Sterling Holiday Resorts Limited Vs DCIT (ITAT Mumbai)
Holding company couldn’t issue shares on behalf of subsidiary to claim demerger tax benefit: ITAT Mumbai
Conclusion: Disallowance of assessee’s claim was upheld for set-off of brought forward unabsorbed depreciation and carry forward of business losses and unabsorbed depreciation of the demerged company under section 72A(4), holding that failure to satisfy the mandatory condition of issuing shares to the demerged company disentitled the assessee from claiming the statutory benefit. A holding company cannot issue shares on behalf of its subsidiary to satisfy the conditions for claiming tax benefits arising from a demerger.
Held: Assessee claimed the benefit of set-off and carry forward of the brought forward business losses and unabsorbed depreciation of a demerged company under section 72A(4) of the Income-tax Act following a corporate restructuring. AO disallowed the claim on the ground that the statutory conditions prescribed under section 72A(4) were not fulfilled, particularly because the resulting subsidiary company did not issue shares to the demerged company as mandated by law. CIT(A) upheld the disallowance, following which the assessee appealed before the Tribunal. Assessee contended that it was entitled to succeed to the losses and unabsorbed depreciation of the demerged undertaking notwithstanding the manner in which the restructuring was implemented. It argued that the transaction substantially complied with the statutory scheme governing demergers. Revenue submitted that section 72A(4) prescribes mandatory conditions for availing the benefit of carry forward and set-off of losses in a demerger. Since the resulting company had not issued shares to the demerged company, an essential statutory requirement remained unfulfilled. It was further argued that a holding company and its subsidiary were separate legal entities and the holding company could not perform or satisfy statutory obligations on behalf of its subsidiary. Tribunal held that the conditions prescribed under section 72A(4) were mandatory and must be strictly complied with before the benefit of carry forward and set-off of losses and unabsorbed depreciation can be claimed. Since assessee admittedly did not issue shares to the demerged company, the statutory requirement stood violated. Tribunal observed that a holding company and its subsidiary possess distinct legal identities, and the holding company could not discharge obligations that the law specifically casts upon the subsidiary. In the absence of compliance with the statutory conditions, assessee was not entitled to claim the benefit of set-off or carry forward of the demerged company’s losses and unabsorbed depreciation.
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