2014 (12) TMI 102 - AT - Income Tax

Claim of set off of unabsorbed depreciation from another company Held that - Assessee has not amalgamated M/s. GVK Novopan Industries P. ltd. - Provisions of section 72A relating to carry forward and set off of accumulated losses and unabsorbed depreciation allowance in amalgamation or demerger will apply only in the case of amalgamation of companies or demerger of companies - amalgamation is in relation to companies, means merger of one or more companies with any other company - in the scheme of arrangement, there is only one company which got merged with assessee company by way of amalgamation i.e., Novopan Furniture Ltd. - as far as GVK Novopan Industries P. Ltd., or GVK Petro Chemicals P. Ltd., are concerned, those companies still exist with its own identity and has not amalgamated into assessee company - even though part of the properties were acquired by assessee company, this can only be considered as acquisition by way of sale or as a scheme but not by way of amalgamation - provisions of section 72A pertaining to carry forward depreciation of M/s. GVK Novopan Industries P. Ltd., cannot be set off in assessee s case, as that company is in existence and has not amalgamated and it only can claim carry forward and set off depreciation available to it Decided against assessee. Claim to increase WDV of assets acquired by unabsorbed depreciation Held that - Assessee has only acquired the manufacturing units and has not amalgamated the two companies, the question of enhancing the WDV does not arise - assessee has acquired assets and liabilities and has issued shares in lieu thereof - Therefore, the cost at which the assets were acquired, was the cost of Assets for the purpose of depreciation - The contention that WDV of assets should be increased by unabsorbed depreciation of M/s. GVK Novopan Industries P. Ltd., which has not amalgamated with the company cannot be accepted Decided against assessee. Claim of loss of surrender of lease Held that - The unit which assessee has proposed to set up has inextricable linkage with the existing business of assessee - following the decision of Hon ble Bombay High Court in the case of CIT vs. ESSAR Oil Ltd. 2008 (10) TMI 387 - Bombay High Court such expenditure was allowed as revenue expenditure - The expenditure on project report, initial expenditure for travelling, salary etc., incurred on the project could have been claimed as revenue expenditure by assessee as there is no dispute on expenditure - assessee company paid an amount of ₹ 1.72 crores as an advance towards land - since the expenditure is for acquiring land which was not acquired subsequently, the expenditure is correctly categorised as capital expenditure and the loss thereof, is to be treated as capital loss - In the normal course if the project took off, the amount would have been shown in asset schedule only and could not be claimed as revenue expenditure Decided against assessee. Non-exclusion of incentives not accrued from the income offered Held that - This issue requires examination by AO afresh - Since, so much of the amount which was accounted as income has not been received by assessee, naturally that amount cannot be brought to tax - However, the entries made in the books of accounts not only in this year but also reversal of entries in later year require examination - the claim can be examined by AO afresh, keeping in mind the entries during the year as well as entries made in books of accounts in later year and allow the deduction in this year and in case, such deduction was already allowed in a later year, the same is required to be withdrawn thus, the matter is remitted back to the AO for consideration Decided in favour of assessee.

Issues Involved:
1. Claim of set off of unabsorbed depreciation from another company.
2. Alternate claim to increase WDV of assets acquired by unabsorbed depreciation.
3. Claim of loss on surrender of lease.
4. Non-exclusion of incentives not accrued from the income offered.

Issue-wise Detailed Analysis:

1. Claim of Set Off of Unabsorbed Depreciation from Another Company:
The assessee claimed the set off of brought forward unabsorbed depreciation belonging to M/s. GVK Novopan Industries P. Ltd., under section 72A of the I.T. Act, following a merger and demerger scheme approved by the Hon'ble A.P. High Court. The Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this claim, stating that the scheme did not meet the definition of amalgamation as per section 2(1B) of the Act. The Tribunal upheld this decision, noting that M/s. GVK Novopan Industries P. Ltd. continued to exist as a separate entity and had not been amalgamated with the assessee company. Therefore, the provisions of section 72A were not applicable, and the unabsorbed depreciation could not be set off in the assessee's case.

2. Alternate Claim to Increase WDV of Assets Acquired by Unabsorbed Depreciation:
The assessee alternatively claimed that if the set off of unabsorbed depreciation was not allowed, the Written Down Value (WDV) of the assets should be increased by the amount of unabsorbed depreciation. The CIT(A) did not provide a specific finding on this ground. The Tribunal rejected this claim, stating that the cases relied upon by the assessee pertained to amalgamations, which was not the case here. The assessee had acquired assets and liabilities and issued shares in lieu thereof, so the cost at which the assets were acquired was the cost for depreciation purposes. The Tribunal concluded that the WDV of assets could not be increased by the unabsorbed depreciation of M/s. GVK Novopan Industries P. Ltd., as there was no amalgamation.

3. Claim of Loss on Surrender of Lease:
The assessee claimed a loss of Rs. 24,89,096 on the surrender of a lease as revenue expenditure. The A.O. treated this as a capital loss, stating that the expenditure was incurred towards setting up a new unit, which is a capital transaction. The CIT(A) upheld this decision. The Tribunal agreed with the lower authorities, stating that the expenditure was for acquiring land for establishing a factory, which would have resulted in acquiring an asset. Therefore, the loss on surrender of the lease was correctly categorized as a capital loss, not a revenue expenditure.

4. Non-exclusion of Incentives Not Accrued from the Income Offered:
The assessee requested the exclusion of Rs. 91,25,379 (Rs. 34,21,854 as sales tax incentive and Rs. 57,03,525 as electricity consumption incentive) from its income, as these amounts were not realized. The A.O. did not consider this claim, and the CIT(A) dismissed it, stating that the incentives were rightly shown as income on an accrual basis. The Tribunal noted that the issue required fresh examination by the A.O. since the amounts accounted as income were not received. The Tribunal directed the A.O. to examine the entries made in the books of accounts during the year and in later years and allow the deduction accordingly. If the deduction was already allowed in a later year, it should be withdrawn. This issue was restored to the file of the A.O. for fresh adjudication.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, with the Tribunal upholding the decisions of the lower authorities on the first three issues and remanding the fourth issue to the A.O. for fresh examination.

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