2008 (7) TMI 611 - AT - Income Tax

Summary

Issues Involved:

1. Whether the unabsorbed capital expenditure on scientific research of the demerged company can be treated as accumulated loss/depreciation loss u/s 32(2) and carried forward u/s 72A(4) of the Income-tax Act.

Summary:

Issue 1: Treatment of Unabsorbed Capital Expenditure on Scientific Research

The appeal by the revenue challenges the CIT(A)'s order allowing the claim of unabsorbed loss on capital expenditure on scientific research and development of the demerged company, treating it as accumulated loss/depreciation loss u/s 32(2) and thus eligible for carry forward u/s 72A(4) of the Income-tax Act.

The demerger of M/s. Maharashtra Hybrid Seeds Co. Ltd. resulted in the creation of M/s. Mahyco Vegetable Seeds Ltd. The unabsorbed depreciation and capital expenditure on scientific research were distributed between the demerged and resulting companies based on the ratio of asset division. The Assessing Officer allowed the benefit of section 72A(4) for unabsorbed depreciation but denied it for unabsorbed capital expenditure on scientific research.

The CIT(A) held that the assessee was entitled to carry forward the claim of unabsorbed scientific research expenditure u/s 72A(4). The revenue argued that section 35(4) could not be equated with section 32(2) as they are distinct, and unabsorbed capital expenditure on scientific research does not fall within the definitions of accumulated loss or unabsorbed depreciation u/s 72A(7).

The assessee contended that demergers should be tax neutral, and the unabsorbed capital expenditure on scientific research should be treated at par with unabsorbed depreciation, citing the Supreme Court's decision in Escorts Ltd. v. Union of India and other judgments.

The Tribunal considered the rival submissions and noted that section 35(4) states that the provisions of section 32(2) apply to deductions allowable under section 35(1)(iv) as they apply to depreciation. The Tribunal held that unabsorbed capital expenditure on scientific research cannot be considered accumulated loss but is treated similarly to unabsorbed depreciation for carry forward purposes.

The Tribunal concluded that the unabsorbed capital expenditure on scientific research should be treated as unabsorbed depreciation for the purposes of section 72A(7) and thus eligible for carry forward. The appeal by the revenue was dismissed.