Amendment to Sec 72 (A) of I-T Act to hit consolidation process

Anindita Dey

Mumbai, Aug 10: The recent amendment to Section 72 (A) of the Income-Tax Act, which excludes major industries like airlines and telecom, is expected to severely impact the consolidation process in these sectors.

Section 72 (A) deals with accumulated business losses of an amalgamating company and relates to the carry forward and set off of these losses and unabsorbed depreciation allowance in certain cases of amalgamation.

Tax experts added that it has put various industries, primarily those in the business of providing telecom services and other infrastructure facilities, in a dilemma.

According to industry experts, this assumes significance in the light of the fact that the amendment has been effected at a time when major divestments, mergers or acquisitions are going on in these sectors. The most recent of these being the merger of Tata Cellular with Birla-AT&T and the proposed divestment of Air-India.

As per the amendment to the section under the new finance bill, the term “industrial undertaking” has been redefined by inserting sub-section 7. As per the new definition, an industrial undertaking is one that is engaged in the manufacture of processing of goods, manufacture of computer software, the business of generation or distribution of electricity or any other form of power or mining or construction of ships, aircraft or rail systems.

Thus, it has put telecom, assembly of goods and airline out of the definition.

According to a tax consultant in a leading MNC firm, the new Section 72 (A) was introduced with effect from April 2001 to substitute the existing section in order to encourage amalgamations and demergers and the make business re-organisation tax neutral.

According to analysts, all these industries like telecom industry, motor parts and power where assembly of goods is a major factor in production process, are major productive sectors in the economy.

They also added that this industry is also witnessing a consolidation phase with many companies looking at the option to expand their presence by mergers and acquistions to achieve economies of scale so as to provide services at the lowest possible rates.

Further, all these industries have a long gestation period and losses of the initial years can only be recouped out of expanded operations in the later years.

Therefore, exclusion of these industries in the definition of industrial undertaking, the accumulated loss and unabsorbed depreciation would be lost on merger and amalgamation which would act as a
disincentive for consolidations by way of amalgamations and would be detrimental to public interest, said an tax expert.