2017 (5) TMI 1212 - AT - Income Tax

Carry forward and set-off of losses - demerger - Applicability of provisions of Sec. 72A(4) with regard to the restructuring undertaken in terms of the scheme of arrangement/demerger approved by HC - Held that - Scheme of arrangement is to be understood as demerger for the purposes of section 2(19AA) only if the conditions prescribed therein are satisfied. One of the conditions prescribed is that all the properties and the liabilities relatable to the undertaking should be transferred by the demerged company to the resulting company by virtue of the demerger. In the present case there is no dispute to the fact that the scheme of restructuring approved by the Hon ble Bombay High Court involved transfer of only the specified assets and liabilities of the PCD and PPD divisions to the Relene Petrochemicals Pvt. Ltd and NOCIL Petrochemicals Ltd. respectively. The aforesaid fact was very much before the Assessing Officer and has been eloquently brought out by the CIT(A) in his order to which there is no dispute. Therefore on this aspect itself one can conclude that the scheme of arrangement in question does not qualify to be a demerger in terms of section 2(19AA) of the Act. In the present scheme of arrangement the consideration in lieu of the transfer of specified assets and liabilities of the two divisions is received by the assessee company whereas in order to qualify to be a demerger in terms of section 2(19AA) of the Act the consideration to be paid by the resulting company is by way of issuance of shares to the shareholders of the demerged company. In the above background the provisions of sub-section(4) of section 72A of the Act are not attracted in relation to the instant scheme of arrangement. Decision of the CIT(A) in holding that the accumulated loss and unabsorbed depreciation relating to the transferred divisions have to remain with the assessee company for set-off and carry forward for set-off in future years deserves to be affirmed. - Decided against revenue

Summary

Issues Involved:
1. Whether the CIT(A) erred in accepting the assessee's plea that there was no demerger of its PPD and PCD divisions.
2. Whether the assessee company fulfilled the conditions of Section 2(19AA) regarding demerger.
3. Whether the assessee is eligible for set-off and carry forward of brought forward business losses under Section 72A(4).
4. Whether the assessee is entitled to deduction for brought forward unabsorbed depreciation of its demerged undertaking.
5. Compliance with the conditions stipulated in the demerger scheme approved by the Hon'ble Bombay High Court.
6. Validity of the reassessment proceedings initiated by the Assessing Officer under Section 147/148.

Issue-wise Detailed Analysis:

1. Acceptance of Assessee's Plea on Demerger:
The CIT(A) accepted the assessee's plea that the transfer of its PPD and PCD divisions did not constitute a demerger as per the Income Tax Act. The CIT(A) noted that the scheme approved by the Hon'ble Bombay High Court did not result in a "demerger" as defined under Section 2(19AA) of the Act. The CIT(A) observed that not all properties and liabilities of the undertaking were transferred to the resulting company, and the resulting company did not issue shares to the shareholders of the demerged company.

2. Fulfillment of Section 2(19AA) Conditions:
The CIT(A) held that the conditions of Section 2(19AA) were not fulfilled because:
- Not all properties and liabilities were transferred.
- The resulting company did not issue shares to the shareholders of the demerged company.
- The transfer of divisions under the scheme did not meet the definition of "demerger" as per the Act.

3. Eligibility for Set-off and Carry Forward of Business Losses:
The CIT(A) concluded that Section 72A(4) of the Act, which pertains to the carry forward and set-off of accumulated losses and unabsorbed depreciation in cases of demerger, was not applicable. Since the scheme did not qualify as a "demerger," the assessee was eligible to carry forward and set off the accumulated losses and unabsorbed depreciation.

4. Deduction for Brought Forward Unabsorbed Depreciation:
The CIT(A) allowed the assessee to claim deduction for brought forward unabsorbed depreciation. The CIT(A) reasoned that since the scheme did not constitute a demerger, the provisions of Section 72A(4) restricting such deductions were not applicable.

5. Compliance with Demerger Scheme Conditions:
The CIT(A) found that the conditions stipulated in the demerger scheme approved by the Hon'ble Bombay High Court were not fully complied with, as the scheme did not meet the statutory definition of a "demerger." Therefore, the provisions of Section 72A(4) were not triggered.

6. Validity of Reassessment Proceedings:
The cross objection filed by the assessee challenged the validity of the reassessment proceedings initiated under Section 147/148. However, since the appeal of the Revenue was dismissed, this issue was rendered academic and not adjudicated.

Conclusion:
The appeal of the Revenue was dismissed, affirming the CIT(A)'s decision that the scheme of arrangement did not qualify as a "demerger" under Section 2(19AA) and thus, the provisions of Section 72A(4) were not applicable. Consequently, the assessee was allowed to carry forward and set off the accumulated losses and unabsorbed depreciation. The cross objection by the assessee regarding the validity of reassessment proceedings was treated as dismissed for statistical purposes.