Capgemini Technology Services India Limited Vs DCIT (ITAT Pune)
ITAT Pune held that as the business of amalgamating company continues uninterruptedly by amalgamated company, the benefit of carry forward and set off earned by amalgamating company is available to amalgamated company.
Facts-
The first major issued raised by the assessee, through ground no. 9, is against not allowing brought forward long term capital loss of Rs.104,46,39,309/- in respect of erstwhile iGATE Computer Systems Limited (ICSL), which amalgamated with the assessee company w.e.f. 01-04-2012 under the Scheme approved by the Hon’ble High Court.
Conclusion-
In view of the fact that the business of the amalgamating company under amalgamation continues uninterruptedly by the amalgamated company, the benefit of such carry forward and set off earned by the business of the amalgamating company has to be allowed as per the mandate of section 74 to the amalgamated company, more so, when the Scheme of amalgamation as approved by the Hon’ble High Court specifically declares that benefits, inter alia, under tax laws `shall be transferred and vest in the Transferee Company….. as if the Transferee Company was originally entitled to all benefits’. The term “the assessee” as used in sub-section (1) of section 74, which was originally referring to the amalgamating company which suffered the loss, shall now substitute the amalgamated company to be considered as the assessee entitled to set off of the brought forward long term capital loss not only because of the Scheme of amalgamation so providing but also because of the assessee becoming a successor-in-interest of such loss. Going with the phraseology of section 74, the sequitur is that the long term capital loss of the amalgamating company is available for set off in the hands of the assessee-amalgamated company. This ground is, thus, allowed.
FULL TEXT OF THE ORDER OF ITAT PUNE
These two cross appeals – one by the assessee and the other by the Revenue – arise out of the order passed by the CIT(A)-1, Pune on 23-05-2017 in relation to the assessment year 2013-14.
2. Succinctly, the facts of the case are that the assessee is a company engaged in providing Software Development services and also IT enabled services. The e-return was filed declaring total income at Rs.6,98,02,52,640/- as per the normal computation and book profit u/s.115JB of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) at Rs.7,08,45,55,209/-. Thereafter, the return was revised twice. The assessee claimed deduction u/s.10AA. The assessment was completed by determining the total income, under the regular provisions of the Act, at Rs.766,09,96,530/-.
I. SET OFF OF LONG TERM CAPITAL LOSS OF AMALGAMATING COMPANY
3. The first major issued raised by the assessee, through ground no. 9, is against not allowing brought forward long term capital loss of Rs.104,46,39,309/- in respect of erstwhile iGATE Computer Systems Limited (ICSL), which amalgamated with the assessee company w.e.f. 01-04-2012 under the Scheme approved by the Hon’ble High Court.
4. The factual matrix anent to this ground is that the assessee claimed brought forward long term capital loss of Rs.109.86 crore. On perusal of the details, the AO observed that a sum of Rs.104,46,39,309/- was long term capital loss of the erstwhile ICSL which got amalgamated with the assessee company on the first day of the financial year under consideration. On being called upon to explain as to how such long term capital loss could be allowed set off against the assessee’s income, it was submitted that the amalgamation took place w.e.f. 01-04-2012 and the Scheme of amalgamation, as approved by the Hon’ble High Court, provided through para 10(f) that the loss etc., of the amalgamating company shall be available to the amalgamated company. The AO took note of the provisions of section 72A of the Act, which provide for the set off and carry forward only of the brought forward loss and unabsorbed depreciation of the amalgamating company in the hands of the amalgamated company. He found such provision as not covering long term capital loss. He also did not find any force in the contention of the assessee about the applicability of section 74 of the Act. The ld. CIT(A) accorded his imprimatur to the view canvassed by the AO.
5. We have heard the rival submissions and gone through the relevant material on record. ICSL got amalgamated with the assessee company w.e.f. 01-04-2012. A copy of the Scheme of arrangement, as approved by the Hon’ble High Court, has been placed at page 68 onwards of the paper book. As per the Scheme of arrangement u/s.391 and 394 of the Companies Act, 1956, it has been provided that all the assets and liabilities of the undertaking of the amalgamating company shall stand transferred and vest in and deemed to be the assets and liabilities of the amalgamated company. Clause 4(h) of the Scheme provides that all the benefits including entitlements and incentives of any nature whatsoever including tax concessions (not limited to income tax, unexpired credit for minimum alternate tax, minimum alternate tax, fringe benefit tax, sales tax) of the Transferor company shall be transferred to and vest in the Transferee Company and: `these shall relate back to the appointed date as if the Transferee Company was originally entitled to all benefits to such incentive schemes and policies subject to the continued compliance by the Transferee Company of all the terms and conditions’. Para 10(f) of the Scheme provides that: `with effect from the appointed date and up to and including the effective date, any exemption from or any assessment with respect to any tax which has been granted or made, or any benefit by way of set off or carry forward as the case may be of any unabsorbed depreciation or investment allowance or other allowance or loss which has been extended to or is available to the Transferor Company under the Income Tax Act, 1961 shall be available to the Transferee Company.’ On going through the approved Scheme of amalgamation, it is discernible that all the assets and liabilities of the amalgamating (transferor) company vested in the assessee-amalgamated (transferee) company, which “shall be claimed by the Transferee Company and these shall relate back to the appointed date as if the Transferee Company was originally entitled to all the benefits”. It has further been provided that any exemption which was benefit by way of set off or carry forward, as the case may be, of any unabsorbed depreciation/investment allowance or “other allowance or loss” which is available to the Transferor Company shall be available to the Transferee Company. On an analysis of the relevant clauses of the Scheme, it is overt that any loss which was available to amalgamating company shall become available to the amalgamated company for necessary set off.
6. Even otherwise, the law of succession puts the successor in the shoes of the predecessor, as a result of which all the liabilities and assets of the predecessor fall upon or vest in the successor subject to the specific stipulations under the relevant statutes. The liabilities of the predecessor under the Income-tax Act, 1961 (hereinafter also called `the Act’) become the obligations of the successor. In the like manner, the successor becomes entitled to all the entitlements, benefits or privileges that had accrued to the predecessor under the Act subject to the restrictions, if any, under the Act.
7. At this juncture, it would be relevant to take note of the judgment of the Hon’ble Supreme Court in CIT Vs. T. Veerabhadra Rao (1985) 155 ITR 152 (SC). In that case, a partnership firm took over the business of an earlier firm and all the assets and liabilities of the predecessor firm passed on to the successor firm. The assets included a certain amount of debt due from a certain party to the predecessor firm. Later on, the amount became bad and the successor assessee-firm claimed deduction of the same as bad debt. The AO denied the deduction on the ground that the debt was due originally to the predecessor firm and hence, the successor-assessee could not claim the deduction. When the matter finally came up before the Hon’ble Supreme Court, it allowed the deduction by holding that if the debt had been taken into account in computing the income of the predecessor firm, which was subsequently written off as irrecoverable by the successor-firm, the assessee-successor will be entitled to the deduction. It further laid down that: `it is not imperative that the assessee referred to in sub-clause (a) must necessarily mean the identical assessee referred to in subsection (b). A successor to the pertinent interest of a previous assessee would be covered within the terms of sub-clause (b)’. This judgment emphasizes the point that the successor-in-interest becomes entitled to all the entitlements and deductions which were due to the predecessor firm subject to the specific provisions contained in the Act.
8. At this juncture, we would like to accentuate that amalgamation is distinct from winding up. Whereas in winding up, the entity, as such, comes to an end along with the business that it was hitherto carrying; in amalgamation, only the entity carrying on the business either ceases to exist or is divested of its business, but the business continues albeit in the hands of another entity. All the assets and liabilities of the business of the amalgamating company devolve upon to the amalgamated company. The only difference which occurs is that the business which was earlier run by the amalgamating company is now continued by the amalgamated company. Thus, it is evident that the per se existence of the business of the amalgamating entity does not extinct in amalgamation in contrast to the business coming to an end in the winding up. It is imperative to draw a line of distinction between `business’ of an entity and the `entity’ itself. When the business of the entity continues despite the closure of the entity or divesting of the business, then all the obligations and privileges attached to the business of the erstwhile entity, must go along with the business in the hands of the new entity carrying on such business, save as otherwise provided under the Act.
9. Adverting to the facts of the extant case, it is seen that the amalgamating company had long term capital loss of Rs.104.46 crore which vested in the assessee company along with all other assets and liabilities of ICSL. The assessee claimed set off of such long term capital loss of the amalgamating company, which the AO denied by relying on section 72A of the Act.
10. Section 72A with the heading: “Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger etc.,” defines the term `accumulated loss’ under sub-section (7) to mean: ` so much of the loss of …. the amalgamating company … under the head “Profits and gains of business or profession” (not being a loss sustained in a speculation business) which such …. amalgamating company….would have been entitled to carry forward and set off under the provisions of section 72 if the … amalgamation … had not taken place’. It is thus graphically clear from the prescription of section 72A, that it applies only in respect of accumulated losses and unabsorbed depreciation under the head “Profit and gains of business or profession”. The benefit of accumulated loss and unabsorbed depreciation of the amalgamating company, which would have been otherwise available to the amalgamated company under the general law of succession, has been circumscribed by certain conditions set out in section 72A. This is a specific provision containing the conditions to be fulfilled for taking the benefit of accumulated loss and unabsorbed depreciation of the amalgamating company by the amalgamated company under the head “Profit and gains of business or profession”. It is not as if section 72A is the only provision taking care of all the benefits, privileges or entitlements under the Act, originally pertaining to the amalgamating company now vesting in and passing on the amalgamated company. To reiterate and summarize, all the benefits under the Act due to the amalgamating company devolve upon the amalgamated company because of succession. However, we need to find out the restrictions, if any, imposed by provisions of the Act upon availing such benefits.
11. Like section 72A, dealing exclusively with the loss under the head `Profits and gains of business or profession’, section 35AB contains a specific provision dealing with amortization of expenditure of know-how in the case of amalgamation. This section provides that any expenditure incurred on acquiring any know-how for the purpose of business shall be amortized in six years beginning with the year in which the amount is paid. Subsection (3) was inserted by the Finance Act, 1999 w.e.f. 01-042000 to provide that where there is transfer of an undertaking under scheme of amalgamation etc., and the amalgamating company is entitled to deduction under the section, then the amalgamated company etc., shall be entitled to claim deduction under the section in respect of such undertaking to the same extent and in respect of residual period as it would have been allowable to the amalgamating company on such amalgamation not taking place. This provision is clarificatory qua preliminary expenditure reiterating the-ever existing position of law on this score that all the benefits and privileges etc. available to the predecessor-amalgamating company pass on to the successor-amalgamated company. Though sub-section (3) has been inserted w.e.f. 01-04-2000, the Pune Tribunal in Kirloskar Oil Engines Ltd. Vs. JCIT (ITA Nos. 1039 and 1040/PUN/2000) has held for the assessment years 1995-1996 and 1996-97 that the amalgamated company is entitled to deduction in respect of the residual period of expenditure on know-how incurred by the amalgamating company de hors sub-section (3) of section 35AB.
12. Similarly, the Tribunal in several decisions has held that MAT credit of the amalgamating company is to be allowed in the hands of the amalgamated company after amalgamation. The Chennai bench of the Tribunal in ACIT Vs. M/s. Caplin Point Laboratories Ltd. (ITA No.667/Mds/2013) has held, vide order dated 31-01-2014, that MAT credit is no different from the TDS credit and hence the carry forward of MAT credit of erstwhile company has to be allowed to the amalgamated company.
13. The upshot of the above discussion is that section 72A, like some other provisions distinctly dealing with the effects of amalgamation, exclusively applies to accumulated losses and unabsorbed depreciation of the amalgamating company in relation to the income under the head “Profit and gains of business or profession”. It is not a panacea for all the tax related issues of amalgamation, so as to have application insofar as the other tax entitlements, privileges or benefits in the hands of the amalgamating company, are concerned.
14. Section 74 deals with `Losses under the head `Capital gains”. It specifically provides that where in respect of any assessment year, the net result of the computation under the head “Capital gains” is loss to the assessee, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year and clause (b) of sub-section (1) provides that: “insofar such loss relates to long term capital asset, it shall be set off against income, if any, under the head “Capital gain” assessable for that assessment year in respect of any other capital asset not being a short term capital asset”. Clause (c) of section 74(1) provides that “if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on”. Sub-section (2) of section 74 provides that no loss shall be carried forward under this section for more than eight assessment years immediately succeeding assessment year for which the loss was first computed. On going through the directive of section 74, it becomes comprehensible that the amount of long term capital loss, not set off as per the relevant provisions, is carried forward to the following assessment years and so on for set off subject to other conditions including that of sub-section (2). In view of the fact that the business of the amalgamating company under amalgamation continues uninterruptedly by the amalgamated company, the benefit of such carry forward and set off earned by the business of the amalgamating company has to be allowed as per the mandate of section 74 to the amalgamated company, more so, when the Scheme of amalgamation as approved by the Hon’ble High Court specifically declares that benefits, inter alia, under tax laws `shall be transferred and vest in the Transferee Company….. as if the Transferee Company was originally entitled to all benefits’. The term “the assessee” as used in sub-section (1) of section 74, which was originally referring to the amalgamating company which suffered the loss, shall now substitute the amalgamated company to be considered as the assessee entitled to set off of the brought forward long term capital loss not only because of the Scheme of amalgamation so providing but also because of the assessee becoming a successor-in-interest of such loss. Going with the phraseology of section 74, the sequitur is that the long term capital loss of the amalgamating company is available for set off in the hands of the assessee-amalgamated company. This ground is, thus, allowed.
II. FRINGE BENEFIT TAX PAID IN AUSTRALIA
15. Ground No.6 of the assessee’s appeal is against not allowing deduction towards Fringe Benefit Tax (FBT) paid in Australia. The facts apropos this ground are that the assessee claimed deduction of Rs.9,84,270/- in respect of FBT paid in Australia both for the purposes of computation of income under regular provisions as well as book profits u/s.115JB of the Act. The AO refused to grant such deduction. The ld. CIT(A) allowed the benefit of deduction in the computation of book profit u/s.115JB by relying on Board Circular No.8/2005. However, the deduction was not allowed in the normal computation of income on the ground that it was hit by section 40(a)(ic) of the Act. Both the sides have come up in appeal on their respective stands.
16. Having heard both the sides and gone through the relevant material on record, it is seen that the Board, vide Circular No.8/2015, has opined that the prohibition for claiming deduction in respect of FBT does not apply in the computation of book profits u/s.115JB and the same has to be allowed as deduction in such computation. We therefore countenance the view taken by the ld. CIT(A) on this score. The Department’s ground No.8 is not allowed.
17. As regards the assessee’s contention for allowing deduction under the regular provisions of the Act as well, we find that section 40(a)(ic) stipulates that no deduction shall be allowed in respect of “any sum paid on account of fringe benefit tax under Chapter XIIH”. The Chapter XIIH deals with income tax on FBT under the provisions of the Act. Section 115W is the first section of the Chapter, which is a definition clause. Clause (b) states that fringe benefit tax: `means the tax chargeable under section 115WA’. Section 115WA dealing with `Charge of fringe benefit tax’ provides through sub-section (1) that: `In addition to the income-tax charged under this Act, there shall be charged for every assessment year commencing on or after the 1st day of April, 2006, additional income-tax (in this Act referred to as fringe benefit tax) in respect of the fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year at the rate of thirty per cent on the value of such fringe benefits.’ Ergo, it gets explicit that section 40(a)(ic) talks of not allowing deduction for fringe benefit tax paid under the Act in the computation of business income. It does not refer to any fringe benefit tax paid abroad outside the ambit of the Act. Such latter tax cannot be brought within the purview of section 40(a)(ic) because it is not a FBT under Chapter XIIH. As a corollary, the amount of the FBT paid in Australia is eligible for deduction under the normal provisions of the Act.
18. Our view is fortified by the judgment of Hon’ble Bombay High Court in Reliance Infrastructure Ltd. Vs. CIT (2017) 390 ITR 271 (Bom.) holding that income tax paid in Saudi Arabia was allowable as deduction in computing the income under the provisions of the Act as the same was not taken benefit of by the assessee either under section 90 or 91 of the Act. This position stands accepted by the legislature as is manifest from the insertion of Explanation 1 to section 40(a)(ii) of the Act declaring: `that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.’ This implies that the deduction of income tax paid outside India will be admissible if no benefit of such tax has been availed either u/s 90 or 91.
19. The assessee in the instant case has not taken any benefit of the FBT paid in Australia and further unlike section 40(a)(ic) of the Act, it is also not hit by any specific provision calling for disallowance. On a parity of the reasoning, such FBT is held to be deductible. This ground of the assessee is, therefore, allowed.
III. FOREIGN TAX CREDIT
20. Ground No.10 of the assessee’s appeal is against not allowing the credit for taxes i.e., inhabitant tax, enterprise tax etc., paid in Japan. The Department has also raised connected ground no. 10 by which it has assailed certain relief granted by the ld. CIT(A) on account of tax paid in Japan and other countries.
21. Pithily put, the facts of this issue are that the assessee claimed foreign tax credit. On perusal of the details, the AO observed that the amount of total claim, including tax paid in Japan, was Rs.13,05,33,028/-. He noticed that the assessee claimed credit for four types of taxes paid in Japan viz., Corporation tax, Local Corporation Taxes, Inhabitant Taxes –Surcharge and Enterprise tax – Income based aggregating to 5,15,69,314/- Yen. Noticing the language of the Double Taxation Avoidance Agreement (DTAA) between India and Japan, the AO opined that it covered only Corporation taxes. As such, the credit was allowed only in respect of Corporation taxes of 3,55,02,000/- Yen. He further noticed that the assessee company claimed deduction u/s.10AA in respect of the eligible units. Turnover of these eligible units was 8.90% of the total turnover, which, in his view, meant that no Indian income-tax was paid to the extent of profits of the eligible units qualifying for deduction u/s.10AA. He held that the proportionate foreign tax credit in respect of income of 10AA units could not be allowed as deduction. The AO thus allowed total foreign tax credit of Rs.10,92,54,956/- as against the assessee’s claim of Rs.13.05 crore. The ld. CIT(A) approved the action of the AO to the extent of allowing credit for taxes paid in Japan as per the DTAA, referring only to income-tax as well as corporation tax. He, however, accepted the assessee’s alternate contention of allowing deduction u/s.37(1) in respect of such taxes paid in Japan. On the other foreign tax credit not allowed by the AO on the ground of income of 10AA units not suffering any tax in India, he relied on the judgment of the Hon’ble Karnataka High Court in Wipro Ltd. Vs. DCIT (2016) 382 ITR 179 (Kar) to hold that such credit was admissible. This is how, both the sides have come up in appeal before the Tribunal on their respective stands.
22. We have heard both the sides and gone through the relevant material on record. The AO computed the amount of foreign tax credit available to the assessee as under:
Table No.1:
