The answer for a qualifying company amalgamation
For FY 2025–26 / AY 2026–27, an accounting fair-value allocation does not by itself reset the depreciation cost of assets transferred in an amalgamation. Section 43(1), Explanation 7 of the Income-tax Act, 1961 preserves the cost that would have applied had the amalgamating company continued to hold the asset, where the amalgamated company is an Indian company. For a transferred block, section 43(6), Explanation 2 supplies the block-level continuity calculation and expressly overrides clause (1) when determining the transferred block's actual cost. The historic asset-cost reference must therefore not be imported as a fresh gross block addition. Maintain both records: original tax cost and remaining tax block value are different measures.
Read the applicable text: Income-tax Act, 1961: sections 2(1B), 32 and 43 Department’s 1961 Act compilation as amended by Finance Act, 2026.
Establish the legal transaction before importing values
Collect the sanctioned scheme, operative dates, transfer schedules and predecessor identity. Test the tax definition of amalgamation in section 2(1B); a commercial label or an accounting business combination does not establish those conditions. Verify the Indian-company condition separately. This article addresses depreciation-cost continuity, rather than the separate eligibility of carried-forward losses under section 72A or the capital-gains treatment of every transfer.
Use two linked ledgers
The asset register should preserve identification, predecessor tax cost, book carrying amount and any accounting remeasurement. The block ledger should identify the tax block, its preceding-year WDV and depreciation actually allowed for that preceding year. Section 43(6), Explanation 2 uses that preceding-year value less that depreciation. Establish whether an imported figure is before or after depreciation before subtracting anything; otherwise the same allowance may be deducted twice. Obtain filed computations and relevant orders rather than treating an unaudited spreadsheet as conclusive. Section 43(6), Explanation 3 also deems depreciation carried forward under section 32(2) to be depreciation actually allowed; a lack of current taxable profits does not by itself justify omitting that statutory reduction.
Keep the transfer-year depreciation working separate
Section 32 contains a separate aggregate restriction and days-of-use apportionment for qualifying amalgamations. An opening block bridge is therefore not the final depreciation deduction. Subsequent additions, disposals, use conditions and the transfer-year allocation need their own computation. Do not use the scheme consideration, a valuation report or accounting goodwill as an automatic replacement for the statutory continuity amount. The illustrations below deliberately stop at cost and opening-block reconciliation.
Resolve exceptions and predecessor changes
A nil block can coexist with assets still used in production. Special cost provisions, including section 43(1), Explanation 13 for section 35AD assets, require a separate overlay; the ordinary bridge cannot override them. If an assessment or rectification changes the predecessor depreciation, trace the corresponding cost/WDV consequence and maintain a version history. These AY references use the 1961 Act applicable to the stated return period; they do not mechanically substitute the Income-tax Act, 2025 tax-year numbering.
Close the file with a signed reconciliation
Reconcile every transferred tax block to predecessor evidence and every asset identifier to the transfer schedule. Record book-to-tax differences without calling the difference an immediate taxable receipt or deductible expense. Document unresolved differences and the reviewer’s conclusion before using the result in the return. A higher accounting amount is a reconciliation item, not proof of a larger tax depreciation base.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Book uplift versus continuing asset cost
A machine has predecessor tax actual cost of ₹40 lakh. The amalgamated Indian company records it at ₹62 lakh under its accounting treatment. Assuming Explanation 7 applies and no special cost adjustment intervenes, the continuing actual-cost reference remains ₹40 lakh. The ₹22 lakh uplift is separately tagged; it is not a fresh tax-cost addition. Remaining depreciable WDV still needs the block ledger.
Illustrative example 2: Transferred block bridge
The predecessor’s preceding-year block WDV before that year’s depreciation is ₹80 lakh and depreciation actually allowed for that year is ₹12 lakh. With no other bridge differences, Explanation 2 produces ₹68 lakh. Recording the block at a book allocation of ₹95 lakh creates a ₹27 lakh reconciliation difference, rather than a ₹27 lakh tax addition to the block.
Illustrative example 3: Avoid the second subtraction
A handover schedule reports ₹51 lakh as the closing tax WDV after ₹9 lakh depreciation on a ₹60 lakh opening figure. Reconstructing ₹60 lakh − ₹9 lakh gives ₹51 lakh. Subtracting ₹9 lakh again from the already-net figure gives ₹42 lakh and understates the imported block by ₹9 lakh. Label every spreadsheet column before importing it.
Illustrative example 4: Keep blocks separate
Two transferred blocks have preceding-year pre-depreciation values of ₹100 lakh and ₹25 lakh; their supported depreciation amounts are ₹15 lakh and ₹2.5 lakh. The respective continuity values are ₹85 lakh and ₹22.5 lakh, totalling ₹107.5 lakh. A total-only import loses the separate block evidence even though the arithmetic agrees.
Illustrative example 5: Assets remain after the tax block reaches zero
A qualifying transferred block has preceding-year value ₹20 lakh and supported depreciation of ₹20 lakh, leaving ₹0. The accounting carrying amount is ₹7 lakh. The ₹7 lakh book amount does not revive the tax block. Continued physical use and nil remaining tax basis must both be visible in the handover file.
Illustrative example 6: A corrected predecessor allowance
The original bridge used ₹50 lakh less ₹7.5 lakh depreciation, giving ₹42.5 lakh. A later operative order establishes depreciation actually allowed of ₹6 lakh for that preceding year. On those assumed facts, the corrected bridge is ₹44 lakh, a ₹1.5 lakh increase. Retain the order and evaluate the proper correction route for any already-filed successor return.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm the transaction | Scheme, operative dates and section 2(1B) analysis. |
| 2 | Confirm the recipient condition | Evidence that the amalgamated company is an Indian company. |
| 3 | Identify transferred assets | Asset identifiers tied to the scheme annexure. |
| 4 | Preserve predecessor actual cost | Tax invoices, historic cost adjustments and asset ledger. |
| 5 | Identify tax blocks | Predecessor block schedule and classification evidence. |
| 6 | Label before/after depreciation figures | Opening WDV, allowance and closing-WDV column definitions. |
| 7 | Reconcile the statutory block bridge | Section 43(6), Explanation 2 working and filed computation. |
| 8 | Apply special overlays | Section 35AD history and other relevant cost restrictions. |
| 9 | Compute transfer-year depreciation separately | Section 32 use-day and aggregate-cap working. |
| 10 | Approve the final import | Book-to-tax differences, orders, version history and sign-off. |
Sixteen practitioner FAQs
1. Does an amalgamation valuation create tax cost?
Not by itself. Apply the statutory continuity rules to the qualifying transaction.
2. Is actual cost the same as WDV?
No. Preserve historical tax cost and the remaining block value as separate records.
3. Which recipient condition matters here?
Explanation 7 expressly requires the amalgamated company to be an Indian company.
4. Is every merger an amalgamation for income tax?
No. Review the statutory definition and the actual scheme conditions.
5. Can the predecessor’s closing WDV be used blindly?
No. Confirm which allowances and adjustments it already includes.
6. Should preceding-year depreciation be deducted twice?
No. Reconstruct the gross-to-net bridge once.
7. May all blocks be combined in one import line?
Retain block-specific records; one total cannot support each block’s computation.
8. Does accounting goodwill replace the machinery tax block?
No. Accounting allocation and statutory depreciation basis require separate analysis.
9. Is this a section 72A loss-eligibility opinion?
No. Loss-transfer conditions need an independent eligibility file.
10. Does nil WDV mean the machinery must be removed physically?
No. Tax basis and continuing physical use are different facts.
11. What if a predecessor assessment changes depreciation?
Trace the operative order into the continuity working and evaluate required return corrections.
12. Are new assets acquired after amalgamation part of this bridge?
Identify them separately and apply their own cost and use rules.
13. Does the opening bridge determine the annual deduction?
No. Section 32 and transfer-year apportionment must still be applied.
14. Can a foreign recipient assume this Explanation 7 result?
The Indian-company condition must be satisfied; do not extend the conclusion automatically.
15. What about assets with section 35AD history?
Apply the special nil-cost and other relevant statutory rules before using an ordinary bridge.
16. Which period do these section numbers address?
FY 2025–26 / AY 2026–27 under the Income-tax Act, 1961.
Official sources
Income-tax Act, 1961: sections 2(1B), 32 and 43 Department’s 1961 Act compilation as amended by Finance Act, 2026