Income Tax Rules | Centre's Power To Relax Conditions Under Rule 9C Exceptional & Discretionary, Not Ordinarily Subject To Judicial Review: Delhi HC

In terms of Section 72A of the Act, the accumulated losses and unabsorbed depreciation of the amalgamated companies are deemed to be unabsorbed depreciation and losses of the amalgamated company for the previous year in which the amalgamation was effected.

It also allows set-off and carry-forward of losses if certain conditions are satisfied, like amalgamation is for a genuine business purpose and the amalgamated company ensures the revival of the business of the amalgamating company.

Rule 9C sets out an objective parameter for availing the benefit of Section 72A of the Act – the achievement of 50% of the installed capacity of the industrial undertaking of the amalgamating company and maintaining the same till the end of five years from the date of amalgamation.

In the case at hand, the Petitioner's plea to relax the said conditions for an extended period of three years was declined by the Revenue.

While hearing a challenge to this order of the Revenue, a division bench of Justices Vibhu Bakhru and Swarana Kanta Sharma observed that the power to relax a Rule or a condition is by way of an exception, and the scope of such power cannot be construed in an expansive manner.

“In terms of Rule 9C(a) of the Rules, the Central Government can relax (i) the capacity utilisation to be achieved; or (ii) the time period to achieve the same; or both. Such relaxation can be granted by Central Government having regard to the two factors: (i) the genuine efforts made by the amalgamated company to attain the prescribed level of production; and (ii) the circumstances preventing such efforts from achieving the same. However, these two factors are by no means exhaustive. The use of the expression “having regard to” as used in Rule 9C(a) of the Rules merely indicates that these two factors are relevant for considering relaxation of the stipulated conditions.”

It cited West Bengal State Electricity Board v. Patel Engineering Co. Ltd. & Ors. (2001), whereby the Supreme Court had observed that “where power to relax or waive a rule or a condition exists under the Rules, it has to be done strictly in compliance with the Rules”.

The Court thus added, “It is necessary that the power is exercised reasonably and objectively. It is also well settled that the power to relax a Rule or a condition is required to be exercised only to the extent it is necessary. The necessity for using such power must obviously be dictated by the object of the Rules or condition sought to be relaxed.”

So far as the power of Court to review the exercise of Centre's power to relax or not relax the conditions are concerned, the Court said,

“The proviso to Rule 9C(a) of the Rules confers a discretionary power, which is to be exercised in terms of the guidelines as indicated in the said proviso as well as bearing in mind all the relevant factors. It is trite law that exercise of such discretionary power is not amenable to judicial review unless the court finds that exercise is capricious, malafide, arbitrary and/or unreasonable. The court can interfere only if the decision is perverse and no reasonable body of persons, properly informed could arrive at such a decision. The decision is also amenable to judicial review if the concerned authority has misdirected itself and the decision is based on irrelevant or extraneous considerations or in disregard of relevant consideration.”

In terms of the scheme for amalgamation sanctioned by the Court, four separate companies were amalgamated with the petitioner.

As on the appointed date, the accumulated losses and unabsorbed depreciation of the four amalgamated companies amounted to ₹141 crores. The Petitioner sought to set off and carry forward the losses beyond the prescribed time and sought relaxation of the conditions prescribed under Section 72A and Rule 9C.

It was the petitioner's case that though 50% of the installed capacity was achieved by three of the amalgamating companies, however one company did not achieve the prescribed level of production.

It submitted that the production capacity utilization of that company had doubled but due to circumstances beyond its control, the threshold minimum level of 50% of the installed capacity was not achieved.

The petitioner sought that (a) that the conditions of achieving the level of production be relaxed to 40% and (b) the time for meeting the said condition be extended for a year.

In this regard, it referred to the decision of the Supreme Court in Commissioner of Income-tax Bombay and Ors. v. Mahindra & Mahindra Ltd. & Ors. (1983) to contend that the power to relax should be exercised liberally.

Revenue on the other hand argued that the Central Government had wide discretion in entertaining an application for relaxation of the conditions as stipulated under Rule 9C.

The High Court observed that Section 72A(2) contains a non obstante clause. Thus, it held, if the conditions as specified in Section 72A (2) of the Act are not satisfied, the benefits of Section 72A (1) of the Act are not available.

So far as Rule 9C is concerned, the High Court said that it is only an enabling provision that empowers the Central Government to relax the stipulated conditions. “This power is not unbridled but its exercise is guided by the considerations as set out in the proviso – (i) genuine efforts made by the amalgamated company to attain the prescribed level of production; and, (ii) the circumstances preventing such efforts from achieving the same,” it said.

As such, the Court dismissed the petition on noting that the condition as specified – that is, achieving production equivalent to at least 50% of the installed capacity of the undertaking of the amalgamating company – was not satisfied by the Petitioner even if the extended time for satisfying the same was taken into account.

Appearance: For the Petitioners : Mr. Kamal Sawhney, Mr. Nikhil Agarwal, Mr. Puru Medhira& Mr. Nishank Vashistha, Advocates. For the Respondents : Mr. Indruj Singh Rai, SSC, Mr. Sanjeev Menon, Mr. Rahul Singh JSCs & Mr. Anmol Jagga, Advocate.

Case title: Cargill India Private Limited v. Central Board Of Direct Taxes.

Citation: 2025 LiveLaw (Del) 306

Case no.: W.P.(C) 399/2022

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