2022 (8) TMI 1371 - AT - Income Tax

Set off of Long term capital loss of Amalgamating company - AO took note of the provisions of section 72A of the Act, which provide for the set off and carry forward only of the brought forward loss and unabsorbed depreciation of the amalgamating company in the hands of the amalgamated company and found such provision as not covering long term capital loss - HELD THAT - Section 72A, like some other provisions distinctly dealing with the effects of amalgamation, exclusively applies to accumulated losses and unabsorbed depreciation of the amalgamating company in relation to the income under the head Profit and gains of business or profession . It is not a panacea for all the tax related issues of amalgamation, so as to have application insofar as the other tax entitlements, privileges or benefits in the hands of the amalgamating company, are concerned. In view of the fact that the business of the amalgamating company under amalgamation continues uninterruptedly by the amalgamated company, the benefit of such carry forward and set off earned by the business of the amalgamating company has to be allowed as per the mandate of section 74 to the amalgamated company, more so, when the Scheme of amalgamation as approved by the Hon ble High Court specifically declares that benefits, inter alia, under tax laws shall be transferred and vest in the Transferee Companyas if the Transferee Company was originally entitled to all benefits . The term the assessee as used in sub-section (1) of section 74, which was originally referring to the amalgamating company which suffered the loss, shall now substitute the amalgamated company to be considered as the assessee entitled to set off of the brought forward long term capital loss not only because of the Scheme of amalgamation so providing but also because of the assessee becoming a successor-in-interest of such loss. Going with the phraseology of section 74, the sequitur is that the long term capital loss of the amalgamating company is available for set off in the hands of the assessee-amalgamated company. This ground is, thus, allowed. Disallowing deduction towards Fringe Benefit Tax (FBT) paid in Australia - CIT(A) allowed the benefit of deduction in the computation of book profit u/s. 115JB by relying on Board Circular No.8/2005. However, the deduction was not allowed in the normal computation of income on the ground that it was hit by section 40(a)(ic) of the Act - HELD THAT - As seen that the Board, vide Circular No.8/2015, has opined that the prohibition for claiming deduction in respect of FBT does not apply in the computation of book profits u/s. 115JB and the same has to be allowed as deduction in such computation. We therefore countenance the view taken by the ld. CIT(A) on this score. The Department s ground is not allowed. Assessee s contention for allowing deduction under the regular provisions of the Act as well - Section 40(a)(ic) talks of not allowing deduction for fringe benefit tax paid under the Act in the computation of business income. It does not refer to any fringe benefit tax paid abroad outside the ambit of the Act. Such latter tax cannot be brought within the purview of section 40(a)(ic) because it is not a FBT under Chapter XIIH. As a corollary, the amount of the FBT paid in Australia is eligible for deduction under the normal provisions of the Act. Our view is fortified by the judgment of Reliance Infrastructure Ltd. 2016 (12) TMI 1293 - BOMBAY HIGH COURT holding that income tax paid in Saudi Arabia was allowable as deduction in computing the income under the provisions of the Act as the same was not taken benefit of by the assessee either under section 90 or 91 of the Act. Deduction of income tax paid outside India will be admissible if no benefit of such tax has been availed either u/s 90 or 91. Assessee in the instant case has not taken any benefit of the FBT paid in Australia and further unlike section 40(a)(ic) of the Act, it is also not hit by any specific provision calling for disallowance. On a parity of the reasoning, such FBT is held to be deductible. This ground of the assessee is, therefore, allowed. Denial of Foreign tax credit - not allowing the credit for taxes i.e., inhabitant tax, enterprise tax etc., paid in Japan - first objection of the Department is that the ld. CIT(A) erred in directing the AO to allow deduction under section 37(1) of the Act in respect of the taxes paid in Japan, which is the first part of the foreign tax credit - HELD THAT - CIT(A) directed to allow deduction u/s. 37(1) in respect of Inhabitant tax, Enterprise tax etc., paid in Japan. Since such a deduction is in respect of taxes for which no benefit of foreign tax credit has been allowed in terms of section 90/91 of the Act, the same has been rightly allowed u/s. 37(1) of the Act in view of Explanation 1 to section 40(a)(ii) of the Act as discussed supra in the context of Fringe benefit tax paid in Australia. The grievance of the Revenue on this count is, ergo, repelled. Objection of the Revenue is against allowing foreign tax credit in respect of sales made by the assessee which were eligible for deduction u/s. 10AA - The assessee paid foreign tax in six countries, viz., Australia, Belgium, Canada, Japan, Switzerland and Malaysia. India has entered into DTAAs with all such countries. As such, section 90 governs the allowability or otherwise of foreign tax credit in the extant case and as a corollary, section 91 goes out of reckoning, leaving the reliance of the ld. DR on Reliance Infrastructure ( 2016 (12) TMI 1293 - BOMBAY HIGH COURT superfluous. Out of tax paid by the assessee in six countries, it is entitled to foreign tax credit only from Belgium, Japan, Swiss and Malaysia. The foreign tax paid by the assessee in the remaining two countries, namely, Australia and Canada, does not qualify for credit. AO computed the ineligibility of foreign tax credit at 8.90% of revised amount of foreign tax credit as per Table I drawn above by considering the proportionate sales made by the 10AA units to these six countries vis- -vis total sales of the assessee. This working made by the AO cannot be upheld because of the discussion made above about the question for consideration not being the deductibility of such income from Indian incometax, but the credit in respect of tax paid on such income in six countries. Thus, we need to find out the precise amount of foreign tax in respect of sale of 10AA units made to Australia and Canada, which cannot be allowed credit. However, such amount, though not available for credit, will be eligible for deduction u/s. 37(1) of the Act, as being not hit by section 40(a)(ia) of the Act in line with our decision on the first part of the ground raised by the Department. The taxes paid in other four countries, namely, Belgium, Japan, Swiss and Malaysia in respect of sale of 10AA units, will be available for credit in terms of the relevant Article of the concerned DTAAs as discussed supra. We, therefore, set-aside the impugned order and remit the matter to the file of the AO for deciding this issue accordingly. Needless to say, the assessee will be allowed reasonable opportunity of hearing. MAT credit of amalgamating company - AO has denied the claim, at the threshold, on the ground that the MAT credit of the amalgamating company is not covered u/s 72A of the Act - HELD THAT - Parliament wanted to restrict the allowing of MAT credit to the successor only on conversion of a company into LLP and not any other case of succession, including the amalgamation. Had the intention of the legislature been not to allow MAT credit of the amalgamating company, it would have specifically covered the cases to amalgamation in addition to the cases of conversion of a company into LLP. In view of the specific provision contained in sub-section (7) prohibiting the MAT credit only in case of a conversion of a private company into a limited liability partnership and not extending such prohibition to the cases of amalgamation, there is no doubt that the MAT credit earned by the amalgamating company has to be allowed in the hands of the amalgamated company. We, therefore, hold that the MAT credit of the amalgamating company has to be allowed in the hands of the amalgamated company. Claim of deduction u/s. 10AA of the Act in respect of three undertakings - HELD THAT - In view of the clear decision of the Tribunal holding that the erstwhile 3 units of the amalgamating company were newly established units and hence, eligible for deduction u/s. 10AA, we do not find any infirmity in the impugned order in granting such deduction in the hands of the assessee, as the very foundation, being, the three units were not newly established, does not exist in view of the orders passed by the Tribunal in earlier years in the hands of the amalgamating company. Deduction u/s. 10AA for Pune unit - such deduction was not claimed in the original return of income but was claimed in the revised return of income and further Form No. 56F was uploaded at the time of filing of the revised return - HELD THAT - It is clear from the command of sub-section (5) of section 10A that the assessee is required to furnish the audit report in the prescribed form along with the return of income. There is no reference to the filing of such return u/s. 139(1) or u/s. 139(5) of the Act. The Finance Act, 2020 has carried out an amendment to sub-section (5) of section 10A by providing that the report of the auditor in the prescribed form should be filed before the specified date referred to in section 44AB, which, in turn, refers to section 139(1) of the Act. Thus, for the period anterior to the amendment carried out by the Finance Act, 2020, the only requirement was to furnish the audit report in the prescribed form along with the return of income. Such return of income may be u/s. 139(1) or u/s. 139(5). Since the assessee claimed deduction by filing the revised return u/s. 139(5) and also uploaded the requisite audit report in Form No. 56F along with that, no infirmity can be found in the impugned order in accepting the assessee s claim in this regard. This ground is, therefore, not allowed. Disallowance u/s. 10AA - exclusion of expenditure on providing technical services abroad from export turnover as well as total turnover in the computation of deduction - CIT(A) directed its exclusion from both the export as well as total turnover - HELD THAT - It is seen that similar issue came up for consideration before the Tribunal in assessee s own case for the immediately preceding assessment year. The Tribunal has upheld the view taken by the ld. CIT(A) on this score. Following the same, we dismiss the grounds raised both by the assessee as well as the Revenue. Deduction u/s. 10AA on the amount of profit on on-site/deputation of technical manpower services allowed. Deduction in respect of provision for doubtful advances written back while computing total income as well as book profit u/s. 115JB - HELD THAT - The onus is on the assessee to correlate the amount of provision created in the earlier year by the erstwhile ICSL and not claimed as deduction with the amount of provision written back during the year under consideration by the assessee. The ld. AR submitted that all the necessary details are available and the matter may be considered by the AO. In such circumstances, we direct the AO to examine such details which the assessee is now proposing to file to prove its case and then decide accordingly in terms of the discussion made above. Disallowance of Finance Lease charges - HELD THAT - Once the amount of finance lease charges was reduced by the assessee by means of credit to the account, the same ought to have been reduced for the purpose of claiming deduction as well, unless proved otherwise. AR fairly admitted that no detail of re-classification of Rs. 71.65 lakh was available. In such circumstances, we uphold the impugned order in not allowing deduction of Rs. 71.65 lakh as finance lease charges. This ground is not allowed. Disallowance u/s 14A - Suo-moto addition by assessee - HELD THAT - More recently the Hon ble jurisdictional High Court in Pr. CIT VS. Kohinoor Projects Pvt. Ltd. 2020 (1) TMI 1161 - BOMBAY HIGH COURT has held that in the absence of any exempt income, there cannot be any disallowance of expenses u/s 14A of the Act. Thus the disallowance has to be restricted to the extent of exempt income - As the assessee has suo motu offered disallowance we sustain the further disallowance less suo moto addition made - This ground is, therefore, partly allowed. Depreciation on goodwill - HELD THAT - Similar view has been followed by the Tribunal in the immediately preceding assessment year, namely, 2012-13 2021 (11) TMI 362 - ITAT PUNE by remitting the matter to the file of the AO for deciding it in conformity with the guidelines laid down by the Tribunal in earlier years. We also take similar view and send the matter to the file of the AO for deciding this issue in conformity with the directions given for earlier years. Addition on account of delisting expenses - assessee incurred expenses for delisting of the shares of the erstwhile ICSL, which was a listed company and got amalgamated with the assessee company - HELD THAT - As it is seen that the deductibility of delisting expenses has been decided in assessee s favour in Eicher Motors Ltd 2014 (12) TMI 601 - ITAT DELHI No contrary view has been placed on record by the ld. DR. Respectfully following the Tribunal order, we uphold the impugned order on this score. Treatment given to the amount of foreign exchange fluctuation gain of overseas branches credited to Reserves - AO treated such amount as part of total income - CIT(A) restored the matter to the file of the AO for following the direction given in the appellate order for the A.Y. 2010-11 - HELD THAT - Tribunal for the A.Y.2011-12 2021 (10) TMI 1248 - ITAT PUNE held that the amount of foreign exchange fluctuation gain relatable to the items of revenue field should be considered as includible in the total income and the part relatable to the items in capital field should be excluded. As the ld. CIT(A) has directed to follow such view, we do not find any reason to interfere with the impugned order on this score. This ground is, therefore, not allowed.

Summary

Issues Involved:

1. Set off of long-term capital loss of amalgamating company.
2. Deduction of Fringe Benefit Tax paid in Australia.
3. Foreign tax credit.
4. MAT credit of amalgamating company.
5. Various other issues including deduction under section 10AA, allocation of interest expenditure, disallowance under section 14A, depreciation on goodwill, delisting expenses, and treatment of foreign exchange fluctuation gain.

Detailed Analysis:

I. Set off of Long Term Capital Loss of Amalgamating Company:

The assessee claimed set off of a long-term capital loss of Rs. 104.46 crore from the amalgamating company, ICSL. The AO denied this by citing section 72A of the Income-tax Act, which does not cover long-term capital loss. The Tribunal, however, found that the Scheme of Amalgamation approved by the High Court allowed such set-off and that the law of succession supports the successor inheriting all liabilities and benefits of the predecessor. The Tribunal allowed the set-off, emphasizing that section 72A is not a comprehensive provision for all tax benefits in amalgamation.

II. Fringe Benefit Tax Paid in Australia:

The assessee claimed a deduction for Fringe Benefit Tax (FBT) paid in Australia. The AO disallowed it under section 40(a)(ic), but the CIT(A) allowed it for book profit calculation under section 115JB. The Tribunal upheld the CIT(A)'s decision and also allowed the deduction under normal provisions, stating that section 40(a)(ic) applies only to FBT under the Indian Act, not foreign taxes.

III. Foreign Tax Credit:

The assessee claimed foreign tax credit for taxes paid in Japan, which the AO partially allowed, excluding certain local and inhabitant taxes. The CIT(A) allowed deduction under section 37(1) for these excluded taxes. The Tribunal upheld the CIT(A)'s decision and directed the AO to re-compute foreign tax credit, considering the specific provisions of the DTAAs with the respective countries. The Tribunal also noted that foreign tax credit should be allowed for countries with which India has DTAAs, subject to the terms of those agreements.

IV. MAT Credit of Amalgamating Company:

The assessee claimed MAT credit available to the amalgamating company, ICSL. The AO denied it, citing the absence of a specific provision. The Tribunal allowed the claim, stating that the Scheme of Amalgamation approved by the High Court provided for such credit and that there was no statutory prohibition against it.

V. Other Issues:

1. Deduction under Section 10AA: The Tribunal upheld the CIT(A)'s decision to allow deduction under section 10AA for three undertakings of the amalgamating company and the Pune unit, despite the AO's objections regarding the timing of the claim and the nature of the units.

2. Allocation of Interest Expenditure: The Tribunal upheld the allocation of interest expenditure to section 10AA undertakings, consistent with the decision in the previous assessment year.

3. Disallowance under Section 14A: The Tribunal restricted the disallowance under section 14A to the extent of exempt income earned by the assessee, following the precedent set by higher courts.

4. Depreciation on Goodwill: The Tribunal remitted the matter back to the AO for re-examination, following the directions given in earlier years.

5. Delisting Expenses: The Tribunal upheld the CIT(A)'s decision to allow deduction for delisting expenses, citing a precedent from the Delhi Bench of the Tribunal.

6. Foreign Exchange Fluctuation Gain: The Tribunal upheld the CIT(A)'s decision to follow the previous year's direction, treating the gain based on its relation to revenue or capital items.

Conclusion:

The appeals were partly allowed, with specific directions for re-computation and re-examination on certain issues. The Tribunal emphasized adherence to the approved Scheme of Amalgamation and relevant statutory provisions, ensuring that the assessee receives all entitled benefits and deductions. The judgment highlights the importance of understanding the nuances of tax provisions related to amalgamation, foreign tax credits, and specific deductions under the Income-tax Act.