2020 (6) TMI 47 - AT - Income Tax

Set off/ adjustment and carry forward of accumulated losses and unabsorbed depreciation of the demerged company - validity of the return filed under section 139(5) - AO to reject the revised ROI was that both the demerging company and the resultant company have claimed the same loss resulting in double claim of set off and carry forward of losses pertaining to the demerged undertaking - HELD THAT - Intimation issued u/s 143(1) of the Act does not preclude the assessee from filing a revised return of income. More so, when assessment order u/s 143(3) of the Act was also passed in the present case of the assessee, thus the intimation u/s 143(1) of the Act loses its importance. And we find in this case the assessee has rightly filed the revised return of income u/s 139(5) of the Act within the stipulated time frame as per statute. In this advanced technological era, the AO (Kolkata) could have cross checked the veracity of the contention of M/s. SYK that they have filed revised return of income forgoing the claims of Vortal Division for AY 2010-11 without doing that AO has stuck to his allegation which action of AO cannot be countenanced. And in any way the department has the power vested in them to ensure that M/s. SYK does not get the benefit of M/s. Vortal Division for AY 2010-11 after it has filed the revised returns disclaiming the benefits. In the light of the above discussion, we do not find any merit in the objection raised by AO. Hence, there was no double claim as alleged by the AO since the demerged company (SYK Ltd) has forsaken its claim with respect of brought forward losses of the demerged unit. Once demerger is sanctioned by the Hon ble High court the enabling provision is section 72A of the Act, which allows carry forward and set off of accumulated loss and unabsorbed depreciation allowance in cases of amalgamation or demerger etc. Sub-section (4) of section 72A provides that in the case of a demerger is compatible to the scheme as envisaged and defined u/s. 2(19AA) of the Act, the eligible accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall be allowed to be carried forward and set off in the hands of the resulting company. In the instant case, all the conditions stated in section 72A(4) read with section 2(19AA) of the Act has been fulfilled. In view of the same, assessee company is eligible to claim the set off of brought forward losses transferred from the demerged company M/s. SYK. Since the assessee company meets all the requirements contained in the Income-tax Act, 1961, all the carried forward losses and unabsorbed Depreciation in respect of M/s. Vortal Undertaking were transferred, pursuant to section 72A(4) of the Act, from the demerged company (M/s. Star Ya Kalakaar.Com Limited) to the resulting company (M/s. Padma Logistic Khanij Private Limited) w.e.f. the appointed date i.e. 01.03.2010. The claim of assessee is as per law and the AO erred in refusing to consider the Revised Return of Income so, the Ld. CIT(A) rightly allowed the claim of assessee and, therefore, the ground nos. 1 and 2 raised by the Revenue lacks merit. Disallowance u/s. 14A - HELD THAT - Assessee was having sufficient own funds to invest in shares. And since the assessee was having a common fund consisting of both own funds and borrowed funds and in case the own funds are sufficient to invest in non-business activities, a presumption drawn is that the said investment is made out of own funds. For this proposition of law, we rely on the judgment of Hon ble Bombay High court in the case of CIT Vs. Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT and hold that no disallowance under rule 8D(2)(ii) is warranted. Disallowance of rent - HELD THAT - Since the department while preferring the grounds of appeal has not assailed the factual finding rendered by the Ld. CIT(A), the result is that the assessee on the strength of the rental agreements referred to by the Ld. CIT(A) establishes the relation of assessee as that of tenant with the land/building owner. With this factual finding in the backdrop, when we peruse the impugned order of the Ld. CIT(A) we note that the Ld. CIT(A) has taken note that the AO has not refuted the claim of the assessee that the expenditure/rent paid was for the purpose of the business. This factual assertion of Ld. CIT(A) has also not been assailed before us which is evident from the ground raised by the department. So, the factual finding of the Ld. CIT(A) crystallizes and therefore, the order of the Ld. CIT(A) is based on material and cannot be termed as perverse. - Decided against revenue.

Summary

Issues Involved:
1. Set off/adjustment and carry forward of accumulated losses and unabsorbed depreciation of the demerged company.
2. Application of Section 14A and Rule 8D for disallowance of expenditure related to exempt income.
3. Disallowance of rent expenses.

Comprehensive, Issue-Wise Detailed Analysis:

1. Set off/Adjustment and Carry Forward of Accumulated Losses and Unabsorbed Depreciation:
The primary issue revolves around whether the assessee is entitled to set off/adjustment and carry forward of accumulated losses and unabsorbed depreciation of the demerged company. The facts reveal that the assessee filed an original return on 28-09-2010, and later, a revised return on 09-06-2011, following the approval of a demerger scheme by the Hon'ble High Courts of Calcutta and Bombay, effective 01-03-2010. The AO rejected the revised return on several grounds, including the absence of demerger details in the audited accounts, untimely filing of the return of loss, and the alleged double claim of losses by both the demerged and resulting companies.

The Tribunal found the AO's assertions factually incorrect, noting that the pending demerger was disclosed in the audited accounts. It clarified that Section 139(3) of the Act, which mandates timely filing of loss returns, was not applicable since the losses pertained to the demerged company's undertaking and were claimed under Section 72A(4). The Tribunal emphasized that the revised return was filed within the permissible period under Section 139(5) and that the intimation under Section 143(1) does not preclude filing a revised return. The Tribunal also dismissed the AO's claim of double deduction, noting that the demerged company had not claimed the losses in its revised computation.

The Tribunal upheld the CIT(A)'s decision, allowing the assessee's claim for set off/adjustment and carry forward of accumulated losses and unabsorbed depreciation, as the conditions under Section 72A(4) and Section 2(19AA) were met.

2. Application of Section 14A and Rule 8D for Disallowance of Expenditure Related to Exempt Income:
The second issue concerns the disallowance under Section 14A read with Rule 8D. The AO applied Rule 8D to compute an additional disallowance of ?18,32,751/- against the assessee's suo moto disallowance of ?77,933/-. The CIT(A) restricted the disallowance to ?77,678/-, considering that the investments in Aryan Mining & Trading Corporation Pvt. Ltd. were strategic and that the assessee had sufficient own funds to cover the investments.

The Tribunal disagreed with the CIT(A) on excluding strategic investments from the ambit of Section 14A, citing the Supreme Court's ruling in Maxopp Investment Ltd. However, it upheld the CIT(A)'s finding that no disallowance under Rule 8D(2)(ii) was warranted due to sufficient own funds. The Tribunal directed the AO to recompute the disallowance under Rule 8D(2)(iii) in line with the principles laid down in REI Agro Ltd. vs. DCIT, considering only the investments that generated exempt income.

3. Disallowance of Rent Expenses:
The third issue pertains to the disallowance of rent expenses. The AO disallowed ?11,82,000/- out of ?30,75,000/- rent paid, questioning the business use of the premises. The CIT(A) reduced the disallowance to ?2,16,000/- for non-deduction of TDS on rent paid to Nathmall Girdharilal Steels Ltd.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee provided rental agreements and evidence of payment, and the AO did not dispute the genuineness of the payments. The Tribunal confirmed that the rent expenses were for business purposes and dismissed the revenue's appeal on this ground.

Conclusion:
The Tribunal's detailed analysis led to the following conclusions:
1. The assessee is entitled to set off/adjustment and carry forward of accumulated losses and unabsorbed depreciation of the demerged company.
2. Disallowance under Section 14A should be recomputed, excluding strategic investments but considering only those generating exempt income.
3. The disallowance of rent expenses was correctly limited to ?2,16,000/- due to non-deduction of TDS, with the remaining expenses allowed as business expenditure.

The revenue's appeal was partly allowed for statistical purposes, primarily to recompute the disallowance under Section 14A.