1. This appeal by the assessee-company is directed against the order of the CIT (Appeals) relating to the assessment year 1982-83.
2. The first ground is that the CIT (Appeals) erred in holding that the brought forwa,rd business losses and unabsorbed depreciation of M/s.
Aravalli Svachalit Vahan Ltd. would be eligible for set off under Section 72A only in the assessment year 1984-85 and not in the current assessment year. In order to understand this ground, some facts have to be given. The appellant-company is a manufacturer of refrigerators, cash registers, tools, etc. M/s. Aravalli Svachalit Vahan Ltd. was a company carrying on its business of manufacture of scooters at Alwar in Rajasthan. That company was amalgamated with the assessee-company with effect from 1-7-1980. At the time of such amalgamation, there were certain losses and unabsorbed depreciation of Aravalli Svachalit Vahan Ltd. which had been claimed to be carried forward and set off against the profit of the assessee-company for this year. The total amount which has been claimed for carry forward and set off of losses and unabsorbed depreciation was Rs. 1,58,57,904. The Income-tax Officer referred to the provisions of Section 72A, which is a special provision relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation. For the purpose of carry forward and set off of such losses and depreciation certain conditions have been laid down and only if they are satisfied such carry forward is permissible. The provisions of Section 72A, Sub-section (1) and Sub-section (2) are as under: 72A. (1) Where there has been an amalgamation of a company owning an industrial undertaking or a ship with another company and the Central Government, on the recommendation of the specified authority, is satisfied that the following conditions are fulfilled, namely:- (a) the amalgamating company was not, immediately before such amalgamation, financially viable by reason of its liabilities, losses and other relevant factors; (c) such other conditions as the Central Government may, by notification in the Official Gazette, specify, to ensure that the benefit under this section is restricted to amalgamations which would facilitate the rehabilitation or survival of the business of the amalgamating company, then the Central Government may make a declaration to that effect, and, thereupon, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and the other provisions of this Act, relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.
(2) Notwithstanding anything contained in Sub-section (1), the accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company unless the following conditions are fulfilled, namely:- (i) during the previous year relevant to the assessment year for which such set off of allowance is claimed, the business of the amalgamating company is carried on by the amalgamated company without any modification or reorganisation or with such modification or reorganisation as may be approved by the Central Government to enable the amalgamated company to carry on such business more economically or more efficiently; (ii) the amalgamated company furnishes, along with its return of income for the said assessment year, a certificate from the specified authority to the effect that adequate steps have been taken by that company for the rehabilitation or revival of the business of the amalgamating company.
(3) Where a company owning an industrial undertaking or a ship proposes to amalgamate with any other company and such other company submits the proposed scheme of amalgamation to the specified authority and that authority is satisfied, after examining the scheme and taking into account all relevant facts, that the conditions referred to in Sub-section (1) would be fulfilled if such amalgamation is effected in accordance with such scheme or, as the case may be, in accordance with such scheme as modified in such manner as that authority may specify, it shall intimate such other company that, after the amalgamation is effected in accordance with such scheme or, as the case may be, such scheme as so modified, it would make (unless there is any material change in the relevant facts) a recommendation to the Central Government under Sub-section (1).
(a) "accumulated loss" means so much of the loss of the amalgamating company under the head "Profits and gains of business or profession" (not being a loss sustained in a speculation business) which the amalgamating company would have been entitled to carry forward and set off under the provisions of Section 72 if the amalgamation had not been effected; (b) "specified authority" means such authority as the Central Government may, by notification in Official Gazette, specify for the purposes of this section; (c) "unabsorbed depreciation" means so much of the allowance for depreciation of the amalgamating company which remains to be allowed and which would have been allowed to the amalgamating company under the provisions of this Act if the amalgamation had not been effected The Inspecting Assistant Commissioner (Assessment) noted that under Sub-section (2) of Section 72A the accumulated loss can be set off and carried forward if the amalgamated company furnishes along with its return of income for the relevant assessment year, a certificate from specified authority to the effect that adequate steps have been taken by that company for the rehabilitation or revival of the business of the amalgamating company. It was further noted that under the revival scheme submitted by the amalgamated company it was indicated that the sick unit will be revived in a period of five years, i.e., from 1980-81 to 1984-85. It was also noted by the Assessing Officer that it had not been possible for the assessee-company to implement the revival scheme in the years 1980-81 and 1981-82, and it was only in the assessment year 1982-83 onwards that the scheme was implemented. The Inspecting Assistant Commissioner further noted that the specified authority had not issued the required certificate. Therefore, the carry forward of loss and unabsorbed depreciation were not being allowed in the year 1982-83. The Assessing Officer, therefore, did not go into the extent of the claim and its correctness.
3. When the matter came before the CIT (Appeals), it was noted by him that the High Courts of Rajasthan and Delhi sanctioned the scheme of amalgamation in the month of May 1982, but the specified date for agreement was 1-7-1980. It was noted by the CIT (Appeals) that on receipt of recommendation of the specified authority the Ministry of Finance made a declaration to the following certificate under Section 72A of the Income-tax Act: CERTIFICATE UNDER SECTION 72A(2)(ii) OF THE INCOME-TAX ACT, 1961 (43 of 1961) The Central Government, on the recommendation of the Specified Authority, has made a declaration No. 208/15/82-ITA-II dated 15th October, 1982 to the effect that the conditions laid down in Section 72A(1) have been fulfilled in respect of the amalgamation of Messrs Aravali Svachalit Vahan Limited with Messrs Kelvinator of India Limited.
2. In terms of Section 72A(2)(ii) of the Income-Tax Act, 1961, the Specified Authority hereby certifies that in the previous year relevant to the assessment year 1984-85 Messrs Kelvina,tor of India Limited has taken adequate steps for the rehabilitation/revival of the business of Messrs Aravali Svachalit Vahan Limited, 3. The certificate issued in terms of Section 72A(2)(ii) of the Income-Tax Act, 1961.
This was issued on 22nd September, 1983. Before this the Ministry of Finance, Department of Revenue had issued a declaration under Section 72A(1) of the Income-tax Act as follows:- Amalgamation of M/s. Aravali Svachalit Vahan Ltd. with Kelvinator of India Limited.
On receipt of recommendation of the Specified Authority recommending approval under Section 72A(1) of the IT Act, 1961 of the Amalgamation of M/s. Aravali Svachalit Vahan Ltd. with Kelvinator of India Ltd. effected on 1st July, 1980 it is hereby declared that the conditions mentioned in Clauses (a), (b) and (c) of Sub-section (1) of the section have been fulfilled and notwithstanding anything mentioned in any other provision of Income-tax Act, 1961, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected and the other provisions of Income-tax Act, 1961 relating to set off and carry forward of loss and allowance for the depreciation shall apply accordingly.
This declaration is subject to the requirements of Section 72A(1) of the IT Act, 1961. After taking adequate steps for the rehabilitation and revival of the amalgamating company in terms of the scheme of amalgamation and rehabilitation approved by the Specified Authority, the amalgamated company may apply for the necessary certificate under Section 72A(2)(ii) to the Specified Authority.Sd/- The CIT (Appeals) further noted that the specified authority had conveyed to the assessee-company that in reply to the assessee's letter dated 24-2-1983 the specified authority have conveyed that it was not satisfied that the assessee had taken adequate steps for revival of the industrial undertaking of the amalgamating company till the year 1981-82. The assessee-eompany had been advised to file fresh application for grant of certificate later on. It was as a result of this fresh application that the specified authority had issued the certificate mentioned above.
4. The CIT (Appeals) agreed with the aasessee's stand that the non-filing of the certificate along with the return was not fatal to its claim and it should be deemed that it had been filed with the return of income if it had later on been placed on record. However, the CIT (Appeals) was of the view that the unabsorbed loss and depreciation would be set off only against the profit for the assessment year 1984-85 and it could not be set off in the year 1982-83 and in the relevant period the company had not yet taken adequate steps for the rehabilitation of the company. The CIT (Appeals) did not agree with the contention of the assessee that the unabsorbed loss or depreciation would be set off only in the year when the adequate steps are taken. It was contended that once it is found that adequate steps have been taken as contemplated in the scheme of revival the unabsorbed loss and depreciation should be set off in the first year when the amalgamation has become effective. The relevant first year after the amalgamation has become effective was the current year. The CIT (Appeals) referred to the requirements of the filing of the certificate and the satisfaction of the condition for taking adequate steps held that the benefit of carry forward and set off cannot be taken unless adequate steps have been taken and he cannot be set off in a year prior to the year when such adequate steps are taken. The CIT (Appeals) referred to the decision of the Delhi High Court as well as the Supreme Court in the case of Mahindra and Mahindra Ltd. v. Union of India [1983] 141 ITR 174 and CIT v. Mahindra and Mahindra Ltd. [1983] 144 ITR 225. The CIT (Appeals) further observed that carry forward loss and unabsorbed depreciation will no doubt be deemed as the loss and depreciation respectively of the year of amalgamation but the set off will be in the year in which adequate steps have considerably be taken by the assessee. According to the CIT (Appeals) any of the interpretation would defeat the purpose of this concession. The CIT (Appeals), therefore, directed that the unabsorbed loss and depreciation should be set off only in the year 1984-85 and not in this year.
5. The learned Counsel for the assessee submitted that the interpretation placed by the learned CIT (Appeals) on the provisions of Section 72A is not correct and creates an incongruous position. He pointed out that the current year's losses of the amalgamating company have already been adjusted in year's profit. However, the unabsorbed loss and depreciation though becomes loss and depreciation of the assessee-company has to wait for actual set off in a future year in which in this case happened to be the assessment year 1984-85. He contended that in all cases of revival of sick industries a scheme is submitted and in almost all such cases it is bound to take a few years before the steps taken for revival could be considered to be adequate.
It was contended that though taking of the adequate steps was necessary, it would not mean that the set off would take place against the profits of that year when adequate steps are taken. He pointed out that in Section 72A(1) there is a clear provision that the unabsorbed depreciation and accumulated losses of the amalgamating company could be deemed to be the loss or the allowance for the previous year in which the amalgamation was effected. This position is not denied by the learned CIT (Appeals). However, the learned CIT (Appeals) has created a sort of anomaly as a result of which though the loss and unabsorbed depreciation has to be treated as loss and unabsorbed depreciation of the year of amalgamation, it cannot be set off against the profit of that year. It was also contended that in the case of the.
assessee-company it did not matter whether it was set off in the current year or in the year 1984-85 but it was a wrong principle which has been enunciated by the Department. It was also approved by him that the steps for revival have to be taken over in a number of years and whereas in the beginning such steps cannot be considered to be adequate, they could be considered to be adequate only at a later time when several steps have been taken.
6. The Departmental Representative submitted that the CIT (Appeals) has considered all the aspects in the light of the legal position. He argued that unless the basic condition regarding taking adequate steps was fulfilled, the assessee cannot get the benefit of set off of loss of the amalgamating company.
7. We have carefully considered the facts of the case and the rival arguments. The question for consideration is whether under the provisions of Section 72A the unabsorbed loss and the unabsorbed depreciation of the amalgamating company has to be set off in the year from which the amalgamation becomes effective or has to wait to be set off against the profits of the year when adequate steps are taken to implement the scheme of amalgamation. It is not held by the CIT (Appeals) that in the present case the loss has not to be set off or the unabsorbed depreciation had not to be adjusted towards the profits of the assessee-company. The question is the assessment year against whose profits the unabsorbed losses have to be set off. In our view, the Sub-section (1) of Section 72A clearly provides that the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to the loss or allowance for depreciation of the amalgamated company for the previous year in which amalgamation was effected. This process mainly depends on the declaration made by the Central Government as contemplated in Sub-section (1) and the other condition which is placed in the statute for this purpose is contained in Sub-section (2). Those conditions are that during the previous year relevant to the assessment year for which set off or allowance is claimed the business of the amalgamating company is carried on by the amalgamated company without any modification or reorganisation or with such modification or the reoganisation as may be approved by the Central Government to enable the amalgamated company to carry on such business more economically or more efficiently and the amalgamated company furnishes along with its return of income for the said assessment year a certificate from the specified authority to the effect that adequate steps have been taken by that company for the rehabilitation or revival of the business of the amalgamating company.
As far as the first condition laid down in Sub-section (2) is concerned, that relates to the situation during the previous year relevant to the assessment year for which such set off or allowance is claimed, there is no dispute regarding the fulfilment of this condition. The second condition is that the amalgamated company would satisfy the specified authority that adequate steps have been taken for rehabilitation or revival of the business of the amalgamated company and to that effect the certificate is furnished. This action of taking adequate steps or revival need not necessarily be taken in the year in which the amalgamation was effected and it may take more than one year to take such steps which may be considered to be adequate. The position, however, appears to be that once it is found that in this case the amalgamated company has taken adequate steps for the rehabilitation or revival of the business of the amalgamated company, the amalgamated company becomes entitled for set off of the unabsorbed losses and unabsorbed depreciation on the basis that it becomes the loss and depreciation of the amalgamated company for the previous year in which the amalgamation was effected. In the present case, the amalgamation became effective from 1st July, 1980 and this date falls in the accounting period relevant for the assessment year 1982-83. We find force in the submission of the learned counsel for the assessee that the set off for the carry forward losses of the amalgamated company has not to wait to be set off against the profits of that year when adequate steps are found to have been taken. It would be incongruous to hold the loss and unabsorbed depreciation as a loss of this company and at the same time not set it off of the year of amalgamation in spite of the fact that the competent authority has given a certificate that the condition as given in law has been fulfilled. It is true that up to the end of the previous year relevant for the current assessment year adequate steps have not been taken and such steps have been taken in a later year. It is also true that the Department of Industrial Development in a certificate dated 22nd September, 1983 has noted that the company has taken adequate steps in the year relevant to the assessment year 1984-85. Even then we are of the view that under the law the set off has to be allowed in the year of amalgamation which is the current year. The plea of the assessee is therefore, accepted and the order of the GIT (Appeals) is reversed on this issue.
8 to 20. [Thes paras are not reproduced here as they involved minor issues.]