ITAT MUMBAI BENCH ‘J’
Bayer Material Science (P.) Ltd.
Versus
Assistant Commissioner of Income-tax
IT Appeal Nos. 6666 & 6667 (Mum.) of 2009
[ASSESSMENT YEARS 2003-04 & 2004-05]
FEBRUARY 13, 2013
ORDER
R.S. Syal Accountant Member
These two appeals by the assessee are directed against the separate orders dated 12.10.2009 passed by the ld. CIT(A) in relation to the A.Ys. 2003-04 & 2004-05. Since some common issues are involved in these appeals, we are therefore, proceeding to dispose them off by this consolidated order for the sake of convenience.
A.Y. 2004-05 :-
2. First ground of this appeal is against upholding the action of the Assessing Officer (AO) in disallowing the brought forward loss of Bayer TPU Pvt. Ltd. (amalgamating company) (hereinafter called as BTPU) amounting to Rs. 7,73,00,414/- u/s. 72A of the Act.
3. Briefly stated the facts of this ground are that two separate companies – BTPU and Bayer Specialty Products Pvt. Ltd. (BSPPL) -got amalgamated with the assessee-company in the year under consideration. Initially, the assessee claimed a set off of loss of Rs. 12.53 crore u/s.72A of the Act. However, in the revised computation of income, the amount of brought forward loss was reduced to Rs. 7.73 crore on account of amalgamation of BTPU alone. The Assessing Officer considered the provisions of section 72A and came to the conclusion that no set off of such loss was permissible due to the reasons, which can be summarized as under :-
(i) The condition laid down in section 72A(2)(b)(i) requiring the amalgamated company to hold continuously for a minimum period of five years from the date of amalgamation at least three-fourth of the book value of fixed assets of the amalgamating company was not satisfied. It can be seen that the A.O. has drawn a table on page No. 9 of his order by which he computed 43.79% representing the disposal of assets of the amalgamating company by the assessee in the very first year of the amalgamation.
(ii) The assessee-company was not able to substantiate that the Scheme of Amalgamation was with a view to revive the business of the amalgamating company and amalgamation was for a genuine business purposes. This, in his opinion, was violation of section 72A(2)(b)(iii).
(iii) The assessee-company did not achieve the level of production of at least 50% of the installed capacity of the amalgamating company before the end of four years from the date of amalgamation and that it further failed to demonstrate that it continued to maintain the said minimum level of production till the end of five years from the date of amalgamation, as laid down in Rule 9C(a) of Income-tax Rules, 1962. Since amalgamation took place as on 1.4.2003 and a period of three years and nine months had already expired from that date till the passing of the assessment order, the Assessing Officer came to hold that the assessee was not eligible to claim set off of brought forward loss.
(iv) The assessee-company also failed to furnish a certificate in the prescribed Form No. 62 duly verified by an Accountant showing particulars of production, which is one of the pre-requisite conditions for availing the allowance u/s.72A, as laid down in Rule 9C(b).
4. Considering these facts, the Assessing Officer held that the assessee was not entitled to claim set off and/or the carry-forward of the accumulated losses and/or unabsorbed depreciation of the amalgamating company as per section 72A of the Act. The assessee failed to convince the learned CIT(A) on its line of reasoning about the satisfaction of all the vital conditions for claiming benefit u/s 72A.
5. We have heard the rival submissions and perused the relevant material on record. It is observed that the fact of amalgamation of BTPU with the assessee-company during the previous year relevant to the assessment year under consideration and the further fact of the amount of brought-forward business losses and/or unabsorbed depreciation of such amalgamating company are not in dispute. Section 72A(1) provides that where there has been an amalgamation of a company owning an industrial undertaking etc. with another company then, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly. As the amalgamation took place in the relevant previous year, the accumulated loss of BTPU is to be deemed as the brought forward loss of the assessee company eligible for set off and carry forward. Sub-section (2) of section 72A sets out some conditions to be fulfilled before claiming set off or carry forward of accumulated loss and unabsorbed depreciation of the amalgamating company as per sub-section (1) of section 72A. Such conditions are required to be fulfilled by the amalgamating company and also the amalgamated company. The Assessing Officer has not disputed the compliance of conditions by the amalgamating company, being BTPU, as given in clause (a) of sub-section (2) to section 72A. Controversy has been raised in relation to the fulfillment of conditions by the amalgamated company as given under clause (b) of section 72A(2) of the Act. The first objection of the Assessing Officer is that the assessee-company ought to have held continuously for a minimum period of five years from the date of amalgamation at least three fourths of the book value of the fixed assets of the amalgamating company. As per the AO’s calculation, the assessee disposed of 43.79% of the assets of BTPU which violated the requisite condition. It has been observed in an earlier part of this order, which is also apparent from the assessee’s submission as recorded on page No. 3 of the impugned order that two companies, namely, BTPU and BSPPL amalgamated with the assessee-company in the relevant previous year. The assessee claimed set off of brought forward loss of BTPU alone. From page No. 60 of the paper book, which was also filed before the authorities below, it can be seen that the assessee got assets of BTPU on amalgamation worth Rs. 15,53,42,000/-. Assets worth Rs. 32.67 lakhs of BTPU were disposed in the previous year relevant to assessment year under consideration. Similar disposals of the assets of BTPU were effected in subsequent two years as well, thereby making such total disposal in three years at Rs. 1,56,55,000/-. What to talk of disposal of assets during the relevant previous year at 43.79%, it is evident that the disposal of assets by the assessee in all the three years combined is around 10% of the book value of total assets of BTPU. We find that the Assessing Officer, while calculating percentage of 43.79%, erred in including the disposal of assets of BSPPL also along with the disposal of asset of BTPU. The requirement for continuously holding at least 75% of the book value of the fixed asset of the amalgamating company for a minimum period of five years is qua the amalgamating company whose accumulated loss and unabsorbed depreciation are sought to be taken by the amalgamated company in its hands for set off and carry forward. Thus what is required to consider on one hand is the percentage of disposal of assets of amalgamating company and on the other the brought forward loss and unabsorbed deprecation of such company. It is not as if the disposal of fixed assets of all the amalgamating companies should be considered cumulatively for allowing set off and carry forward of accumulated loss and unabsorbed depreciation of one of such amalgamating companies. It is up to the amalgamated company to distinctly establish the satisfaction of these conditions in respect each amalgamating company. Obviously, if there are two or more amalgamations in a year, then the amalgamated company is required to prove satisfaction of these conditions in respect of such companies one by one as a pre-requisite for availing benefit u/s 72A in respect of each such company separately. Benefit u/s 72A(1) is allowed to the amalgamated company for the number of amalgamating companies in respect of which it succeeds in satisfying the conditions u/s 72A(2)(b). If, say, out of three amalgamations, the amalgamated company proves the fulfillment of conditions as per section 72A(2)(b) in respect of one or two amalgamating companies, then it shall be entitled to the benefit u/s 72A(1) in respect of such one or two companies. It is not the case that the benefit u/s 72A(1) shall be allowed or denied for all the amalgamating companies taken together as one unit on the cumulative satisfaction of the requisite conditions of section 72A(2)(b) in respect of such companies. Reverting to the facts of the present case, it is observed that there were two amalgamations with the assessee company, viz. of BTPU and BSPPL. The assessee claimed set off and carry forward of business losses and unabsorbed depreciation of BTPU alone. In order to claim such benefit, it was incumbent upon the asseessee not to dispose of more than 25% of the assets of BTPU alone. Disposal of assets of BSPPL could have been included in the total disposal of assets, as has been done by the AO, if the assessee had claimed set off and carry forward of the accumulated loss and unabsorbed depreciation of BSPPL as well. As the assessee claimed set off and carry forward of the brought forward business loss and unabsorbed depreciation only of BTPU, it was required to limit the disposal at 25% of assets of BTPU alone. The objection of the Assessing Officer for not granting set off and carry forward of accumulated loss and unabsorbed depreciation of BTPU that the assessee disposed more than 25% of the assets of BTPU is, therefore, not sustainable. Contention of the ld. DR reiterating the reasons recorded by the lower authorities for jettisoning the assessee’s claim in this regard, is therefore, bereft of any force. Such argument advanced on behalf of the Revenue is liable to be and is hereby repelled.
6. The other point considered by the authorities below marring the benefit u/s 72A(1) is that the assessee company failed to lead evidence that the amalgamation was to ensure the revival of the business of the amalgamating company. Objections of the AO in points nos. (iii) and (iv) of para 3 of this order about the violation of the conditions prescribed in Rule 9C are also related to this very aspect of the matter. The case of the AO is that the assessee failed to substantiate the steps taken by it to revive business of BTPU and further it did not satisfy the twin conditions as per rule 9C, being, achieving the stipulated level of production of at least fifty percent of the installed capacity of BTPU and furnishing certificate in Form no. 62. Before examining this aspect, it would be apt to note that section 72A(2)(b)(iii) provides that the accumulated loss of the amalgamating company shall not be set off or carried forward and unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company if the amalgamated company fails to fulfill such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose. The ‘prescribed’ conditions as referred to in this provision have been set out in Rule 9C. This Rule has two clauses. First clause provides that the amalgamated company shall achieve level of production of at least 50% of the installed capacity of the amalgamating company before the end of four years from the date of amalgamation and continue to maintain the said minimum level of production till the end of five years from the date of amalgamation. The second clause states that the amalgamated company shall furnish to the Assessing Officer a certificate in Form No. 62 duly verified by an Accountant showing particulars of production along with return of income “for the assessment year relevant to the previous year during which the prescribed level of production is achieved and for the subsequent assessment years relevant to previous years falling within five years from the date of amalgamation”. On going through clause (a) of Rule 9C, we find that the amalgamated company is required to achieve the level of production of at least 50% of the installed capacity of the undertaking of the amalgamating company ‘before the end of four years from the date of amalgamation’. A cursory perusal simply divulges that the requirement of achieving production of at least 50% of the installed capacity of the undertaking is to be fulfilled before the end of four years from the date of amalgamation. This production level may be achieved in the first year or second year or third year or even before the end of the fourth year. There is nothing in the phraseology of the Rule that the said level of production must be achieved in the very first year of amalgamation as has been held by the AO in the extant case. The Assessing Officer noticed that the amalgamation took place on 1.4.2003 and from that date a period of three years and nine months had already passed till the passing of the assessment order, but the assessee failed to produce and submit any details relating to production to substantiate its claim. In principle, we do not approve the view canvassed by the Assessing Officer as approved in the first appeal to press for enforcing compliance of achieving desired production before the end of stipulated period. Going even by the standard of the Assessing Officer himself, the period of four years had not expired at the time of completion of the assessment. The Assessing Officer is required to restrict himself only to the year before him for considering as to whether there is any violation of section 72A(2). As the previous year relevant to assessment year under consideration is not the fourth year from the date of amalgamation, the Assessing Officer was not required to examine this aspect at that stage.
7. The further opinion of the Assessing Officer that the assessee failed to place on record any material indicating the revival of business of the amalgamating company, in our considered opinion, is unwarranted in the year in question. The mention of ensuring the revival of the business of the amalgamating company in section 72A(2)(b)(iii) is only with reference to fulfillment of the conditions as prescribed in Rule 9C. Meaning of the revival of business of the amalgamating company is ‘prescribed’ in clause (a) of rule 9C itself, which talks of achieving the desired level of production of the undertaking within the specified period. In other words, there is no other stipulation for establishing that the amalgamated company took steps to revive the undertaking of the amalgamating company independent of clause (a) of rule 9C. On satisfaction of the condition of achieving the desired level of production of the amalgamating company, the condition of ensuring revival of the business of the amalgamated company automatically gets satisfied. Ex consequenti, revival of the business of the amalgamated company can be adversely viewed only at the end of fourth year from the date of amalgamation. We, therefore, hold that it is pre-mature to require the material for demonstrating efforts taken by the amalgamated company for reviving the business of amalgamating company.
8. The last requisite condition which, in the opinion of the Assessing Officer, was not fulfilled is about the failure of the assessee to furnish the certificate in the Form No. 62. It is axiomatic that the same is not applicable in the previous year relevant to assessment year under consideration. The language of clause (b) of Rule 9C is categorical in stating that the amalgamated company has to “furnish to the Assessing Officer a certificate in Form No. 62 ……. along with the return of income for the assessment year relevant to previous year during which prescribed level of production is achieved…………….”. Thus, it is manifest that the requirement of furnishing Form No. 62 will arise for the first time only when the amalgamated company fulfills the condition of achieving the level of production of at least 50% of the installed capacity of the undertaking of the amalgamating company within four years from the date of amalgamation. As the assessee admittedly did not achieve the production at the desired level of the installed capacity and it is not the fourth year from the date of amalgamation, the said requirement of furnishing certificate in Form No. 62 is pre-mature.
9. Here it is interesting to note the prescription of sub-section (3) of section 72A, which provides that : ‘In a case where any of the conditions laid down in sub-section (2) are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with’. Sub-section (3) is a correcting provision and gives logical meaning to consequences flowing from the failure to comply with the requirements with in the specified number of years as set out in sub-section (2) after having availed the benefit of set off and carry forward of accumulated loss of the amalgamating company as per sub-section (1) of section 72A. It transpires on a conjoint reading of sub-sections (2) and (3) of section 72A that the amalgamated company is entitled to set off and carry forward the brought forward business losses and unabsorbed depreciation of the amalgamating company from the very first year of the amalgamation. If, however, the conditions given in clause (b) of section 72A(2) are not fulfilled with in the prescribed time, then the set off as allowed in the earlier year(s) shall be deemed to be the income of the amalgamated company of the last year stipulated for compliance of such conditions.
10. Thus it can be seen that amalgamated company is required to achieve the level of production of at least 50% of the installed capacity of the amalgamating company before the end of four years from the date of amalgamation. After availing the benefit of set off and carry forward of the brought forward business losses and unabsorbed depreciation of the amalgamating company by the assessee company in the very first year of the amalgamation as per sub-section (1) of section 72A, if it fails to achieve the desired level of production up to the end of the fourth year from the date of amalgamation, the benefit of set off claimed and allowed in the first year shall become income of such later year. We do not find any problem with the claim of set off and carry forward of accumulated loss etc. of the amalgamating company during the interregnum.
11. In view of the foregoing discussion, we are of the considered opinion that there is no failure on the part of the assessee to fulfill the requisite conditions for claiming set off of brought forward business losses and unabsorbed depreciation of BTPU in year under consideration. This impugned order is overturned on this issue and this ground is allowed.
12. Second issue in this appeal is against considering income from sale of shares of Bayer (India) Ltd. as ‘Business income’ instead of ‘Capital gains’ as claimed by the assessee.
13. The facts apropos this issue are that the assessee lodged a claim during the course of assessment proceedings that profit on sale of investment was shown twice, viz., firstly, by crediting a sum of Rs. 66,57,463/- to the profit and loss accounts and secondly, by including a sum of Rs. 63,10,102/- under the head ‘Capital gains’ as long term capital gain. The AO found correct the assessee’s contention and permitted withdrawal of Rs.63.10 lac as long term capital gain. The assessee contended before the ld. CIT(A) that such profit arose from sale of shares held as investment and hence the amount of capital gain should have been retained by reducing the amount of business income. The ld. CIT(A) upheld the assessment order on this issue by observing that no material was placed before the Assessing Officer or him to prove that the assessee’s claim was on account of investment in shares resulting into long term capital gains and not as business income. Nutshell of the controversy is that the assessee sold certain shares and offered for taxation the resultant profit twice, that is, a sum of Rs. 66.57 lakhs as business income and long term capital gains at Rs. 63.10 lakhs. The assessee’s request of doubly offering of one income under two different heads was accepted by the Assessing Officer by deleting the long term capital gains of Rs. 63.10 lakhs from inclusion in the total income thereby allowing to continue a sum of Rs. 66.57 lakhs as business income. The claim of the assessee is that the converse should be done. In other words, the amount of Rs. 66.57 lakhs included in the business income ought to have been excluded by retaining the amount of long term capital gains of Rs. 63.10 lakhs.
14. The learned AR contended that the shares of the company were held as investment since long and hence profit from their transfer should have been charged to tax under the head ‘Capital gains’. From the impugned order as well the assessment order, it is clear that no material has been considered or referred to verify as to whether such shares were held as ‘Investment’ or ‘Stock in trade’. Without going into the merits of the ground, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of the Assessing Officer. We order accordingly and direct him to determine as to whether such shares were held by the assessee as stock-in-trade or investment. If such verification divulges that the shares were held as investment, then the income from their transfer should be considered under the head ‘Capital gains’ otherwise ‘Business income’. This ground is allowed for statistical purposes.
15. Next issue raised through ground nos. 3&4 of the appeal is against not accepting the assessee’s contention of loss of Rs. 2,10,26,593/- on account of transfer of H&R business as a business loss but instead determining and including a sum of Rs. 3,28,81,141/-on this score in the total income for the A.Y.2003-04 by reopening the assessment of such earlier year.
16. Briefly stated the facts of this issue are that the assessee initially claimed a sum of Rs. 2,10,26,593/- as long term capital loss on sale of Harmer & Reimmer (H&R) Business. The assessee was required to furnish details of the sale of the aforesaid business and valuation of assets. The assessee furnished the details in the following form :-
