Amalgamation – Carry Forward & set off of ‘Capital Gain’ Losses

The issue that whether in the case of amalgamation loss under the head of capital gain can be carry forward or not was a matter of discussion. In the Income Tax Act, 1961, there is no clarity in respect of this issue. However, in respect of business loss Section 72A of the Act was introduced by the Finance Act, 1977 to cover such benefit of carried forward and set off of accumulated losses under the head business income but there was no such provision for the carry forward of loss under the head of Capital Gain.

In case of Clariant Chemicals (I) Ltd. v. ACIT (ITA no. 4281/Mum./2011), it has been held by the Mumbai ITAT that with regard to loss under the head ‘Capital Gain’ there was no mention about a situation and condition under which such a loss was allowed to be set off and carried forward in case of amalgamation

The Fact of the case are as under:

1. In the case of Clariant Chemical (I) Ltd (Formerly known as Colour Chem Ltd.) (‘the Appellant’) vs. Addl. Commissioner of Income Tax Range-1(1), Mumbai – Income Tax – ITAT MUMBAI as per the scheme of merger, four companies were merged into Clariant Chemicals (I) Ltd. with effect from 1 April 2005.
2. In the computation of total income, the Appellant brought forward the long-term capital loss and also sought to carry forward remaining loss.
3. The appellant was of the view that there was no bar in Section 74 for claim of losses under the head capital gains of the amalgamating companies.
4. The Assessing Officer was of the view that as per provisions of Section 72A of the Act, accumulated loss of the amalgamating company was allowed to be brought forward and set off only under the head ‘profit and gains of business or profession’, and such a carry forward was subject to certain conditions, whereas in Section 74, there was no such stipulation of carry forward in case of the amalgamation.
5. The CIT (A) also rejected the appellant’s contentions. Aggrieved, the appellant filed an appeal before the Tribunal.

The Mumbai ITAT, held that,

1. On perusal of Section 74 of the Act, the Tribunal was of the opinion that with regard to loss under the head ‘Capital Gain’ there was no mention about a situation and condition under which such a loss was allowed to be set off and carried forward in case of amalgamation.
2. Likewise in Section 72, the Tribunal noted that there was no provision relating to carry forward and set-off of business loss in legislature has to be inferred and is to be applied. Had the legislature intended to allow set–off and carry forward of loss of capital gains in the case of amalgamation or demerger, the legislature could have stated so specifically.
3. Section 72A of the Act was introduced by the Finance Act, 1977 to cover such benefit of carried forward and set off of accumulated losses under the head business income. The Tribunal was of the view that once the legislature had enacted a different code all together for a specific purpose and intention, then such a code laying down the terms and conditions and the circumstances, cannot be imported or read into other general provisions or sections. The intention of legislature for enacting a particular statute or provision had to be kept in mind while interpreting a particular provision of the Act. In cases of amalgamation, wherever the statute had provided certain conditions or benefits or restrictions, the same has been provided categorically e.g. Section 47, dealing with transactions not regarded as transfer, has provided specific clauses (vi) to (vid) for the cases of amalgamation and demerger.
4. The Tribunal held that it is not the role of the Tribunal, to read such specific provisions into general provisions. The Tribunal is not empowered to read down the provision of Section 72, by importing the provisions of Section 72A, into the said section. What is apparent from the clear language of the section and intention of the legislature has to be inferred and is to be applied. Had the legislature intended to allow set–off and carry forward of loss of capital gains in the case of amalgamation or demerger, the legislature could have stated so specifically.
5. On the basis of the above, the Tribunal concluded that Section 74 of the Act cannot be read or interpreted so as to give benefit of set–off and carry forward of losses under the head capital gains in the case of amalgamation and demerger, sans any specific provision therein.

The case is decided against the assessee.