While amalgamations focus on continuity, demergers raise a different question for CXOs: who gets the losses when a business is split? Section 72A provides a clear—though often misunderstood—framework.

In a demerger, the tax law recognises that businesses and balance sheets are being carved up, not absorbed. Accordingly, accumulated business losses and unabsorbed depreciation of the demerged company do not vanish. Instead, they follow logic and commercial reality.

If losses or unabsorbed depreciation are directly attributable to the undertaking being transferred—say, a specific division with its own operations and assets—those losses move along with the undertaking. The resulting company can carry them forward and set them off against future profits of that business. This is the cleanest scenario and typically works well where divisions are operationally ring-fenced.

The complexity arises where losses are not directly relatable to a specific undertaking. In such cases, the law prescribes a proportionate split. Losses are apportioned between the demerged company and the resulting company based on the ratio of assets retained versus assets transferred. In simple terms, tax losses follow the assets.

What’s important is that Section 72A does not impose continuity conditions in demergers similar to amalgamations. There is no five-year business continuation test or asset-holding requirement. This reflects a practical reality: demergers are often about strategic focus, not revival of a sick business.

For promoters and CXOs, the message is straightforward. Losses can be preserved and unlocked in a demerger—but only with careful mapping of assets, businesses, and financials. In demergers, precision beats optimism.