Approval Of Demerger Would Not Entail The Benefit Of Set-Off Under Section 72A Of Income Tax Act: ITAT

The Pune Bench of ITAT has ruled that the mere fact that the scheme of demerger or amalgamation was approved by the High Court, does not automatically entitle the assessee to claim the set-off of brought forward business losses relating to the demerged or amalgamating undertaking. The Bench, consisting of S. S. Viswanethra Ravi (Judicial Member) and Inturi Rama Rao (Accountant Member), held that Section 72A (5) of the Income Tax Act, 1961 has been enacted empowering the Assessing Officer to deny the benefit of set-off of brought forward business losses, and hence, merely because the scheme of demerger was approved by the High Court would not ipso facto entitle the assessee to the benefit of set-off, if the scheme was contrary to the objects behind the enactment of the provisions of Section 72A. The ITAT observed that the scheme of demerger was carried out by the assessee only with the sole object of availing the tax benefit and that the assessee had no intention of carrying on the business of the demerged undertaking. Thus, the ITAT upheld the order of the Assessing Officer in denying the set-off. During the relevant previous year, Highway Solutions of Cummins Auto Services Ltd., a 100% subsidiary of the assessee company M/s. Cummins Sales & Services (I) Ltd., was demerged and vested with the assessee company. The scheme of the demerger was approved by the High Court of Bombay. The assessee company claimed set-off of the brought forward business losses and unabsorbed depreciation losses relating to the demerged undertaking against the assessee's taxable income, as provided under Section 72A (4) of the Income Tax Act. During the assessment proceedings, the Assessing Officer (AO) found that the assets of the demerged undertaking were held for sale, indicating that there was no intention of the assessee to continue the business of the demerged undertaking. Thus, the AO concluded that the scheme of demerger was not carried out for a genuine purpose as contemplated under Section 72A (5) of the Income Tax Act. Therefore, the AO passed an order denying the claim of set-off of brought forward business losses and unabsorbed depreciation losses pertaining to the demerged undertaking. The AO also made a disallowance of indirect expenses by applying Rule 8D(2)(iii) of the Income Tax Rules, 1962, which was inserted with effect from assessment year 2007-2008. The AO had opined that since Rule 8D is a procedural provision, it was applicable in all the pending matters. Against this, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT(A) held that once the demerger was approved by the Bombay High Court, the AO had no jurisdiction to question the motive behind the demerger. The CIT(A) ruled that in the absence of any notification by the Central Government, as provided under Section 72A (5), the AO could not apply his own guidelines in order to arrive at a conclusion as to whether the demerger was for a genuine purpose or not. Hence, the CIT(A) passed an order directing the AO to allow the set-off of brought forward business losses and unabsorbed depreciation losses relating to the demerged undertaking. The CIT(A) also ruled that the provisions of Rule 8D cannot be applied retrospectively and thus, the CIT(A) restricted the disallowances made by the AO under Section 14A of the Income Tax Act read with Rule 8D(2)(iii) of the Income Tax Rules. Against this, the revenue department filed an appeal before the ITAT. Section 14A of the Income Tax Act, 1961 provides that no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income Tax Act. Rule 8D of the Income Tax Rules provides methods for determining the amount of expenditure in relation to income not includible in total income. Section 72A of the Income Tax Act contains provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in the case of amalgamation or demerger. The assessee M/s. Cummins Sales & Services submitted before the ITAT that the provisions of Rule 8D only have a prospective application and thus, they could not have been applied in the assessment year prior to the assessment year 2008-2009. The ITAT observed that the provisions of Section 14A provide that where an assessee earns exempt income, the expenditure incurred in connection with earning of exempt income cannot be allowed. The ITAT noted that Rule 8D prescribes the method for computing the quantum of disallowance. The ITAT observed that the Supreme Court in the case of CIT versus Essar Teleholdings Ltd. (2018) had held that Rule 8D is prospective in nature and it cannot be applied for any assessment year prior to the assessment year 2008-2009. Thus, the ITAT upheld the order passed by the CIT(A) holding that the ...

Approval Of Demerger Would Not Entail The Benefit Of Set-Off Under Section 72A Of Income Tax Act: ITAT

Parina Katyal

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