TMI Blog2020 (6) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... going the claims of Vortal Division for AY 2010-11 without doing that AO has stuck to his allegation which action of AO cannot be countenanced. And in any way the department has the power vested in them to ensure that M/s. SYK does not get the benefit of M/s. Vortal Division for AY 2010-11 after it has filed the revised returns disclaiming the benefits. In the light of the above discussion, we do not find any merit in the objection raised by AO. Hence, there was no double claim as alleged by the AO since the demerged company (SYK Ltd) has forsaken its claim with respect of brought forward losses of the demerged unit. Once demerger is sanctioned by the Hon ble High court the enabling provision is section 72A of the Act, which allows carry forward and set off of accumulated loss and unabsorbed depreciation allowance in cases of amalgamation or demerger etc. Sub-section (4) of section 72A provides that in the case of a demerger is compatible to the scheme as envisaged and defined u/s. 2(19AA) of the Act, the eligible accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall be allowed to be carried forward and set off in the hands of the resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial and cannot be termed as perverse. - Decided against revenue. - I.T.A. No. 606/Kol/2018 - - - Dated:- 22-5-2020 - Shri J. Sudhakar Reddy, AM And Shri A. T. Varkey, JM For the Appellant : Shri Imokaba Jamir, CIT, DR For the Respondent : Shri S. K. Tulsiyan, Advocate ORDER PER SHRI A.T.VARKEY, JM This is an appeal filed by the revenue against the order of Ld. CIT(A)-14, Kolkata dated 30.01.2017 for AY 2010-11 on the following grounds:- 1. Whether on the basis of facts circumstances of the case and in law the Ld. CIT(A) erred in coming to the conclusion that the assessee is entitled to set off/ adjustment and carry forward of accumulated losses amounting to ₹ 1,21,58,014/- and unabsorbed depreciation amounting to ₹ 20,61,04,026/- of the demerged company. 2. Whether on the basis of facts circumstances of the case and in law the Ld. CIT(A) erred in coming to the conclusion that the assessee is entitled to set off/ adjustment and carry forward of accumulated losses in this assessment year although the same has been claimed by the demerged company in its return of income for this assessment year. 3) Whether on the basis of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment, it was brought to the notice of AO that pursuant to the scheme of demerger between the assessee and M/s. SYK Ltd. com Limited duly approved by the High Court of Calcutta and Hon'ble High Court of Bombay, the assessee company had acquired the Vortal' division from M/s. SYK Ltd. w.e.f 01.03.2010 and copy of the Hon ble High Court orders was also submitted to him a copy of which is found enclosed at pages 69-155 of the paper book. All the necessary formalities in connection with the said scheme of demerger were completed as per law and the scheme was also found to be compatible in terms of Section 2(19AA) of the Income Tax Act, 1961. It was also brought to the notice of AO that when the original Return of Income (ROI) was filed on 28.09.2010, since the Hon ble High courts did not clear the demerger (supra), the impact of demerger and merger of Vortal division to assessee company by way of revised return could not be filed within the due date allowed by statute, yet the revised return taking into consideration the impact of demerger and assessee acquiring Vortal division was filed at the earliest on 09.06.2011 declaring NIL income after adjustment of brou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he revised return which was a correct action. The Ld. DR further submitted that the assessee company has filed a revised return after intimation u/s. 143(1) dated 14.04.2011 was passed against the assessee and hence the revised return u/s. 139(5) of the Act was not filed on time and referred our attention to paragraphs 23.4 page 12 of the assessment order and submitted that the AO could not have accepted the revised return which was belatedly filed. The Ld. CIT, DR also pointed out to us that both the demerging company and the resultant company have claimed the same loss resulting in double claim of set off of losses and carry forward of losses pertaining to the demerged undertaking and drew our attention to paragraph 22 page 10 of the assessment order. And thus, he contended that the impugned order of Ld. CIT(A) needs to be reversed and AO s order to be sustained. 7. Per contra, the Ld. AR supporting the decision of the Ld. CIT(A) and filed a detailed written submission and took pains in controverting the issues pointed out by the ld. CIT, DR which we would discuss infra and also drew our attention to various case laws to controvert the submission of the Ld. CIT, DR and he does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income on 09.06.2011 showing income of Rs. Nil after getting the approval of AGM of assessee company. Subsequent to the filing of revised returns by assessee, the case of the assessee was selected for scrutiny assessment under CASS. During the course of assessment, it was explained to the AO that pursuant to the scheme of demerger between the assessee and M/s. Star Ya Kalakaar.com Limited duly approved by the Hon ble High court of Calcutta and Hon ble High Court of Bombay, the assessee company had acquired the Vortal division from M/s. Star Ya Kalakaar.com Limited w.e.f. 01.03.2010 and since the orders of the Hon ble High Court were passed only in March/April, 2011, the assessee company after receipt of the order, immediately started preparing revised accounts taking into consideration the impact of Demerger (revised audited account dated 08.06.2011) and filed the revised returns prescribed u/s. 139(5) of the Act declaring Nil income on 09.06.2011 after adjustment of brought forward losses relating to the demerged undertaking (Vortal division of M/s. Star Ya Klakaar.com Ltd.). Thereafter, on 29.08.2011, the assessee s case was selected for scrutiny and AO issued the statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tually incorrect and so it fails. b) Coming to the next reason of AO for not accepting the revised return was that since the assessee has not filed the return of loss within time as prescribed u/s. 139(3) of the Act, he did not accept the revised return. We note that section 139(3) of the Act reads as under: If any person who has sustained a loss in any previous year under he head Profits and gains of business or profession or under the head Capital gains and claims that the loss or any part thereof should be carried forward under sub-section (1) of section 72, or section (2) of section 73, or sub-section (2) of section 73A or section (1) or sub-section (3) of section 74, or sub-section (3) of section 74A, he may furnish, within the time allowed under sub-section (1), a return of loss in the prescribed form and verified in the prescribed manner and containing such other particulars as may be prescribed, and all the provisions of this Act shall apply as if it were a return under sub-section (1). 10. Thus, from a reading of the above provision it is clear that section 139(3) of the Act stipulates that loss of previous year under the head Income from Business/profess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company or the resulting company, as the case may be. Sub-section (4) of Section 72A provides that the eligible losses and unabsorbed depreciation of the demerged company shall be allowed to be carried forward and set off in the hands of the resulting company. 13. We have taken note of the order of the Hon ble High Court which is found enclosed at page 69-155 of the paper book. Here we note at page 113 of the order wherein the Hon'ble High Court at Calcutta has clearly stated that the losses of the demerged undertaking will be available to the resulting unit, being the assessee company in the present case. The relevant extract of the order is reproduced below: The Vortal Division of Star Ya Kalakaar.com Limited, the demerged company, has unabsorbed business losses and unabsorbed depreciation as per the Income Tax Act, 1961 eligible to be carried forward and set-off under section 72A(4) of the Income Tax Act, 1961 in the hands of resulting company, i.e. Padma Logistic and Khanij Private Limited as per follows Hence, we are of the opinion that section 139(3) of the Act is not applicable to the facts of the case as contended by the AO and therefore this ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions as laid down in sec. 139(5) of the Act which provision required the filing of revised return prior to completion of assessment. We note that in the instant case the assessee filed ROI on 28.09.2010 and intimation u/s. 143(1) was issued on 14.04.2011 and the revised ROI was filed on 09.06.2011, after the Hon ble High Court s order of demerger was passed on (08.03.2011 and 21.04.2011) with effect from the appointed date 01.03.2010. So from the dates of events given above, it is clear that assessee could not have filed the revised return claiming set off u/s. 72A(4) of the Act of the demerged company without the Hon ble High Court s sanctioned the demerger scheme on 08.03.2011 and 21.04.2011. The intimation was issued by the department u/s. 143(1) of the Act on 14.04.2011. So, the AO by raising this objection is asking the assessee to do an impossible thing. Be that as it may be intimation u/s. 143(1) of the Act is not strictly assessment, when the AO has passed in the relevant year scrutiny assessment u/s. 143(3) of the Act. 17. According to us, the right to file a revised return of income does not lapse with the issuance of intimation under section 143(1) of the Act. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on identical facts it was held that, It is incumbent upon Department to assess total income of successor in respect of previous assessment year after date of succession. Thus, where predecessor companies/transferor companies had been succeeded by appellants/transferee companies who had taken over their business along with all assets, liabilities, profits and losses etc., in view of provisions of section 170(1), Department was required to assess income of appellants after taking into account revised Returns filed after amalgamation of companies 20. In view of the above judgment, the AO was bound to accept the revised return filed by the assessee pursuant to the scheme of demerger sanctioned by the Hon'ble High Courts. Section 139(5) of the Act reads as under: if any person, having furnished a return under sub-section (1) or in pursuance of a notice issued under sub-section (1) of section 142 discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier . 21. Moreover, Section 139(5) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carry forward of losses pertaining to the demerged undertaking was taken twice, both by the resulting company (assessee) and the demerged company (M/s SYK Ltd.). Accordingly, the revised return filed by the assessee was rejected by the AO. 24. Against this objection of AO the Ld. AR submitted that M/s. Star Ya Kalakaar.com Limited (SYK) has not taken the benefit of unabsorbed business loss or unabsorbed depreciation relating to the 'Vortal Undertaking' as alleged by the AO. The entire losses of the demerged undertaking were transferred to the resulting company on 01-03-2010 by virtue of the Hon'ble High Court orders. In this regard, Ld. AR pointed out to our attention a copy of the letter written by M/s SYK Ltd to its Assessing Officer namely Circle -9(3), Mumbai, which is found placed at page 61-68 of paper book wherein it has been clearly written that pursuant to the scheme of demerger being approved by the Hon'ble High Courts, the brought forward losses of the demerged undertaking gets transferred to the resulting company (here the assessee company) and thus to that extent, the company (M/s. SYK) shall not be entitled to take the benefit of brought forward los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from the abstract of the order sheet enclosed at page 57-58 of the paper book. Moreover, vide submissions dated 14-03-2011 (refer page 17-21 of the paper book), the assessee has also submitted a letter received from M/s SYK Ltd addressed to the assessee's AO encompassing the facts of demerger and confirming that the brought forward losses of the demerged unit is retransferred to M/s. Padma Logistics and Khanij Pvt Ltd during AY 2010-11 since the demerger scheme took place w.e.f 01-03-2010. In the said letter it was also confirmed that w.e.f AY 2010-11, M/s SYK Ltd is not entitled to any benefit of brought forward losses of the demerged unit, (refer pages 18-21 of the paper book.). Further, we note that the brought forward losses of the demerged unit was not carried forward by M/s SYK Limited to subsequent years, from the enclosed ITR of M/s SYK Ltd. for the immediately succeeding year, being AY 2011-12, found placed at pages 195-196 and 178-200 of the paper book. From a perusal it is evident that the losses of the demerged unit was neither set off during the year nor was carried forward to subsequent years. 26. However, the AO did not accept and was of the opinion that sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court held in the case of Marsh all Sons Co. (India) Ltd. v. ITO (1997) (2) SCC 302, the Hon ble Apex Court held that Once the scheme had been sanctioned with effect from a particular date, it is binding on everyone including the statutory authorities. The scheme of demerger, as defined under the Income Tax Act, 1961 u/s. 2(19AA), is summarized as follows: As per section 2(19AA) of the Act demerger in relation to companies means the transfer of the undertaking in the following manner: i) All the property of the undertaking, being transferred by the demerged company, immediately before the demerger becomes the property of the resulting company by virtue of the demerger; ii) All the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger. iii) The property and the liabilities of the undertaking or undertakings begin transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger. iv) The resulting company issues, in consideration of the demerger, its shares to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that on perusal of the original computation of income, the AO noted that assessee has earned dividend income of ₹ 77,50,000/-, exempt u/s 10(34) of the Act and has suo moto disallowed a sum of ₹ 77,500/- u/s 14A of the Act. However, in the revised return of income filed on 09-06-2011, the assessee has declared dividend income of ₹ 77,93,336/- and suo moto disallowed a sum of ₹ 77,933/- u/s 14A of the Act. The AO opined that section 14A of the Act provides for disallowance of the expenditure in relation to income which does not form part of the total income and applied Rule 8D and computed an additional disallowance of₹ 18,32,751/- u/s 14A of the Act as follows: Rule 8D(2)(i) Expenditure directly relating to exempt income ₹ 77,500/- Rule 8D(2)(i) Amount of expenditure by way of interest ₹ 9,58,898/- Rule 8D(2)(i) 0.5% of average value of investments ₹ 8,72,853/- TOTAL ₹ 19,10,251/- Less: Amount suo moto disallowed by the assessee ₹ 77,500/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther investments cannot be treated as strategic one since they, primarily, do not sync with the business of the assessee. The assessee has claimed that its company is engaged in the business of mining which is evident from the Audited Statement of accounts and at least one investment i.e. investment made in Aryan Mining and Trading Corporation Pvt. Ltd. amounting to ₹ 18,88,20,000 (previous year ₹ 12,92,50,000) is a strategic one . Therefore, other investments made apart from this investment are perhaps not strategic and hence provisions of Section 14A ought to be applied. Further, from the Audited Statement of accounts it is evident that the self-owned funds of the assessee company are in excess of ₹ 35 crores whereas the investments are as at the end of the year amount to ₹ 20.56 crores. Therefore the claim of the assessee that the availability of interest free funds with the assessee is much more than the amount of investment is correct. Further, as far as unsecured loans taken by the assessee is concerned on which the assessee has paid interest, despite increase in investments, have fallen from ₹ 313 lakhs as at the beginning of the year to & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income. 33. There is no quarrel in assigning this meaning to section 14A of the Act. In fact, all the High Courts, whether it is the Delhi High Court on the one hand or the Punjab and Haryana High Court on the other hand, have agreed in providing this interpretation to section 14A of the Act. The entire dispute is as to what interpretation is to be given to the words 'in relation to' in the given scenario, viz. where the dividend income on the shares is earned, though the dominant purpose for subscribing in those shares of the investee company was not to earn dividend. We have two scenarios in these sets of appeals. In one group of cases the main purpose for investing in shares was to gain control over the investee company. Other cases are those where the shares of investee company were held by the assessees as stock-in-trade (i.e. as a business activity) and not as invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not only inserted section 14A by the Finance (Amendment) Act, 2001 but also made it retrospective i.e. 1962 when the Income Tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum explaining the provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee companies have to fail and are, therefore, dismissed. 34. However, we do agree with the Ld. CIT(A) that no disallowance un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for assessee s business purposes since rent agreements were not produced and according to him, other concerns were also functioning on the same property and, therefore, disallowed a sum of ₹ 11,82,000/- out of the total rent paid of ₹ 30,75,000/-. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who gave partial relief to the assessee by holding as under: The assessee has taken various premises on hire and paid rent on the same. The same has been detailed in the assessment order as well s in various submissions filed by the assessee during the course of appellate hearing. The assessee has also filed copies of rental agreements as well as evidence of payment of rent. The Assessing Officer, on the basis of his presumption that some of the rent paid by the assessee were not for business purposes, had disallowed rent' amounting to ₹ 11,82,000 out of total rent paid ₹ 30,75,000. The assessee had filed detailed submissions and a report was sought from the Assessing Officer in this regard,. From the Assessment records, it is evident that the Assessing Officer has not questioned the genuinety of payment made for rent. However, he was not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,08,000 Dover Properties (P) Ltd. Flat for accommodating visiting staff and othrs at 14/2, Burdwan Road, Kolkata-700 0027. 3,00,000 Aisawat Housing (P) Ltd. Land at Rajarhat for parking of trucks and other goods vehicles 3,00,000 Sukumar Bose Railway siding, Barajmanda, Barbil, Orissa 90,000 Nathmall Girdharill Steels Ltd Record Room for keeping old files of the assessee company at 159, J. N. Mukherjee Road, Howrah-6. 1,08,000 Total 11,82,000/- 37. Having heard both the parties, we note that the Ld. CIT(A) has given a clear finding of fact that the assessee has paid rent and copies of rental agreement and evidences of payment are available and this finding of fact has not been controverted in the grounds of appeal raised by the revenue which reads as under: 4) Whether on the basis of facts circumstances of the case and in law the Ld. CIT(A) erred in restricting the addition on account of disal ..... 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