1998 (6) TMI 107 - AT - Income Tax

Accumulated Loss Carry Forward And Set Off Amalgamation Unabsorbed Business Loss Depreciation Allowance Investment Allowance

Summary

Issues Involved:
1. Validity of the amalgamation and its effective date.
2. Compliance with Section 72A of the IT Act.
3. Disallowance of consultancy charges.
4. Disallowance of transit house expenses.
5. Disallowance of premium on redemption of debentures.
6. Disallowance of employees' welfare expenses.
7. Disallowance of general charges.
8. Disallowance of roll-over charges.
9. Disallowance of interest on borrowed funds for plant and machinery.
10. Disallowance of interest attributable to interest-free loans to subsidiaries.
11. Disallowance under Section 80G.
12. Disallowance of donation to Lakshmipat Singhania Medical Foundation.
13. Disallowance of deduction under Section 80HH.
14. Restriction on investment allowance.
15. Charging of interest under Sections 234B and 234C.

Detailed Analysis:

1. Validity of the Amalgamation and Its Effective Date:
The Tribunal examined whether the amalgamation of M/s. OSL with the assessee, effective from 1-2-1992, was valid. The BIFR sanctioned the scheme on 25-1-1994, specifying 1-2-1992 as the effective date. The Tribunal held that the date specified in the scheme sanctioned by BIFR is the effective date of amalgamation under law, supported by the Supreme Court decision in Marshall Sons & Co. (India) Ltd. v. ITO. Therefore, the amalgamation was valid from 1-2-1992.

2. Compliance with Section 72A of the IT Act:
The Tribunal addressed the compliance with Section 72A, which allows for the carry forward and set off of losses and unabsorbed depreciation of the amalgamating company. The Tribunal found that the BIFR's declaration under Section 72A(1) was valid and that the requirement to carry on the business of the amalgamating company was deemed fulfilled as per the Supreme Court's decision in Marshall Sons & Co. (India) Ltd. The Tribunal also held that the filing of the certificate under Section 72A(2)(ii) was compliant due to the BIFR's exemption order.

3. Disallowance of Consultancy Charges:
The Tribunal upheld the disallowance of consultancy charges amounting to Rs. 5,26,000, as the expenses were not connected with the assessee's existing business but were for a new project.

4. Disallowance of Transit House Expenses:
The Tribunal confirmed the disallowance of Rs. 4,61,599 under Section 37(4) for guest house expenses, as the section is overriding and disallows such expenses.

5. Disallowance of Premium on Redemption of Debentures:
The Tribunal upheld the disallowance of Rs. 22.85 lacs claimed as a deduction for premium on redemption of debentures, treating it as a contingent liability not allowable until the maturity of the debentures.

6. Disallowance of Employees' Welfare Expenses:
The Tribunal confirmed the disallowance of Rs. 1,24,443 for employees' welfare expenses under Section 40A(9), as these were contributions to social organizations and clubs.

7. Disallowance of General Charges:
The Tribunal upheld the disallowance of Rs. 5.10 lacs under general charges, as the expenses were on capital account and not directly connected with the assessee's business.

8. Disallowance of Roll-Over Charges:
The Tribunal confirmed the disallowance of Rs. 60,16,537 for roll-over charges, treating them as capital expenditure related to the acquisition of plant and machinery.

9. Disallowance of Interest on Borrowed Funds for Plant and Machinery:
The Tribunal upheld the disallowance of Rs. 41,12,177 for interest on borrowed funds for plant and machinery, as the interest was for the period prior to the user of the assets and was to be added to the actual cost under Explanation 8 to Section 43(1).

10. Disallowance of Interest Attributable to Interest-Free Loans to Subsidiaries:
The Tribunal confirmed the disallowance of Rs. 41,44,000 as interest attributable to interest-free loans advanced to subsidiaries and associate companies.

11. Disallowance under Section 80G:
The Tribunal upheld the disallowance of Rs. 5,24,487 under Section 80G for contributions to J.K. Trust and the U.P. Chief Minister's Relief Fund.

12. Disallowance of Donation to Lakshmipat Singhania Medical Foundation:
The Tribunal noted that the CIT (Appeals) had set aside the assessment regarding the donation of Rs. 15 lacs to Lakshmipat Singhania Medical Foundation for re-examination by the Assessing Officer.

13. Disallowance of Deduction under Section 80HH:
The Tribunal confirmed the disallowance of the deduction under Section 80HH for profits of Lakshmi Cement Unit and J.K. Paper Mills PM-IV Unit, as the assessee did not fulfill the statutory obligations while computing the profit of the new industrial units.

14. Restriction on Investment Allowance:
The Tribunal upheld the restriction of the investment allowance to Rs. 2,01,09,380 against the claimed Rs. 5,45,77,257.

15. Charging of Interest under Sections 234B and 234C:
The Tribunal confirmed the charging of interest under Sections 234B and 234C, rejecting the assessee's plea against it.

Conclusion:
The Tribunal's comprehensive analysis upheld several disallowances made by the Assessing Officer and CIT (Appeals) while granting relief on the issue of the effective date of amalgamation and compliance with Section 72A of the IT Act. The Tribunal emphasized the binding nature of the BIFR's sanctioned scheme unless declared invalid by a competent authority.