2007 (11) TMI 549 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee is entitled to the benefit of section 72A(4) in respect of unabsorbed expenditure on scientific research.

Summary:

Issue 1: Entitlement to Benefit u/s 72A(4) for Unabsorbed Expenditure on Scientific Research

The Department appealed against the order of the Commissioner of Income-tax (Appeals) 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 hence to be treated at par for the purpose as contemplated u/s 72A(4) of the Income-tax Act.

Facts of the case: M/s. Maharashtra Hybrid Seeds Co. Ltd. (demerged company) had unabsorbed depreciation and unabsorbed capital expenditure on scientific research before demerger. Upon demerger, these were allocated between the demerged company and the resulting company, M/s. Mahyco Vegetable Seeds Ltd. (assessee). The Assessing Officer allowed the benefit of section 72A(4) for unabsorbed depreciation but denied it for unabsorbed expenditure on scientific research.

The Assessing Officer observed that the business loss cannot be equated with the loss on expenditure on scientific research, as the latter is a weighted deduction and not computed under the head 'Profits and gains of business or profession'. Therefore, it does not amount to accumulated loss. The unabsorbed loss on capital expenditure on scientific research cannot be termed as 'depreciation loss' and hence is not covered by section 72A(4).

The Commissioner of Income-tax (Appeals) decided in favor of the assessee, but the Department appealed to the Tribunal. The Tribunal examined sections 35(4), 32(2), 72, and 72A(4) of the Income-tax Act. Section 35(4) allows unabsorbed capital expenditure on scientific research to be carried forward in the same manner as unabsorbed depreciation u/s 32(2). However, section 72(2) prioritizes the set-off of business losses over unabsorbed depreciation.

Section 72A(4) allows the carry forward and set off of accumulated loss and unabsorbed depreciation in the case of demerger. The definitions of 'accumulated loss' and 'unabsorbed depreciation' in section 72A(7) do not include unabsorbed capital expenditure on scientific research. Therefore, the benefit of section 72A(4) is not extended to unabsorbed capital expenditure on scientific research.

The Tribunal concluded that the unabsorbed portion of capital expenditure on scientific research cannot be treated as part of accumulated loss or unabsorbed depreciation for the purpose of section 72A(4). Consequently, the order of the Commissioner of Income-tax (Appeals) was reversed, and the Assessing Officer's decision was restored.