2012 (7) TMI 698 - HC - Income Tax

Carry forward of investment allowance - unabsorbed depreciation of Amalgamating Company - held that - Section 72A is a specific provision to deal with cases of carry forward and set off of accumulated loss and unabsorbed depreciation allowance in cases of amalgamation or demerger. As per sub section (1), the accumulated loss and unabsorbed depreciation of the amalgamating company is deemed to be the loss or the allowance of depreciation to the amalgamated company for the previous year in which the amalgamation is effected. Unabsorbed depreciation is defined in the Explanation to mean share or allowance of an amalgamating company which remains to be allowed and it would have been allowed to the amalgamating company under the provisions of the Act as if the amalgamation had not been effected. The benefit available under Section 72A was also considered by the Bombay High Court (1990 (7) TMI 44 - BOMBAY HIGH COURT). - Decided in favor of assessee. Regarding investment allowance - the transferor company had not created any reserves in compliance of the provisions of Section 32A(6) - Decided against the assessee. Amortization of expenses - section 35D - held that - expenditure incurred in connection with the additional issue of share and this was directly relatable to the expansion of the capital base of the company. - deduction allowed - Decided in favor of assessee.

Issues Involved
1. Carry forward of investment allowance.
2. Addition of unabsorbed depreciation to the written down value under Section 43(6).
3. Disallowance of deduction under Section 35D for euro shares issuance.
4. Classification of euro issue expenses as capital expenditure under Section 37.

Detailed Analysis

1. Carry Forward of Investment Allowance
The assessee challenged the Tribunal's decision that investment allowance cannot be carried forward. The Tribunal and Assessing Authority rejected the claim due to lack of evidence showing that the amalgamating company was allowed investment allowance at Rs.1,31,99,650/-. The Tribunal upheld the disallowance, and the Court confirmed this decision, stating that the transferor company did not create any reserves in compliance with Section 32A(6). Therefore, the first question in T.C.(A) No.1311 of 2005 was answered against the assessee.

2. Addition of Unabsorbed Depreciation to Written Down Value
The assessee contended that as per Section 43(6) Explanation 2(b), the written down value of the assets at the hands of the amalgamated company should include unabsorbed depreciation from the amalgamating company. The Assessing Authority, however, argued that the decision of the Bombay High Court (Commissioner of Income-tax Vs Hindustan Petroleum Corporation Ltd.) was rendered before the amendment to Explanation 2 in 1986. The Tribunal agreed with the Assessing Authority, but the High Court sided with the assessee, stating that Explanation 3 has no relevance in determining the written down value of the block of assets at the hands of the amalgamated company. The Court concluded that the written down value should be as per Explanation 2 to Clause (c) of Section 43(6), thus answering the second question in T.C.(A) No.1311 of 2005 and the first question in T.C.(A) No.1312 of 2005 in favor of the assessee.

3. Disallowance of Deduction under Section 35D for Euro Shares Issuance
The assessee claimed deduction under Section 35D for expenses related to the issuance of euro shares. The Assessing Authority disallowed this claim, stating that the proceeds were mainly used for increasing investments rather than for the new projects or expansion. The Tribunal upheld this view. However, the High Court noted that the brochure clearly indicated that the proceeds were intended for financing new projects and expansion. The Court accepted the assessee's claim for deduction under Section 35D, thus answering the second question in T.C.(A) No.1312 of 2005 in favor of the assessee.

4. Classification of Euro Issue Expenses as Capital Expenditure under Section 37
The Tribunal had alternatively treated the euro issue expenses as capital expenditure under Section 37, which was disputed by the assessee. Given the Court's decision on the deduction under Section 35D, the third question in T.C.(A) No.1312 of 2005 regarding the alternative claim under Section 37 did not arise. Consequently, T.C.(A) No.1312 of 2005 was allowed in favor of the assessee.

Conclusion
- T.C.(A) No.1311 of 2005: Partly allowed. The first question was answered against the assessee, and the second question was answered in favor of the assessee.
- T.C.(A) No.1312 of 2005: Allowed in favor of the assessee. The first and second questions were answered in favor of the assessee, and the third question did not arise.

No costs were awarded in either case.

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