TMI Blog2008 (7) TMI 611X X X X Extracts X X X X X X X X Extracts X X X X ..... he case are that M/s. Maharashtra Hybrid Seeds Co. Ltd. (de-merged company) had a Vegetable Seeds Division, which was separated by way of de-merger duly approved by the Hon ble Bombay High Court vide its order dated 20-9-2000 with effect from 1-4-2000. As a result of the aforesaid de-merger, the resulting company, i.e., M/s. Mahyco Vegetable Seeds Ltd. (assessee) was created. Before de-merger, there was unabsorbed depreciation amounting to Rs. 10,83,07,548 and unabsorbed capital expenditure on scientific research amounting to Rs. 22,65,78,201, aggregating in all to Rs. 33,48,85,749 in the hands of the de-merged company. Total assets before de-merger stood at Rs. 1,22,95,28,000. While de-merging, M/s. Maharashtra Hybrid Seeds Co. Ltd., carried out the bifurcation of assets as per the claim approved by the Hon ble High Court. As per the aforesaid bifurcation, the de-merged company, i.e., M/s. Maharashtra Hybrid Seeds Co. Ltd., retained assets of the value of Rs. 1,09,76,53,000, which worked out at 89.27 per cent of the total value of all the assets while the resulting company, i.e., the assessee company took over the assets of the value of Rs. 13,18,73,000 which worked out to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iation and "accumulated loss" have been specifically defined for the purpose of set off of accumulated loss and unabsorbed depreciation allowance in the case of reorganisation including demerger. In his opinion, the unabsorbed capital expenditure on scientific research as per section 35(4) was not covered in either of the two expressions employed in sub-section (7). The sum and substance of his submissions was that since the unabsorbed capital expenditure on scientific research was not covered in accumulated loss and unabsorbed depreciation, hence the same was not eligible for carry forward in the hands of the resulting company. 7. On the contrary, the learned counsel for the assessee, while relying on the impugned order contended that the claim of demerger was to be considered as tax neutral as has been mentioned in the Memorandum explaining the provisions in the Finance Bill, 1999 as explained in 236 ITR 159 (St.). He further contended that the Hon ble Supreme Court in the case of Escorts Ltd. v. Union of India 199 ITR 43 has held that the depreciation and scientific research expenditure are basically of the same nature though differing in rationale. In the light of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been determined under the head Profits and gains of business or profession as representing the excess of expenses and losses over the business income. So in order to assume the character of the accumulated loss , it is sine qua non that, so much of the amount should have firstly gone in to the computation of business income accepted as deductible but is not adjusted fully or partly due to the shortage of profit. If a particular allowance or expenditure is not deductible in full and its deductibility is restricted to the extent of the available profits under the specific provisions of the Act, then the portion which cannot be so adjusted is not treated as accumulated loss but the unabsorbed expenditure or allowance as the case may be. The character of loss would be acquired only when the identity of the specific items is lost and the individual items are merged into the overall figure. To cite a simple example, if an assessee has business profit of Rs. 100 prior to the claim of depreciation of Rs. 150, then as per the provisions of section 32, the assessee is entitled to claim depreciation of Rs. 150, but that would be restricted to the available profit of Rs. 100 and the unad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other cases of reorganisation of business, such as a firm succeeded by a company or a proprietary concern succeeded by a company etc., in which case also the accumulated loss and the unabsorbed depreciation of the predecessor firm or the proprietary concern, as the case may be, is deemed to be the loss or allowance for depreciation of the successor company of the previous year in which business reorganisation was effected. All these sub-sections are, of course, subject to the conditions and restrictions placed in them. Then sub-section (7) defines certain expressions used in the earlier sub-sections such as accumulated loss and unabsorbed depreciation etc. 12. Section 72A was substituted by the Finance Act, 1999 with effect from 1-4-2000 with a view to cope up with various challenges to the Indian industry under which it was necessary to make it globally competitive. It was believed that for the restructuring of production system and better utilisation of resources, there was a dire need for bringing out business re-organisations and in this view of the matter rationalisation of the existing provisions was done. 13. The Memorandum explaining the provisions in Finance B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation states that where in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year or owing to the profits or gains chargeable being less than the allowance, then subject to the provisions of sections 72(2) and 73(3), the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years. As the unabsorbed depreciation is added to the amount of depreciation in the succeeding year and deemed as part of that allowance under section 32(2), the capital expenditure on scientific research also gets the same treatment by virtue of section 35(4) which categorically states that the provisions of section 32(2) shall apply in relation to the deductions allowable under clause ( iv ) of section (1) as they apply to the deductions in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ger to the resulting company as if the demerger has not taken place. The rationale behind these amendments is to ensure that the benefit which is otherwise available to the demerged company is not lost due to demerger and gets transferred to the resulting company. Thus, it becomes abundantly clear that the Legislature has taken full care to ensure that the business reorganisations including demerger remain tax neutral. When we consider all the relevant sections, it is discernible that the accumulated loss, unabsorbed depreciation and the other unused amortisation of expenses etc. of the demerged company are available to resulting company on the transfer of undertaking in a scheme of demerger. We hardly see any reason for isolating solitary section 35(1) from the benefits to be conferred on the resulting company on account of demerger. The glaringly patent position is that the Legislature did not consider it appropriate to insert any sub-section in section 35, as analogous to section 35A(7), for the reason that the unabsorbed capital expenditure on scientific research has been recognised as similar to and at par with the unabsorbed depreciation for which section 32(2) is there to en ..... X X X X Extracts X X X X X X X X Extracts X X X X
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