TMI Blog2007 (11) TMI 549X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (assessee) was created. Before demerger, 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 demerged company. Total assets before the demerger stood at Rs. 1,22,95,28,000. While demerging M/s. Maharashtra Hybrid Seeds Co. Ltd., bifurcation of assets was carried out as per the claim approved by the hon ble High Court. As per the aforesaid bifurcation, the demerged 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 to 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 10.73 per cent. of the total value of all the assets of the demerged company, i.e., Maharashtra Hybrid Seeds Co. Ltd. In the ratio of the aforesaid division of assets of the demerged company, the unabsorbed depreciation and the unabsorbed capital expenditure on scientific research have been distributed between the demerged company and the resulting company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to whether the unabsorbed loss on capital expenditure on scientific research claimed by the assessee-company can be termed as a depreciation loss and the treatment of carrying forward and set off be offered accordingly as the assessee has very much reliance on the provisions under section 35(4) of the Income-tax Act. In this context, it is pertinent and essential to refer to the provisions contained in section 72(2) of the Income-tax Act, which reads as under : Section 72. (1) . . . (2) Where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35 to be carried forward, effect shall first be given to the provisions of this section. On a plain reading of this section makes it abundantly clear that the unabsorbed depreciation loss under section 32(2) and unabsorbed expenditure on scientific research under section 35(4) is clearly distinguishable. The provisions for carrying forward and set off of the same is also separately mentioned in the Act. Both these losses cannot be merged together or change the priority of set off. The loss under section 35(4) cannot be equated with the loss under section 32(2) of the Income-tax Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on scientific research in the same manner as unabsorbed depreciation under section 32(2), till it is set off and absorbed against future profits. Sub-section (2) of section 32 reads as under : 32. Depreciation. (1) . . . (2) Where in the assessment of the assessee full effect cannot be given to any allowance under clause (ii) of 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 being less than the allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance), as the case may be, (i) shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year, (ii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year ; (iii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i) and clause (ii), the amount of allowance not so set off shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and 73(3). If an assessee has unabsorbed depreciation under section 32(2) as well as unabsorbed business loss carried forward under section 72(1), section 72(2) provides that the unabsorbed losses shall have precedence and be set off, so far as the sufficiency of the income to be set off against permits. It is only after the carried forward business loss is set off, and there yet remains positive income, that the unabsorbed depreciation would come in for a set off. What section 72(2) contemplates is that if there is some unabsorbed loss carried forward to be set off, and there is also some unabsorbed depreciation allowance carried forward to be set off, the former shall get priority : Aluminium Corporation of India Ltd. v. CIT [1958] 33 ITR 367 (Cal) and CIT v. Ahmedabad Electricity Co. Ltd. [1973] 89 ITR 77 (Bom). It is thus quite clear that the provisions for carry forward and set off of unabsorbed depreciation are contained in section 32(2) alone and not in section 72. Likewise, the provisions for carry forward and set off of unabsorbed capital expenditure on scientific research are contained in section 35(4) read with section 32(2) of the Income-tax Act and not in section 72 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be, which remains to be allowed and which would have been allowed to the predecessor firm or the proprietary concern or amalgamating company or demerged company, as the case may be, under the provisions of this Act, if the reorganisation of business or amalgamation or demerger had not taken place. The first and the foremost feature of section 72A(4) is that it opens with a non obstante clause to the effect notwithstanding anything contained in any other provisions of this Act and thus overrides any other provision of the 1961 Act. In the case of demerger, the provisions enacted in sub-section (4) of section 72A come into play. The accumulated loss [as defined in section 72A(7)(a)] and the allowance for unabsorbed depreciation [as defined in section 72A(7)(b)] of the demerged company are, where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, allowed to be carried forward and set off in the hands of the resulting company. In a case where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, the accumulated loss and unabsorbed depreciation ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , had not taken place. Since the provisions of section 72 are not applicable to carrying forward and setting off of the unabsorbed portion of capital expenditure on scientific research, it is the demerged company alone, which can claim the benefit under section 32(2) on the fulfilment of the conditions prescribed therein. Such unabsorbed portion of capital expenditure on scientific research in the hands of the demerged company cannot form part of accumulated loss under section 72A(4) and hence the resulting company, i.e., the assessee-company cannot claim that the unabsorbed portion of expenditure on scientific research should be treated as part of accumulated loss and consequently allowed to it under section 72A(4) of the Income-tax Act. The Assessing Officer, in our view, has correctly held that the accumulated loss as defined in section 72A(7)(a) does not include unabsorbed capital expenditure on scientific research and therefore the benefit of section 72A(4) cannot be extended to unabsorbed capital expenditure on scientific research. The term unabsorbed depreciation has been exhaustively defined in section 72A(7)(b) of the Income-tax Act so as to mean so much of the allowan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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