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Introduction: The treatment of capital losses in mergers and demergers under Section 72A of the Income Tax Act has been a subject of ambiguity. While the section explicitly addresses carry forward of business losses and unabsorbed depreciation, its applicability to capital losses has sparked legal debates. This article delves into recent juridical precedents to shed light on this complex issue.

1. ACIT vs Capgemini Technology Services India Limited (ITAT Pune, 2017)

The facts of the case were as follows:

  • Capgemini Technology Services India Limited is a company engaged in providing software development services and IT enabled services. Amalgamation of iGate Computer System Limited  with the assessee was approved by the HC through a scheme of amalgamation effective from April 01, 2012.
  • The AO observed that the assessee had claimed brought forward long-term capital loss of Amalgamating Company in its income-tax return. The AO while noting provisions of section 72A of the IT Act denied claim of such long-term capital loss by the assessee.
  • 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.

The judgement drawn in this case was as follows:

  • The tribunal observes that Section 72A of the Act is not the only section providing for benefits, privileges or entitlements under the Act in the case of amalgamation. All the benefits under the Act due to the amalgamating company pass on to the amalgamated company on account of the succession, subject to restrictions, if any, imposed by the provisions of the Act. 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 of the Act.
  • Section 74 of the Act deals with losses under the head ‘capital gains’. It specifically provides that in case of a capital loss to the taxpayer, the whole loss will be carried forward to the following assessment year.
  • On going through 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). Since 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.
  • 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.
  • Even otherwise, the law of succession puts the successor in the shoes of the predecessor, which results in the successor being entitled to all the entitlements, benefits or privileges which had accrued to the predecessor. In the manner in which the liabilities of predecessor under the Act become liabilities of the successor, the successor also becomes entitled to the entitlements, benefits or privileges of the predecessor under the Act, subject to restriction, if any.
  • Accordingly, it was held that the long-term capital loss of the amalgamating company, i.e. transferor company, is available for set-off in the hands of the amalgamated company.

2. DCIT vs Teleperformance Global Services Pvt Ltd (ITAT Mumbai, 2018)

The facts of the case were as follows:

  • M/s SKR BPO Services Pvt. Ltd. (assessee) was a company which got amalgamated with an erstwhile company, viz. M/s Serco BPO Pvt. Ltd. w.e.f. 7/7/2011, dated 5/3/2013. Thereafter, the name of M/s Serco BPO Pvt. Ltd. was changed to M/s Intelenet Global Services Pvt. Ltd. w.e.f. 11/01/2016.
  • Assessee on 30/7/2010 sold 6,44,285 equity shares in M/s Sparsh BPO Services Pvt Ltd. The Ld.AO observed that as on the date of sale of these shares, the assessee  was very much in existence and the assessee, got amalgamated with M/s Serco BPO with effect from 7/7/2011. He observed that at the same time, Serco BPO became eligible to carry forward the long term capital loss incurred by SKR BPO consequent to the amalgamation.
  • Accordingly, the Ld.AO held that SKR BPO sold the shares at purchase cost only with a view to claim fictitious losses and concluded that the sale transaction was not a genuine transaction and was a colourable device. With these observations, the Ld.AO proceeded to disallow the claim of long term capital loss of Rs.2,85,61,088

The judgement drawn in this case was as follows:

  • Now once the scheme of amalgamation has been approved by the Hon’ble High Court, all the assets and liabilities of the transferor company including the losses would get automatically vested with the transferee company. The same cannot be disturbed or disputed by the Ld.AO at the time of implementation of the scheme of amalgamation. This aspect has been duly appreciated by the Ld.CIT(A) while granting relief to the assessee in para 9.4.1 of his order.
  • Further, in the case of Electrocast Sales India Pvt Ltd vs Deputy CIT reported in 64 ITR (Trib), it has been held that, “The accumulated losses of the amalgamating companies, comprising unabsorbed short term capital loss of Rs. 10,26,44,123, unabsorbed long-term capital loss of Rs. 6,34,784 and unabsorbed business loss of Rs. 6,63,574, would belong to the amalgamated company pursuant to paragraph 10(iii) of the scheme of amalgamation which was approved by the High Court. Since the losses belongedto the amalgamated company, i. e… the. assessees, the provisions of section 72 and section 74 would come into play with respect to set off thereof against the respective incomes of the assessee. In view of this, the non-compliance, of section 72A as held bi/ the Commissioner (Appeals) did not hold any water.”
  • In view of the above, we do not find any infirmity in the order of Ld.CIT(A) allowing the claim of long term capital loss in the hands of the assessee company. Accordingly, grounds raised by the Revenue are dismissed.

3. Clariant Chemicals (I) Ltd. v/s ACIT (ITAT, Mumbai, 2011):

The facts were as follows:

  • In pursuant to the scheme of arrangement, four companies got merged into Colourchem Ltd. which was later on renamed as Clariant Chemicals (I) Ltd. (assessee) with effect from April 1, 2005. In the tax audit report for AY 2006-07, it was shown that long term capital loss of Rs 60.19 lakhs for AY 2005-06 and Rs 3.15 lakhs for AY 2004-05 of the erstwhile amalgamating companies were claimed to be brought forward and set off against the Long term capital gain of the amalgamated company.
  • The AO held that assessee’s claim is not correct, because the provision of section 72A, which deals with accumulation of loss of amalgamating company are allowed to be brought forward and set-off only under the head “profit and gains of business or profession” and such a carried forward are subject to certain conditions, whereas in section 74, there is no such stipulation of carried forward in case of amalgamation.

The judgement passed in this case was:

  • ITAT observed that Sec 74 provided that in respect of any assessment year, if the net result of the computation under the head capital gain was loss to the assessee, then such a loss should be carried forward and set–off in the manner provided therein.
  • ITAT opined that the loss under the head “capital gain” was allowable to an assessee alone. 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.
  • ITAT observed that “the entire code of section 72A, was brought in the statute for extending or relaxing the provisions relating to carried forward and set–off of accumulated business losses and unabsorbed depreciation allowance in the case of amalgamation of companies.” Further, ITAT stated that “the entire code of section 72A was only restricted to carried forward of accumulated losses and unabsorbed depreciation which are to be set–off while computing the income under the head “profit and gain of business or profession” and not for any other head of income including losses computed under the head capital gains or speculation business.”
  • ITAT concluded that Section – 74, cannot be read or interpreted to give benefit of set–off and carried forward of losses under the head capital gains in the case of amalgamation and demerger, sans any specific provision therein. Accordingly, ITAT upheld lower authority’s orders and confirmed the additions.

4.  DCIT v/s Brandon & Co. (P) Limited (ITAT, Mumbai, 2018)

The facts were as follows:

  • The assessee during the AY 2011-12, demerged a part of its business to one Ramrod Advisors Pvt. Ltd. i.e., the resulting company. The said demerger was approved under the orders of Hon’ble Bombay High Court dated 16/12/2011.
  • The assessee incurred long term capital loss during AY2006-07 amounting to INR 31,04,864/- on sale of its own listed shares and redemption of debt of mutual funds. A part of the loss was set off during AY 2008-09. The balance loss of INR 30,45,360/- was carried forward and which was set off during the year under consideration against long term capital gain under the head tenancy rights. During the year under consideration, the assessee claimed set off of the said long term capital loss brought forward in its own returned income.
  • The AO denied the set off of the said long term capital loss by relying on the provisions of section 74 of the Act read with section 72 A of the Act.

It was decided by the Tribunal that Section 72A of the Act can apply only to respective person and this section has no application for carry forward or set off of capital loss. We agree with the contention of the assessee that merely because there is a specific provision for disallowance of business loss, it does not mean that there is no provision for set off of capital loss of the very assessee itself and are of the view that there is no specific provision which would prohibit the set off of such loss in the hands of the assessee itself.” Accordingly, it can be indirectly inferred that the capital losses cannot be transferred to the resulting company but can be claimed by the demerged company.

5. ACIT v/s Padma Logistics & Khanij (P) Ltd. (ITAT, Kolkata, 2020)

The facts were as follows:

  • The demerger of ‘Vortal’ division of M/s. SYK Ltd with the assessee company was duly approved by the respective Hon’ble High Court of Calcutta and Hon’ble High Court of Bombay on 8-3-2011 and 21-4-2011 respectively.
  • The appointed date of the scheme was 1-3-2010, being the effective date of demerger, which falls within the relevant assessment year 2010-11. After approval of scheme from the Hon’ble High courts the assessee filed a revised return of income on 9-6-2011 showing income of Rs. Nil after getting approval of AGM of assessee company.
  • The case was selected for scrutiny assessment under CASS. Notices u/s.143(2) and 142(1) of the Income-tax Act, 1961 on 29.08.2011 was issued and served on the assessee and thereafter again a notice u/s. 42(1) of the Act dated 16.10.2012.
  • When the original return of income (ROI) was filed on 28.09.2010, since the Hon’ble High Courts did not clear the demerger, the impact of demerger and merger of ‘Vortal’ division to assessee company by way of revised return could not be filed within the due date allowed by statute, yet the revised return taking into consideration the impact of demerger and assessee acquiring ‘Vortal’ division was filed at the earliest on 09.06.2011 declaring ‘NIL’ income after adjustment of brought forward losses and unabsorbed depreciation relating to the ‘Vortal’ division of M/s. SYK Limited merged with the assessee company.
  • The AO did not appreciate the submissions of the assessee and refused to take cognizance of the said revised return of income filed on 9-6-2011 wherein the assessee company has claimed the set off of brought forward losses and unabsorbed depreciation of ‘Vortal’ division merged into the assessee company w.e.f. 1-3-2010 on the following grounds:
    • No mention of the scheme of demerger pending before the Hon’ble High Court of Calcutta in the audited accounts of the company.
    • Assessee has not filed the return of loss in time as prescribed u/s 139(3) of the Act.
    • Assessee company has filed a revised return after receipt of intimation under section 143(1) and hence do not fulfil the conditions as laid down in Section 139(5) which required the filing of revised return prior to completion of the assessment.
    • Both the demerging company and the resultant company have claimed the same loss resulting in double claim of set off and carry forward of losses pertaining to the demerged undertaking.

In the following case the Court held:

  • ITAT noted that at page 113 of the order “The Vortal Division of Star Ya Kalakaar.com Limited, the demerged company, has unabsorbed business losses and unabsorbed depreciation as per the Income- tax Act, 1961 eligible to be carried forward and set-off under section 72A(4) of the Income-tax Act, 1961 in the hands of resulting company, i.e. Padma Logistic and Khanij Private Limited as per follows” wherein the Hon’ble High Court at Calcutta has clearly stated that the losses of the demerged undertaking will be available to the resulting unit, being the assessee company in the present case.
  • Tribunal observed that once demerger is sanctioned by the Hon’ble High court the enabling provision is section 72A of the Act and all the conditions stated in section 72A(4) read with section 2(19AA) of the Act has been fulfilled. In view of the same, assessee company is eligible to claim the set off of brought forward losses transferred from the demerged company M/s. SYK. Since the assessee company meets all the requirements contained in the Income-tax Act, 1961, all the carried forward losses and unabsorbed depreciation in respect of M/s. Vortal Undertaking were transferred, pursuant to section 72A(4) of the Act, from the demerged company (M/s. Star Ya Kalakaar.Com Limited) to the resulting company (M/s. Padma Logistic & Khanij Private Limited) w.e.f. the appointed date i.e. 01.03.2010.

Conclusion:

While certain judgments suggest that capital losses can be transferred to the amalgamated/resulting company, conflicting decisions exist, raising uncertainties. The legal landscape surrounding the carry forward of capital losses in mergers and demergers demands further clarity and a possible legislative review to ensure consistency and fair application of tax laws in such scenarios.

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One Comment

  1. Sujit Kumar Das says:

    Sir,
    If the there is easy clarity in the LAW, then there will not be the Lawyer and other law practitioners. India is Heaven of Lawyers… some says, i am also of the same opinion.
    You see sir, One nation one tax but taxes are of so many types and govt. may say, you have to pay tax as you are delivering your talk to your friends and you are supposed to pay tax one day. only exclusion may be there if you if you talk to your family members. Even reverse charge may be imposed.. Yes it not related to IT but GST..

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