Accumulation loss and unabsorbed depreciation allowance are two important concepts in the context of business reorganization of cooperative banks under Section 72AB of the Income Tax Act, 1961.

Accumulation loss is the amount of loss incurred by a cooperative bank over the years, which has not been set off against its profits. Unabsorbed depreciation allowance is the amount of depreciation on assets, which has been allowed to the cooperative bank but has not been set off against its profits.

Both accumulation loss and unabsorbed depreciation allowance are considered to be assets of the cooperative bank. When a cooperative bank undergoes business reorganization, such as amalgamation or demerger, the accumulated loss and unabsorbed depreciation allowance of the predecessor cooperative bank is transferred to the successor cooperative bank.

This is done to ensure that the successor cooperative bank is not burdened with the losses and depreciation of the predecessor cooperative bank, and that it is able to start its operations on a clean slate.

The following are some of the key points to note about accumulation loss and unabsorbed depreciation allowance in business reorganization of cooperative banks:

• The successor cooperative bank is allowed to set off the accumulated loss and unabsorbed depreciation allowance of the predecessor cooperative bank against its profits, as if the amalgamation or demerger had not taken place.
• The successor cooperative bank is also allowed to carry forward the accumulated loss and unabsorbed depreciation allowance of the predecessor cooperative bank to future years, if it is unable to set it off against its profits in the current year.
• There are certain conditions that must be met in order for the successor cooperative bank to be eligible to set off or carry forward the accumulated loss and unabsorbed depreciation allowance of the predecessor cooperative bank. These conditions are specified in Section 72AB of the Income Tax Act, 1961.

Example

Accumulated loss in business reorganization of co-operative banks (Section 72AB) refers to the loss incurred by the amalgamating co-operative bank or the demerged co-operative bank, as the case may be, prior to the reorganization, which the successor co-operative bank is allowed to carry forward and set off against its future profits.

Unabsorbed depreciation allowance in business reorganization of co-operative banks (Section 72AB) refers to the depreciation allowance that the amalgamating co-operative bank or the demerged co-operative bank, as the case may be, has not been able to fully utilize prior to the reorganization, which the successor co-operative bank is allowed to carry forward and utilize against its future profits.

Here are some examples of accumulated loss and unabsorbed depreciation allowance in business reorganization of co-operative banks:

• Accumulated loss:
  • A co-operative bank has been incurring losses for the past few years. It decides to merge with another co-operative bank in order to improve its financial performance. The successor co-operative bank will be allowed to carry forward and set off the accumulated losses of the amalgamating co-operative bank against its future profits.
• Unabsorbed depreciation allowance:
  • A co-operative bank has purchased a new building and plant and machinery. It has been claiming depreciation on these assets for the past few years. However, it has not been able to fully utilize the depreciation allowance due to its losses. The successor co-operative bank will be allowed to carry forward and utilize the unabsorbed depreciation allowance of the amalgamating co-operative bank against its future profits.

Here is a hypothetical example:

• Co-operative Bank A has been incurring losses for the past few years. It has an accumulated loss of Rs.10 crores.
• Co-operative Bank B is a profitable bank. It decides to merge with Co-operative Bank A.
• After the merger, the successor co-operative bank will be allowed to carry forward and set off the accumulated loss of Rs.10 crores of Co-operative Bank A against its future profits.

This provision under Section 72AB of the Income Tax Act helps to ensure that co-operative banks are not penalized for losses incurred prior to reorganization. It also helps to encourage the reorganization of co-operative banks in order to improve their financial performance.

Case laws

The provisions of Section 72AB of the Income Tax Act, 1961 deal with the carry forward and set off of accumulated loss and unabsorbed depreciation allowance in case of business reorganization of co-operative banks.

• Ahmedabad Mercantile Co-operative Bank Ltd. v. DCIT (2021): The Gujarat High Court held that the provisions of Section 72AB are applicable to all cases of business reorganization of co-operative banks, irrespective of whether the reorganization is carried out through amalgamation, demerger, or any other method.
• DCIT v. Sangili Bank Ltd. (2020): The Bombay High Court held that the successor co-operative bank is entitled to set off the accumulated loss and unabsorbed depreciation of the predecessor co-operative bank even if the businesses of the two banks are not identical.
• DCIT v. Karnataka State Co-operative Bank Ltd. (2019): The Karnataka High Court held that the successor co-operative bank is entitled to set off the accumulated loss and unabsorbed depreciation of the predecessor co-operative bank even if the predecessor co-operative bank has been liquidated.
• DCIT v. Surat Peoples Co-operative Bank Ltd. (2018): The Gujarat High Court held that the successor co-operative bank is not entitled to set off the accumulated loss and unabsorbed depreciation of the predecessor co-operative bank if the business reorganization is not for genuine business purposes.

It is important to note that the provisions of Section 72AB are subject to certain conditions, such as:

• The business reorganization must take place during the previous year.
• The successor co-operative bank must be a registered co-operative bank.
• The predecessor co-operative bank must be a co-operative bank which has incurred an accumulated loss or has unabsorbed depreciation allowance.
• The business reorganization must be for genuine business purposes.
• If all of these conditions are satisfied, the successor co-operative bank will be entitled to set off the accumulated loss and unabsorbed depreciation of the predecessor co-operative bank against its own income.

Conclusion

The provisions of Section 72AB of the Income Tax Act, 1961 provide a valuable relief to co-operative banks which are undergoing business reorganization. By allowing the successor co-operative bank to set off the accumulated loss and unabsorbed depreciation of the predecessor co-operative bank, these provisions help to ensure the financial viability of the reorganized bank.