2018 (6) TMI 1053 - HC - Income Tax

Carry-forward losses or unabsorbed depreciation of the Demerged Company to resultant company - Whether the brought forward losses & unabsorbed depreciation can be related to transferred undertaking due to demerger in absence of separate accounts u/s 72A(4)(b) - AO rejected the claim on the ground that the assessee had not maintained separate accounts - Tribunal remanded the issue back to the Assessing Officer - Held that - Tribunal is correct in commenting that if the brought forward losses and unabsorbed depreciation are directly relatable to the Transferred Company, the same has to be carried forward in the hands of the Resultant Company as per section 72A(4)(a) - Tribunal noted that the statutory provision do not command that in order to avail the benefit of clause (a), separate books of accounts must be maintained. The Tribunal therefore required the AO to examine the explanation of the assessee on merits - Tribunal has not given any such declaration that in case of the assessee, the brought forward losses and unabsorbed depreciation are directly relatable to the Transferred Company, but has merely required the AO to examine such a question in light of the evidence on record - we see no error in the view of the Tribunal - appeal is dismissed.

Summary

Issues:
- Interpretation of Section 72A(4)(b) of the Income Tax Act
- Consideration of carryforward losses and unabsorbed depreciation in demerger scheme

Analysis:

Interpretation of Section 72A(4)(b) of the Income Tax Act:
The case involved an appeal by the Revenue against a judgment of the Income Tax Appellate Tribunal regarding the interpretation of Section 72A of the Income Tax Act, specifically focusing on subsection (4)(b). The Tribunal held that if brought forward losses and unabsorbed depreciation are directly relatable to the undertakings transferred to the resulting company, they should be carried forward in the hands of the resulting company. The Tribunal emphasized that the assessee's explanation on the direct relatability should be examined on merits without requiring separate accounts to be maintained, as it is not a condition precedent for invoking Section 72A(4)(a). The Tribunal remanded the issue to the Assessing Officer for further examination in accordance with the law and after providing a fair opportunity of hearing to the assessee.

Consideration of carryforward losses and unabsorbed depreciation in demerger scheme:
The demerger scheme approved by the High Court involved transferring properties and liabilities of the Demerged Company to the Resulting Company. The question arose for the assessment year 2008-09 whether the carryforward losses or unabsorbed depreciation of the Demerged Company could be availed by the Resultant Company under Section 72A of the Act. The Assessing Officer initially rejected the claim due to the absence of separate accounts, a decision upheld by the Commissioner of Income Tax (Appeals). However, the Tribunal disagreed, stating that no such requirement existed under subsection (4) of Section 72A. The Tribunal emphasized that as long as the losses and depreciation are directly relatable to the transferred undertakings, they should be carried forward. The High Court upheld the Tribunal's decision, dismissing the Tax Appeal as no error was found in the Tribunal's view.

In conclusion, the High Court affirmed the Tribunal's interpretation of Section 72A(4)(b) and the consideration of carryforward losses and unabsorbed depreciation in the demerger scheme, emphasizing the importance of examining the direct relatability of losses and depreciation without mandating separate accounts.