Benefit Of Carried Forward Business Losses And Unabsorbed Depreciation Losses Can't Be Availed For Ingenuine Amalgamation/Demerger: ITAT

The respondent/assessee is a company incorporated under the provisions of the Companies Act, 1956. The assessee is in the business of selling and servicing diesel engines, their spare parts and related equipment. The return of income for the assessment year 2006-07 was filed, declaring a total income of Rs. 55,44,54,789. The return of income was revised at a total income of Rs. 29,84,61,310. The assessment was completed by the Assessing Officer after disallowing set-off of brought forward business losses and unabsorbed depreciation losses pertaining to demerged undertakings.

The assessee filed an appeal before the CIT (A). The CIT (A) held that once the demerger had been approved by the Bombay High Court, it was not within the jurisdiction of the Assessing Officer to question the motive behind the demerger. In the absence of any notification by the Central Government, the Assessing Officer cannot apply his own guidelines in order to arrive at whether or not the demerger is for a genuine purpose. Accordingly, the CIT (A) directed the Assessing Officer to allow the set-off for business losses and unabsorbed depreciation losses relating to the demerged undertaking.

The department submitted that the motive behind the scheme of demerger is only to avail the tax benefit and not for a genuine purpose as the assets were held for sale as shown on the balance sheet. It clearly indicated that the assessee had no intention of carrying on the business of the demerged undertaking. The Central Government has not prescribed any conditions to determine whether or not the scheme of demerger is genuine. Since the material on record clearly establishes that the scheme demerger is not for genuine purpose, the respondent-assessee is not entitled to the benefit of set-off of brought forward business losses and unabsorbed depreciation losses. The CIT (A) had failed to appreciate the purport of the provisions of section 72A(4). Therefore, the order of theCIT (A) should be reversed.

The assessee contended that the Central Government had not laid down the guidelines for the purpose of determining whether the scheme of demerger was for a genuine purpose or not. It is beyond the scope of the Assessing Officer to go into detail about the scheme of demerger. When the scheme of demerger was approved or sanctioned by the High Court, it was binding on everyone, including the authorities of the income-tax department.

The ITAT held that the mere fact that the scheme of demerger/amalgamation was accorded approval by the Jurisdictional High Court does not automatically entitle the assessee to claim the set-off of brought-forward business losses. In such cases, the government had prescribed conditions for the amalgamation of schemes in order to obtain the tax benefit of set-off of brought forward business losses. One of the conditions is continuous holding of the assets before and after amalgamation, carrying on the business of the amalgamation company for a minimum period of 5 years from the date of amalgamation, etc. However, such conditions are not stipulated in the case of a demerger, which is governed by sub-section (4) of section 72A of the Act.

The Tribunal held that CIT (A) had granted the benefit of set-off and brought forward business losses in a perfunctory manner without looking into the objects behind the enactment of the provisions of section 72A.

Case Title: DCIT Versus M/s. Cummins Sales & Services (I) Ltd.

Citation: ITA No.2121/PUN/2017

Dated: 27.06.2022

Counsel For Appellant: Shivraj B. Morey

Counsel For Respondent: Ketan Ved

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