Section 79 of the Income Tax Act, 1961 (Act) allows set-off and carry forward of losses only if 51% of the company's voting power is beneficially held by the same person who on the last day of the financial year in which the loss was incurred. In order to facilitate 'strategic disinvestment', The Central Board of Direct Taxes (CBDT) vide its press release dated 10 September 2021 has clarified that Section 79 of the Act shall not apply to an erstwhile public sector company that has become so as a result of strategic disinvestment.

'Erstwhile public sector company' is a company which was a public sector company in earlier previous years and ceases to be a public sector company by way of strategic disinvestment by the government. Strategic disinvestment is the sale of shareholding by the Central government or any of the State government in a public sector company which results in the reduction of its shareholding below 51% along with transfer of control to the buyer.

Accordingly, a loss incurred in any previous year prior to, and including, the previous year of strategic disinvestment shall be carried forward and set off by the erstwhile public sector company. However, it is further clarified that the above relaxation shall stop to apply from the previous year in which the ultimate holding company of such erstwhile public sector company immediately after completion of the strategic disinvestment, discontinues to hold, directly or through its subsidiary or subsidiaries, 51% of the voting power of the erstwhile public sector company.

Additionally, the CBDT has also issued a notification1 amending Rule 11UAC of the Income Tax Rules, 1962 (IT Rules), which prescribes certain class of persons to whom provisions of Section 56(2)(x) shall not be applicable, which is understood as Gift Tax provision in common parlance. The notification has amended Rule 11UAC to include persons receiving equity shares of the public sector company from the Central government or any of the State government under strategic disinvestment. The said amendment is effective 1 April 2022 and shall be applicable from the AY 2022-23 onwards.

Our Comments

The Finance Act, 2021 had amended Section 72A to extend the benefit of availability of brought forward losses and unabsorbed depreciation of the amalgamating company to amalgamated company for set-off and carry forward to the amalgamation of a public sector company, which ceases to be so (erstwhile public sector company), as part of strategic disinvestment, with one or more company/companies.

Section 2(19AA) of the Act was also amended vide Finance Act, 2021 to expand the scope of demerger to include reconstruction or splitting up of a PSU.

The above announced further relaxations are in continuation to these amendments and are in line with the government's efforts to promote strategic divestments of PSUs and also to make these deals more attractive to strategic investors.


1. Notification No. 105/2021/F. No. 370149/158/2021-TPL dated 10 September, 2021

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