2015 (11) TMI 648 - HC - Income Tax

Disallowance of business loss and unabsorbed depreciation - whether the period of three years as prescribed u/s.72A(2)(a)(i) of the Act has to be computed including the period of setting up of business and not from the date of commencement of actual production? - Held that - In the present case, the licence for setting up business of power generation, loans for the same, construction of the building and purchase of machinery etc., had started from the year 2000 itself, which was duly reflected in the books of account of the amalgamating company. As such, the view taken by the Appellate Authority CIT (Appeals) as well as the Tribunal, in this regard that the amalgamating company was engaged in the business of generation of power much prior to three years from the date of amalgamation of the Company, cannot be faulted. In the facts of this case, it cannot be disputed that the engagement of the amalgamating company in the business of power generation had begun from the year 2000, even though the production or generation of power, i.e., the commencement of business may have been with effect from 08.08.2003. We may also mention that Section 72A of the Act provides for set off of accumulated loss and unabsorbed depreciation, which is for the benefit of the assessee-amalgamated company. Thus, in our view, when a provision is for the benefit of an assessee, it should be liberally interpreted in favour of the assessee which has to be given the benefit of such provision. It is well settled law that if two views are possible, then the one in favour of the assessee (amalgamated company in this case) should be adopted. We are thus of the opinion that the assessee-amalgamated company would be entitled to the benefit of Section 72A of the Act.- Decided in favour of assessee.

Summary

Issues:
Challenge to Tribunal's order disallowing business loss and unabsorbed depreciation set off. Interpretation of Section 72A(2)(a) of the Income Tax Act.

Analysis:
The case involved a challenge by the Revenue against the Tribunal's order regarding the disallowance of business loss and unabsorbed depreciation set off. The respondent company had amalgamated with another company, and the Revenue contended that the losses from the power generation unit of the amalgamating company could not be allowed for set off. The main legal questions revolved around the interpretation of Section 72A(2)(a) of the Income Tax Act, specifically regarding the period of engagement in business and the conditions for carrying forward losses.

The Revenue argued that the benefit of carrying forward losses should not be granted to the respondent company as the amalgamating company had only commenced its power generation business within three years of the amalgamation. The Revenue emphasized that the actual commencement of business should be the determining factor for eligibility under Section 72A. They contended that the losses from the power generation unit, which were set off, should be disallowed. The Revenue relied on Section 32 of the Act, highlighting the requirement for tangible assets to be actually used for business purposes to claim depreciation.

On the other hand, the respondent company argued that the accumulated loss should be viewed in the context of the entire amalgamating company, not individual units. They asserted that even if the power generation unit's losses were considered separately, the conditions of Section 72A were met. The respondent provided evidence that the engagement in the power generation business had started in 2000, well before the three-year period specified in the Act.

The Court examined the provisions of Section 72A and differentiated between "commencement of business" and "engaged in business." They clarified that engagement in business could precede actual production, as seen in the case of the power generation unit. The Court emphasized that the benefit of Section 72A should be liberally interpreted in favor of the assessee, especially when the provision is for their benefit. Ultimately, the Court ruled in favor of the respondent company, stating that they were entitled to the benefits under Section 72A. The appeal by the Revenue was dismissed, and the judgment favored the respondent company.