1. The Department has filed the present appeal against the order passed by the ld. CIT(A) on 07.06.2004 on the following grounds: On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in allowing the claim of 'unabsorbed loss on capital expenditure on Scientific research & development of the demerged company and treating the same as accumulated loss/depreciation loss as per provisions of Section 32(2) and hence to be treated at par for the purpose as contemplated Under Section 71A(4) of the I-T Act 2. Briefly stated, the facts of the 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 20.09.2000 w.e.f.
01.04.2000. 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., bifurcation of assets was carried out 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 to 89.27% 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% of the total value of all the assets of the de-merged company, i.e., Maharashtra Hybrid Seeds Co. Ltd. In the ratio of the aforesaid division of assets of the de-merged company, the unabsorbed depreciation and unabsorbed capital expenditure on scientific research have been distributed between the de-merged company and the resulting company. As per the aforesaid ratio, Rs. 9,66,90,848/- being 89.27% of Rs. 10,83,07,548/- of unabsorbed depreciation was allotted to de-merged company while a sum of Rs. 1,16,16,700/- being 10.73% of Rs. 10,83,07,548/-of unabsorbed depreciation was allotted to assessee company, i.e., the resulting company. Likewise, unabsorbed capital expenditure on scientific research of Rs. 22,65,78,200/- was allocated between de-merged company and the assessee-company in the aforesaid ratio, which worked out to Rs. 20,22,76,192/- in the hands of the de-merged company and Rs. 2,43,02,009/- in the hands of the assessee-company. The assessee, i.e., the resulting company claimed the benefit of Section 72A(4) r.w.s. 35(4) of the I-T Act in respect of unabsorbed expenditure on scientific research also. The Assessing Officer allowed the benefit of Section 72A(4) in respect of unabsorbed depreciation allocated to the assessee but denied that benefit to the assessee in respect of unabsorbed expenditure on scientific research amounting to Rs. 2,43,02,009/- allocated to the assessee upon de-merger of the de-merged company, with the following observations: In response, the assessee's representative vide letter dated 17.02.2003 filed its explanation and the same was considered carefully. The assessee-company vehemently tried to strengthen its claim of deduction Under Section 72A(4) of the I-T Act with main emphasis on the provisions contained Under Section 35(4) of the I-T Act. From the assessee's submission it is observed that the assessee is treating loss of unabsorbed expenditure on scientific research on the same footing as the business loss. This is not in consultation with the provisions of the I-T Act. The business loss cannot be equated with the loss on expenditure on scientific research. The capital expenditure on scientific research never become a part of profit and loss account as same is not computed under the head :Profits and gains of business or profession' and hence does not amount to accumulated loss. The same is a weighted deduction allowed to the assessee company under the prescribed provisions of the I-T Act. The business loss is, therefore, clearly distinguishable from capital expenditure on Scientific Research.
Now, it is also required to examine, just for the satisfaction of the assessee company as 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 I-T Act.
In this context, it is pertinent and essential to refer to the provisions contained in Section 72(2) of the I-T Act, which reads as under: (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 I-T Act. The assessee's contention that the unabsorbed loss on Scientific Research is allowed to be carried forward Under Section 35(4) and set-off under the provisions of Section 72A(4) of the I-T Act is therefore not tenable.
In view of the aforesaid discussion, the assessee's unabsorbed loss on capital expenditure on Scientific Research neither constitutes accumulated loss or deprecation loss and is therefore not covered by Section 72A(4) of the I-T Act. The assessee company is therefore not entitled to carry forward and set off this loss of Rs. 2,43,02,009/-against the income of the assessee-company. The claim of the assessee is therefore disallowed.
3. The assessee carried the matter in appeal before the ld. CIT(A). The ld. CIT(A) considered the matter in detail and decided the issue in favour of the assessee.
4. Aggrieved by the order of the learned CIT(A), the Department is now in appeal before this Tribunal. In support of appeal, the ld.Departmental Representative has relied upon the assessment order while the ld. Counsel for the assessee has relied upon the order of the ld.CIT(A).
5. We have heard the parties. It is not in dispute that the assessee was allocated a sum of Rs. 2,43,02,009/- on account of unabsorbed expenditure on scientific research upon de-merger of Maharashtra Hybrid Seeds Co. Ltd. The short question is whether the assessee is entitled to the benefit of Section 72A in respect of the aforesaid amount. In order to resolve the controversy, it is necessary to refer to the provisions of Section 35(4), 32(2), 72 and 72A(4) of the I-T Act.
6. Section 35(4) of the I-T Act, as it stood at the relevant point of time, read as under: (4) The provisions of Sub-section (2) of Section 32 shall apply in relation to deductions allowable under Clause (iv) of Sub-section (1) as they apply in relation to deductions allowable in respect of depreciation.
7. Section 35(4) takes care of a situation where deduction on account of capital expenditure on scientific research cannot be absorbed by the profits of the relevant accounting years. In such a situation, it entitles an assessee to carry forward such unabsorbed portion of capital expenditure on scientific research in the same manner as unabsorbed depreciation Under Section 32(2), till it is set off and absorbed against future profits.
(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 be carried forward to the following assessment year and- (a) it 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, (b) if the unabsorbed depreciation allowance cannot be wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed: Provided that the time limit of eight assessment years specified in Sub-clause (b) shall not apply in the case of a company for the assessment year beginning with the assessment year relevant to the previous year in which the said company has become a sick industrial company under Sub-section (1) of Section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year relevant to the previous year in which the entire net worth of such company becomes equal to or exceeds the accumulated losses.
Explanation.- For the purposes of this clause, "net worth" shall have the meaning assigned to in Clause (ga) of Sub-section (1) of Section 3 of the Sick Industrial Companies (Special Provisions) Act, 9. It is clear on bare perusal of Section 32(2) that the benefit contemplated by the said provision is available in the assessment of the assessee and not of anyone else. It is equally clear that, in order to avail the benefit of carry forward and set off Under Section 32(2)(iii), it is essential that the business or profession for which the allowance was originally computed continues to be carried on by him, i.e., by the same assessee, in the previous year relevant for that assessment year.
10. Section 72(2) of the I-T Act, as it stood at the relevant point of time, read as under: (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.
11. It deserves to be noted that the legal fiction of treating unabsorbed depreciation as the depreciation of subsequent year Under Section 32(2) has been specifically made subject to the provisions of Section 72(2) 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 v. CIT 33 ITR 367 (Cal.) and CIT v. Ahmedabad Electricity Co. Ltd. 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 of the Income-tax Act. The aforesaid discussion makes it amply clear that the law maintains clear distinction between business loss on one hand and unabsorbed depreciation/unabsorbed expenditure on capital research on the other. Therefore it is not possible for us to hold that the business loss in respect of which the benefit of carry forward and set off is provided in Section 72, includes unabsorbed depreciation or unabsorbed capital expenditure on scientific research.
Provisions relating to carry forward and set off of acculamated loss and unabsorbed depreciation allowance in amalgamation or demerger etc.
(4) Notwithstanding anything contained in any other provisions of this Act, in the case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall- (a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in the hands of the resulting company; (b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be.
(a) "accumulated loss" means so much of the loss of the predecessor firm or the proprietary concern or the amalgamating company or the demerged company, as the case may be, under the head 'profits and gains of business or profession' (not being a loss sustained in a speculation business) which such predecessor firm or the proprietary concern or amalgamating company or demerged company, would have been entitled to carry forward and set off under the provisions of Section 72 if the reorganisation of business or amalgamation or demerger had not taken place; (b) "unabsorbed depreciation" means so much of the allowance for depreciation of the predecessor firm or the proprietary concern or the amalgamating company or the demerged company, as the case 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.
13. 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 de-merger, 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 de-merged 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 are required to be apportioned between the de-merged company and the resulting company in the same proportion in which the assets of the undertaking have been retained by the de-merged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the de-merged company or the resulting company, as the case may be. Thus the benefit of Section 72A(4) is admissible in respect of (i) accumulated loss; and (ii) the allowance for unabsorbed deprecation, as defined in Section 72A(7) of the I-T Act. The assessee, being a resulting company, shall be entitled to carry forward and set off the unabsorbed portion of capital expenditure on scientific research allocated to it provided it falls either under "accumulated loss" or "the allowance for unabsorbed depreciation" as defined in Section 72A(7) of the I-T Act.
14. The term "accumulated loss" has been exhaustively defined in Clause (a) of Section 72A(7) to mean so much of the loss, inter-alia, of the de-merged company under the head "Profits and Gains of Business or Profession" (not being a loss sustained in speculation business) which such amalgamating company would have been entitled to carry forward and set off under the provisions of Section 72 if the de-merger had not taken place. As already stated earlier in this order, Section 72 allows carry forward and set off of business losses and not of unabsorbed depreciation or unabsorbed capital expenditure on scientific reserach.
The assessee can claim the benefit of carry forward and set off of unabsorbed capital expenditure on scientific research Under Section 35(4) read with Section 32(2) of the I-T Act and not under Section 72 of the I-T Act. Section 72(2) simply lays down the priority in that the loss relating to the business will be set off first. Therefore the benefit of carry forward and set off of unabsorbed expenditure on scientific research can be claimed only Under Section 35(4)/32(2) of the I-T Act and not Under Section 72. In other words, the accumulated loss referred to in Section 72A(4) is restricted to only those losses of the de-merged company computed under the head "Profits and Gains of Business or Profession" (not being a speculation loss) which such de-merged company would have been entitled to carry forward and set off under the provisions of Section 72 if the demerger had not taken place.
Since the provisions of Section 72 are not applicable for carrying forward and setting off of the unabsorbed portion of capital expenditure on scientific research, it is the de-merged company alone, which can claim the benefit Under Section 32(2) on the fulfillment 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 capital research should be treated as part of accumulated loss and consequently allowed to it Under Section 72A(4) of the I-T 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.
15. The term "unabsorbed depreciation" has been exhaustively defined in Section 72(A)(7)(b) of the I-T Act so as to mean so much of the allowance for depreciation of the demerged company, which remains to be allowed, and which would have been allowed to the demerged company if the demerger had not taken place. The scope of "unabsorbed depreciation" as defined in Section 72A(7)(b) is thus restricted to the allowance for depreciation of the de-merged company and therefore does not extend to, either expressly or even by necessary implication, cover the unabsorbed portion of expenditure on scientific research Under Section 35. It is important to note that the aforesaid definition of "unabsorbed depreciation" Under Section 72A(7)(b) does not refer to Section 32(2) or 35(4) of the I-T Act but restricts, in plain terms, the scope of "unabsorbed depreciation" to so much of the allowance for depreciation of the de-merged company which remains to be allowed and which would have been allowed to the de-merged company if the de-merger had not taken place. It is therefore not possible to include unabsorbed capital expenditure on scientific research within the ambit of "unabsorbed depreciation" as defined in Section 72A(7).
16. In view of the foregoing, it transpires that there is nothing either in the definition of "accumulated loss" or "unabsorbed depreciation" as given Under Section 72A(7) to enable us to hold that unabsorbed portion of capital expenditure on scientific research is covered by any of the aforesaid definitions. On the other hand, there is deliberate omission in incorporating the provisions of section 35(4) or 32(2) in the aforesaid definitions given in Section 72A(7) of the I-T Act. It is therefore not possible to include unabsorbed capital expenditure on scientific research allocated to the assessee in its status as resulting company either in "accumulated loss" or "unabsorbed deprecation" to enable it to carry forward and set off the said expenditure Under Section 72A(4). Resultantly, the order of the ld.CIT(A) is reversed and that of the Assessing Officer restored.