor co-operative bank—
- (i) has been engaged in the business of banking for three or more years; and
- (ii) has held at least three-fourths of the book value of fixed assets as on the date of the business reorganisation, continuously for two years before to the date of business reorganisation;
- (b) the successor co-operative bank,—
- (i) holds at least three-fourths of the book value of fixed assets of the predecessor co-operative bank acquired through business reorganisation, continuously for a minimum five years immediately succeeding the date of business reorganisation;
- (ii) continues the business of the predecessor co-operative bank for a minimum five years from the date of business reorganisation; and
- (iii) fulfils such other conditions, as prescribed, to ensure the revival of the business of the predecessor co-operative bank or to ensure that the business reorganisation is for genuine business purpose.
Section 118(5) of Income Tax Act 2025
118(5) The Central Government may, by notification, specify such other conditions as it may consider necessary, other than the condition referred to in sub-section (4)(b)(iii), for the purposes of ensuring that the specified business reorganisation is for genuine business purposes.
Section 118(6) of Income Tax Act 2025
118(6) In a case where any of the conditions referred to in sub-section (4) or (5) are not complied with, the set off of accumulated business loss or unabsorbed depreciation made in any tax year in the hands of the successor co-operative bank shall be deemed to be the income of the successor co-operative bank chargeable to tax for the year in which such conditions are not complied with.
Section 118(7) of Income Tax Act 2025
118(7) The period commencing from the beginning of the tax year and ending on the date immediately preceding the date of business reorganisation, and the period commencing from the date of such business reorganisation and ending with the tax year, shall be deemed to be two different tax years for the purposes of set off and carry forward of loss and allowance for depreciation.
Section 118(8) of Income Tax Act 2025
118(8) In this section,––
- (a) “accumulated business loss” means so much of the loss of amalgamating co-operative bank or demerged co-operative bank as referred to in section 112 in the hands of predecessor co-operative bank, which such predecessor co-operative bank would have been entitled to carry forward and set off under the said section, as if the business reorganisation had not taken place;
- (b) “amalgamated co-operative bank”, “amalgamating co-operative bank”, “amalgamation”, “business reorganisation”, “demerged co-operative bank”, “demerger”, “predecessor co-operative bank”, “successor co-operative bank” and “resulting co-operative bank” shall have the meanings respectively assigned to them in section 65;
- (c) “unabsorbed depreciation” means so much of the allowance for depreciation in the hands of amalgamating co-operative bank or demerged co-operative bank, which remains to be allowed and which would have been allowed to such banks, if the business reorganisation had not taken place.
FAQs on Section 118 of Income Tax Act 2025
What is the primary benefit provided under Section 118(1) of the Income Tax Act, 2025 for co-operative banks in case of amalgamation?
In the case of amalgamation of co-operative banks, the accumulated business loss and unabsorbed depreciation of the predecessor co-operative bank are allowed to be set off against the income of the successor co-operative bank for the same tax year, as if no business reorganisation had taken place.
How are accumulated losses and unabsorbed depreciation treated in case of a demerger of a co-operative bank?
They are either fully transferred to the resulting co-operative bank if directly relatable to the transferred undertaking or proportionately allocated between the demerged and resulting banks based on asset distribution, and allowed to be carried forward and set off accordingly.
What happens if the accumulated loss or unabsorbed depreciation is not directly relatable to the undertaking transferred in a demerger?
It is apportioned between the demerged and resulting co-operative banks in proportion to the asset distribution and allowed to be carried forward and set off against their respective incomes.
For how long can the accumulated business loss be carried forward post-reorganisation?
It can be carried forward for a maximum period of eight tax years from the year in which the loss was first computed by the predecessor co-operative bank.
What are the minimum conditions related to business duration and asset holding for the predecessor co-operative bank under Section 118(4)?
The predecessor must have:
(i) carried on the banking business for at least three years, and
(ii) held at least 75% of the book value of its fixed assets for two years preceding the business reorganisation.
What are the key conditions the successor co-operative bank must fulfil to retain the benefit of set off and carry forward?
The successor must:
(i) hold 75% of the book value of acquired fixed assets for five years,
(ii) continue the predecessor’s business for five years, and
(iii) comply with other prescribed conditions to ensure business revival or genuine reorganisation.
Can the Central Government prescribe additional conditions under Section 118?
Yes, under Section 118(5), the Central Government may notify further conditions (other than those under 118(4)(b)(iii)) to ensure that the reorganisation is for genuine business purposes.
What is the consequence if any condition under sub-sections (4) or (5) is violated?
The set off of losses or unabsorbed depreciation previously availed by the successor co-operative bank shall be deemed as its income and taxed in the year of non-compliance.
How is the tax year treated for the purpose of set off in the year of business reorganisation?
The tax year is split into two separate tax years:
(i) from the beginning of the year to the day before the reorganisation, and
(ii) from the date of reorganisation to the end of the tax year.
What does “accumulated business loss” mean as per Section 118(8)(a)?
It refers to the loss under Section 112 that the predecessor co-operative bank could have carried forward and set off, had the reorganisation not occurred.
What is “unabsorbed depreciation” under Section 118(8)(c)?
It is the part of depreciation allowance remaining to be claimed by the amalgamating or demerged bank, which would have been allowed if reorganisation had not happened.
Where are the definitions of terms like “amalgamation”, “successor co-operative bank”, and “business reorganisation” provided?
These terms are defined under Section 65 of the Income Tax Act, 2025.
Refresh Page