2017 (1) TMI 1613 - AT - Income Tax

Allowing set off current year and brought forward losses and unabsorbed depreciation - Scheme of amalgamation - Held that - Prior to date of sanction by BIFR and higher Courts, there is provision in the scheme that business done by Modern Terry Towels Ltd. shall be on behalf of the appellant company. The importance of the registration of reference cannot be undermined as once a reference is registered, the provisions of SICA get triggered. There can hardly be and doubt that once a scheme is formulated after a reference is gone through the process of Sections 17 & 18 of the SICA, the said scheme would have the force of law notwithstanding anything inconsistent therewith contained in any other law. Thus, neither the party making any concessions at the time of formulation of the scheme nor the company at whose behest the scheme is formulated and sanctioned can get out of the scheme. Accordingly, direct the AO to allow set off of current year losses and brought forward losses/unabsorbed depreciation of M/s. Modern Terry Towels Ltd. as per Section 72A against the income of the appellant. At the same time, the AO shall pass a protective assessment order in the case of appellant for A.Y. 2008-09 presuming that no amalgamation has taken place. Deduction u/Section 40(a) - Retrospectivity - Held that - Hon ble Apex Court in the case of G.E.India Technologies Centre (P) Ltd. vs CIT 2010 (9) TMI 7 - SUPREME COURT OF INDIA has held that in case whole remittance is not chargeable in India then there is no question of tax at source being deducted. Since the tax at source is nor required to be deducted then Section 40(a) will not be applicable. It is further noticed that Section 40((a)(ia) refers to commission payable to a resident. Hence, this provision is not at all applicable. Section 40(a) is applicable in respect of payments to non-resident and the payment should be in the nature of interest, royalty, fee for technical services or other sum chargeable under this Act. It is undisputed fact that the sum is commission and the word commission is not specifically mentioned in Section 40(a). The sum paid is not chargeable in India under Income Tax Act, 1961. Hence, Section 40(a) is not applicable

Summary

Issues Involved:

1. Allowing set off of current year and brought forward losses and unabsorbed depreciation of M/s. Modern Terry Towels Ltd. (MTTL) against the income of the assessee company.
2. Deleting the addition made by AO under Section 40(a)(ia) for non-deduction of TDS on payment made to foreign parties.

Issue-wise Detailed Analysis:

1. Allowing Set Off of Losses and Unabsorbed Depreciation:

Assessment Year 2008-09:
The Revenue contended that the CIT(A) erred in allowing the set off of current year and brought forward losses and unabsorbed depreciation of M/s. Modern Terry Towels Ltd. (MTTL) against the income of the assessee company, as the approval of BIFR was not received. The CIT(A) relied on the draft resolution scheme dated 28-07-2009, which indicated the date of amalgamation as 01-01-2008. According to Section 18 of SICA, amalgamations are subject to an order by the High Court or BIFR. The CIT(A) cited the Supreme Court's decision in Marshall Sons & Co. (India) Ltd. vs. ITO (223 ITR 809), which held that the scheme of amalgamation is operative from the date mentioned in the scheme, not from the date of the formal order. Therefore, the income/losses arising from 01-01-2008 would be assessable in the hands of the appellant. The CIT(A) directed the AO to allow the set off of losses and unabsorbed depreciation as per Section 72A and also to pass a protective assessment order presuming no amalgamation had taken place. If the amalgamation scheme was not sanctioned, the protective assessment order would prevail.

Assessment Year 2009-10:
The CIT(A) upheld the addition made by the AO on a protective basis, directing the AO to allow the set off of current year losses and brought forward losses/unabsorbed depreciation of MTTL against the income of the appellant. The CIT(A) noted that the AAIFR order dated 21-11-2011 stayed the BIFR's direction until the disposal of the appeal. The CIT(A) reiterated the directive for the AO to pass both substantive and protective assessments, with the protective assessment prevailing if the amalgamation scheme was not sanctioned.

Assessment Year 2010-11:
The CIT(A) noted that the AAIFR order dated 03-06-2013 confirmed the merger date as 01-01-2008. The CIT(A) directed the AO to allow the set off of current year losses and brought forward losses/unabsorbed depreciation of MTTL against the income of the appellant. The AO was also instructed to pass a protective assessment order presuming no amalgamation had taken place, with the protective assessment prevailing if the amalgamation scheme was not sanctioned.

2. Deleting Addition under Section 40(a)(ia) for Non-Deduction of TDS:

Assessment Year 2008-09:
The CIT(A) deleted the addition of ?4,14,78,795 made by the AO under Section 40(a)(ia) for non-deduction of TDS on payment made to foreign parties. The CIT(A) relied on the previous order of the Hon'ble Jaipur Tribunal for A.Y. 2007-08, which held that TDS was not required to be deducted on account of Circular No. 786 dated 07-02-2000. The Tribunal had observed that the commission earned by non-residents was business profit and not chargeable in India as the non-resident companies did not have a permanent establishment in India. The CIT(A) directed the AO to delete the addition, maintaining judicial discipline.

Conclusion:
The Tribunal upheld the CIT(A)'s orders for all the assessment years involved, dismissing the Revenue's appeals. The Tribunal found no infirmity in the CIT(A)'s decisions to allow the set off of losses and unabsorbed depreciation of MTTL against the income of the assessee company and to delete the addition made under Section 40(a)(ia) for non-deduction of TDS on payment made to foreign parties. The Tribunal's decision was pronounced in open court on 30-01-2017.