Section 118 of the Income-tax Act, 2025 — Carry Forward of Loss on Reorganisation of Co-operative Banks

In plain language

What Section 118 is about

When two or more co-operative banks merge (amalgamate), or when a co-operative bank splits off part of its business (a demerger), the bank that survives or receives the business does not automatically inherit the losses of the old bank. Ordinarily, tax losses and unabsorbed depreciation "die" with the entity that earned them. Section 118 of the Income-tax Act, 2025 creates a special exception: it allows the successor / resulting co-operative bank to carry forward and set off the accumulated business loss and unabsorbed depreciation of the predecessor co-operative bank, "as if the business reorganisation had not taken place."

This section is the 2025 Act's re-enactment of the old Section 72AB of the Income-tax Act, 1961. The intent is the same — to encourage the consolidation and revival of weak co-operative banks (a policy the RBI and the government have pushed for years) by making sure a healthy bank taking over a sick one is not deprived of the tax benefit of the sick bank's losses.

Who it applies to

• Only co-operative banks — as defined under Part V of the Banking Regulation Act, 1949 (state co-operative banks, central co-operative banks and primary co-operative banks). It does not apply to ordinary companies (those use Sections 113 and related provisions) or to co-operative societies that are not banks.
• Predecessor co-operative bank — the amalgamating or demerged bank whose losses are being transferred.
• Successor co-operative bank — the amalgamated bank, or the resulting bank in a demerger, that wants to use those losses.

Key conditions that must be satisfied

Conditions for the PREDECESSOR bank (before reorganisation):

• It must have been engaged in the banking business for 3 or more years.
• It must have held at least three-fourths (75%) of the book value of its fixed assets continuously for the 2 years immediately preceding the reorganisation.

Conditions for the SUCCESSOR bank (after reorganisation):

• It must hold at least 75% of the book value of the fixed assets acquired through the reorganisation, continuously for a minimum of 5 years.
• It must continue the business of the predecessor bank for at least 5 years.
• It must satisfy any other conditions the Central Government prescribes to ensure the revival of the business is genuine.

How losses are split in a demerger

• Directly relatable losses: If the accumulated loss or unabsorbed depreciation directly relates to the undertaking that is transferred, the full amount goes to the resulting bank.
• Non-relatable losses: If the loss cannot be directly linked to the transferred undertaking, it is apportioned between the demerged bank and the resulting bank in the same ratio as the assets are split.

Carry-forward period

A crucial benefit is a fresh clock. In the hands of the successor bank, the accumulated business loss is treated as the loss of the year in which the reorganisation happened. Practically, the business loss can then be carried forward for up to 8 tax years from that year. Unabsorbed depreciation, as under the general scheme, can be carried forward indefinitely until fully absorbed.

What happens if conditions are broken

Section 118 has teeth. If the successor bank fails to meet any of the specified conditions (for example, it sells off more than 25% of the acquired fixed assets, or stops the business, before 5 years are up), the set-off already claimed is reversed. The amount of loss or depreciation earlier allowed is deemed to be the income of the successor bank, chargeable to tax in the very year in which the condition is breached.

How it interacts with other sections

• Section 112 (carry forward and set off of business loss) — Section 118 borrows the meaning of "accumulated business loss" from the general set-off scheme.
• Section 113 — the parallel provision for amalgamation/demerger of companies; Section 118 is the co-operative-bank-specific version.
• Section 65 / definitions clauses — supply the meanings of "amalgamation", "demerger", "co-operative bank", "predecessor" and "successor co-operative bank".

Practical implications

For a strong urban or district co-operative bank considering a merger with a struggling neighbour, Section 118 can turn the target's losses into a real tax shield — but only if the deal is structured to satisfy every condition and the merged bank commits to the 5-year holding and continuity requirements. Boards should build these covenants into the scheme of amalgamation and monitor asset disposals carefully, because a slip triggers an automatic claw-back.