Kirloskar Brothers Limited — Important, 04-11-2025: Disclosure of material issue

Kirloskar Brothers (KBL) has announced that the National Company Law Tribunal (NCLT) has approved the scheme of amalgamation between its wholly-owned subsidiaries: loss-making The Kolhapur Steel Limited (TKSL) into profitable Karad Projects And Motors Limited (KPML).

**The Issue:** The Income Tax Department (ITD) raised concerns that the primary purpose of this merger was tax avoidance. TKSL has accumulated significant business losses (ranging from ~₹11.61 Cr to ~₹19.40 Cr annually over the last five years, with a total carry-forward business loss of ~₹83.34 Cr and unabsorbed depreciation of ~₹13.19 Cr). The ITD suspected these losses would be used to offset KPML's profits (which grew from ~₹3.55 Cr to ~₹77.60 Cr over the same period), thereby reducing KBL's tax liability.

**Possible Impact:** While the NCLT has approved the merger, it has explicitly stated that the Income Tax Department remains free to examine any tax implications. This means potential scrutiny on the tax benefits derived from offsetting losses. Furthermore, KBL has undertaken to comply with the new Finance Act 2025, which, for amalgamations effected on or after April 1, 2025, limits the carry-forward of predecessor entity's losses to a maximum of eight assessment years. This could limit the duration of tax benefits from TKSL's past losses.

**Company's Response/Mitigation:** KBL clarified that the merger has strong commercial rationales beyond tax. These include:

* **Simplification:** Streamlining the corporate structure and eliminating multiple entities.

* **Operational Efficiency:** Improving financial, human, and managerial resource utilization, reducing administrative overheads and compliance costs.

* **Financial Stabilization:** Addressing TKSL's financial distress, including ~₹84 Cr in vendor payables, by leveraging KPML's robust balance sheet and ~₹78 Cr in cash reserves.

* **Strategic Alignment:** Better oversight, governance, and long-term planning under a unified structure.

KBL argued that any tax benefits derived from Section 72A of the Income Tax Act are legitimate and within the framework of the law, not a device for tax evasion. The NCLT ultimately sided with the company's commercial rationale for the merger.

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