Case Note & Summary
The Revenue appealed against the order of the Income Tax Appellate Tribunal (ITAT) dated 10.07.2009, which had allowed the assessee-company to set off unabsorbed depreciation of the amalgamating company against its business income. The respondent-assessee, M/s. KBD Sugars and Distilleries Ltd. (formerly Karnataka Breweries & Distilleries Pvt. Ltd.), was engaged in the manufacture of beer, IML, and speed zone. By an amalgamation scheme approved by the High Courts of Karnataka and Andhra Pradesh on 08.03.2006 and 17.04.2006 respectively, M/s. Shree Vani Sugars and Industries Ltd. (amalgamating company) amalgamated with the respondent with effect from 01.03.2005. The amalgamating company was engaged in the manufacture of sugar since 1984 and had commenced power generation business on 08.08.2003 as an expansion. For the assessment year 2005-06, the assessee declared business income of Rs.24,64,96,704/- and claimed set off of brought forward losses and unabsorbed depreciation of the amalgamating company. The Assessing Officer disallowed the set off of unabsorbed depreciation of the power generation business on the ground that the amalgamating company had not been in that business for at least three years prior to amalgamation, as required under Section 72A of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) upheld the disallowance, but the ITAT reversed it, allowing the set off. The Revenue appealed to the High Court under Section 260A of the Act. The High Court framed the substantial question of law: whether the unabsorbed depreciation of the amalgamating company could be set off against the business income of the amalgamated company under Section 72A. The court analyzed Section 72A(1)(a), which requires the amalgamating company to have been engaged in the business for at least three years prior to amalgamation. Since the power generation business commenced on 08.08.2003, and the amalgamation was effective from 01.03.2005, the period was less than three years. The court held that the condition was not satisfied, and therefore, the unabsorbed depreciation could not be set off. The court allowed the Revenue's appeal, set aside the ITAT order, and restored the order of the Assessing Officer.
Headnote
A) Income Tax - Amalgamation - Set off of unabsorbed depreciation - Section 72A, Section 32 of Income Tax Act, 1961 - The issue was whether unabsorbed depreciation of the amalgamating company could be set off against the business income of the amalgamated company. The court held that the benefit of Section 72A is available only if the amalgamating company was engaged in the business for at least three years prior to amalgamation. Since the power generation business commenced only on 08.08.2003, less than three years before the amalgamation effective date of 01.03.2005, the condition was not satisfied. The unabsorbed depreciation could not be set off. (Paras 1-8) B) Income Tax - Amalgamation - Condition of three years business - Section 72A(1)(a) of Income Tax Act, 1961 - The court interpreted Section 72A(1)(a) which requires the amalgamating company to have been engaged in the business for at least three years prior to amalgamation. The amalgamating company's power generation business started on 08.08.2003, and amalgamation was effective from 01.03.2005, which is less than three years. Hence, the condition was not fulfilled. (Paras 5-8) C) Income Tax - Amalgamation - Unabsorbed depreciation - Section 32 of Income Tax Act, 1961 - The court noted that unabsorbed depreciation is not a loss but a deemed loss under Section 32. However, the set off of unabsorbed depreciation of the amalgamating company is subject to the conditions of Section 72A. Since the condition of three years business was not satisfied, the unabsorbed depreciation could not be set off. (Paras 6-8)
Issue of Consideration
Whether the unabsorbed depreciation of the amalgamating company can be set off against the business income of the amalgamated company under Section 72A of the Income Tax Act, 1961, when the amalgamating company had not commenced its power generation business before amalgamation?
Final Decision
Appeal allowed. Order of ITAT set aside. Order of Assessing Officer restored. The unabsorbed depreciation of the amalgamating company cannot be set off against the business income of the amalgamated company under Section 72A of the Income Tax Act, 1961.
Law Points
- Amalgamation
- Unabsorbed depreciation
- Set off of losses
- Section 72A of Income Tax Act
- 1961
- Section 32 of Income Tax Act
- Business continuity
- Amalgamating company
- Amalgamated company
