2025 (3) TMI 465 - HC - Income Tax

Rejecting the petitioner s request for relaxation of the conditions under Rule 9C of the Rules read with Section 72A seeking permission to carry forward all losses of the companies that had amalgamated with the petitioner for an extended period of three years Petitioner s request for relaxation of the conditions under Rule 9C of the Rules has been declined on the ground that the petitioner had failed to achieve the requisite level of production capacity even during the extended period of three years as was sought by the petitioner. HELD THAT - The objective of Section 72A of the Act is not to extend the benefit of carry-forward of unabsorbed losses to the amalgamated company for the purposes of encouraging simplification of corporate structure; it is to extend the benefit to encourage scheme for genuine business purpose and only in cases where the industrial undertakings of the amalgamating company are revived and/or continued. In the present case the petitioner had not sought any relaxation of the said conditions either at the time of amalgamation or immediately thereafter. The petitioner had made its first application seeking relaxation of the conditions under proviso to Rule 9C of the Rules one day prior to the expiry of period of four years from the date of amalgamation that is on 30.03.2011. It is material to note that on that date the petitioner had sought an extension of three years to achieve the installed capacity of 50% production. Admittedly the threshold capacity was not achieved within the extended period that is within 31.03.2014. However the petitioner s application for relaxation continued to be pending and was not disposed of. The petitioner once again sent a communication modifying its request to relax the condition regarding achieving the level of production to 40% instead of 50% as required and sought extension of further one year that is till 31.03.2012. It is material to note that the said request was made by a separate application in response to proceedings/communications in relation to the petitioner s earlier application for extension of time for achieving the threshold production level of 50% of the installed capacity. The petitioner subsequently modified the said request by a letter dated 21.06.2018 which was sent in continuation of its application dated 31.03.2011 inter alia praying that the condition regarding the level of production be reduced from 50% to 36% or in the alterative relax the production level from 50% to 42% with extension of time from March 2011 to March 2012. We are unable to accept that the decision to reject the petitioner s request is perverse or based on extraneous considerations. The petition is unmerited and is accordingly dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Court was whether the decision to reject the petitioner's request for relaxation of conditions under Rule 9C of the Income Tax Rules, 1962, was arbitrary, unreasonable, and contrary to law. Specifically, the issue was whether the Central Government's refusal to relax the conditions for carrying forward accumulated losses and unabsorbed depreciation, as prescribed under Section 72A of the Income Tax Act, 1962, was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

Section 72A of the Income Tax Act, 1962, allows the set-off and carry forward of losses of an amalgamating company subject to certain conditions. Rule 9C of the Income Tax Rules prescribes additional conditions, including achieving a production level of at least 50% of the installed capacity of the amalgamating company within four years of amalgamation. The Central Government has the discretion to relax these conditions under certain circumstances.

Court's interpretation and reasoning:

The Court examined whether the Central Government's decision to deny the petitioner's request for relaxation was arbitrary or unreasonable. The Court emphasized that the power to relax conditions under Rule 9C is discretionary and should be exercised in line with the objectives of Section 72A, which aims to facilitate the revival of industrial undertakings.

Key evidence and findings:

The petitioner argued that it made genuine efforts to achieve the required production levels but was hindered by external factors such as increased costs and market conditions. Despite these efforts, the petitioner failed to meet the 50% production threshold even after an extended period.

Application of law to facts:

The Court noted that while the petitioner made substantial investments and faced genuine constraints, these factors alone did not justify a relaxation of the prescribed conditions. The petitioner's inability to achieve the required production levels within the extended timeframe was a critical factor in the decision to deny the request for relaxation.

Treatment of competing arguments:

While the petitioner cited efforts and external constraints, the Court found that the Central Government's decision was not in disregard of these factors. The decision was based on the failure to meet the production threshold, which is a key condition for granting the benefit under Section 72A.

Conclusions:

The Court concluded that the decision to reject the petitioner's request for relaxation was neither arbitrary nor unreasonable. The decision was made in consideration of the petitioner's failure to meet the prescribed production levels, even after an extended period.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

The Court emphasized that "the power to relax a rule or a condition is by way of an exception and the scope of such power cannot be construed in an expansive manner."

Core principles established:

The discretionary power to relax conditions under Rule 9C should be exercised in line with the objectives of Section 72A, which is to ensure the revival of industrial undertakings. The power to relax is not to be exercised liberally but only in exceptional cases.

Final determinations on each issue:

The Court determined that the Central Government's decision to deny the petitioner's request for relaxation of conditions under Rule 9C was justified. The petitioner's failure to achieve the required production levels, even after an extended period, was a valid basis for the decision.