2014 (7) TMI 461 - AT - Income Tax

Carry forward and set of the unabsorbed depreciation u/s 32(2) of the Act Effect of amendment under Finance Act 2001 w.e.f. 01.04.02 Held that - The decision in GENERAL MOTORS INDIA PVT. LTD Versus DEPUTY COMMISSIONER OF INCOME-TAX 2012 (8) TMI 714 - GUJARAT HIGH COURT followed - any unabsorbed depreciation available to an assessee on 1st day of April 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001, thus once the Circular No.14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from A.Y.1997-98 upto the A.Y.2001-02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever Revenue was not able to brought out any contrary decision Decided against Revenue. Validity of re-assessment proceedings u/s 147/148 of the Act - Deduction incurred on payment of compensation for re-rating of shares Held that - The AO has made the addition in respect of the income for which reasons for escapement of assessment were recorded by him i.e. unabsorbed depreciation - Merely the additions so made stand deleted by the CIT(A) will not make the action of the assessing officer illegal if he has added any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently, in the course of the proceedings u/s 147 - reasons u/s 148 was duly recorded for escapement of the income in respect of unabsorbed depreciation - section 147 of the Income Tax Act talks of AO not of the appellate authority - there is no illegality as per the provision of section 147 of the Income Tax Act Decided against Assessee. Amortization of expenses u/s 35DD of the Act Held that - The true nature of the expenditure is that the company has compensated the lenders as they agreed to take the shares in ICCL at a higher price than what was proposed by them in their structured settlement during the year 2003 - expenditure so incurred is clearly on capital account, it cannot be regarded to have been incurred for serving the debt or to have been incurred for the purpose of the amalgamation - This expenditure can also not be regarded to have been incurred for the purpose of the amalgamation as the debts has been converted into the equity shares at a lesser value prior to the merging of the ICCL into IMFA and compensation has been paid to the lenders on conversion of the debts into equity shares at a higher value - compensation paid is directly linked with the loss suffered by the lenders on account of conversion of debts into equity shares due to the amended proposal - The assessee gets benefited in consequence that it has to allot less shares in its company to the erstwhile shareholder of ICCL - Thus this expenditure has clearly being incurred by the assessee on capital account for the purpose of share capital- the expenditure cannot be allowed as a revenue expenditure u/s 37(1) as it is a capital expenditure. The assessee also cannot get deduction u/s 35DD of the Income tax Act as this expenditure has nothing to do with the amalgamation and incurrence of this expenditure was made for allotting the shares in ICCL not for the purpose of amalgamation of ICCL with the assessee Decided against Assessee.

Summary

Issues Involved:
1. Carry forward and set-off of unabsorbed depreciation for assessment years 1990-91 to 1997-98.
2. Disallowance of deduction for expenses incurred in connection with de-rating of shares.
3. Applicability of Section 35DD for amortization of expenses related to de-rating of shares.
4. Violation of Rule 46A by CIT(A).

Detailed Analysis:

1. Carry forward and set-off of unabsorbed depreciation for assessment years 1990-91 to 1997-98:
The primary issue raised by the revenue was the carry forward and set-off of unabsorbed depreciation for assessment years 1990-91 to 1997-98. The Assessing Officer (AO) initially allowed the carry forward of unabsorbed depreciation amounting to Rs. 319,41,24,000/- but disallowed Rs. 182,74,22,000/- citing that it lapsed by assessment year 2001-02. The CIT(A) reversed this decision, allowing the carry forward of the full amount, relying on the Gujarat High Court's decision in General Motors Ltd. The Tribunal upheld CIT(A)'s decision, stating that the unabsorbed depreciation available as of 1st April 2002 would be governed by the amended Section 32(2) of the Finance Act, 2001, allowing indefinite carry forward. The Tribunal also noted that no contrary decision was provided by the revenue, and the SLP against the Gujarat High Court's decision was dismissed by the Supreme Court.

2. Disallowance of deduction for expenses incurred in connection with de-rating of shares:
The assessee claimed a deduction of Rs. 7.41 crores as revenue expenditure for compensation paid to lenders for de-rating shares. The AO disallowed this, treating it as capital expenditure, not related to amalgamation. CIT(A) upheld the AO's decision, stating the compensation was paid for debt restructuring, not for facilitating business operations. The Tribunal agreed, emphasizing that the compensation was capital in nature, paid to lenders for accepting shares at a higher price due to reduced de-rating. The Tribunal concluded that this expenditure was not for facilitating business or amalgamation but for compensating lenders for the reduced value of shares.

3. Applicability of Section 35DD for amortization of expenses related to de-rating of shares:
The assessee alternatively claimed that the expenditure should be allowed under Section 35DD, which allows amortization of expenses for amalgamation. The Tribunal rejected this, stating the expenditure was not related to amalgamation but to the restructuring of debt and conversion of debt into equity shares at a higher value. The Tribunal reiterated that the compensation was capital expenditure and not eligible for deduction under Section 35DD.

4. Violation of Rule 46A by CIT(A):
The revenue contended that CIT(A) violated Rule 46A by not giving the AO a reasonable opportunity to address new evidence. The Tribunal dismissed this ground, noting that the revenue failed to specify what fresh evidence was presented before CIT(A). The Tribunal found no violation of Rule 46A, thus dismissing the revenue's contention.

Conclusion:
The Tribunal dismissed both the revenue's appeal and the assessee's cross-objection. It upheld CIT(A)'s decision allowing the carry forward of unabsorbed depreciation and confirmed the disallowance of the Rs. 7.41 crores deduction for de-rating of shares, treating it as capital expenditure. The Tribunal also found no violation of Rule 46A by CIT(A). The order was pronounced on 6th June 2014.