Unique International Pvt. Ltd., ... vs Department Of Income Tax

IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH: KOLKATA

[Before Hon'ble Shri Mahavir Singh, JM & Hon'bleShri Shamim Yahya AM ]

I.T.A No.1295/Kol/2011 Assessment Year: 2006-07

D.C.I.T., Circle-8, Vs. M/s.Unique International Pvt.Ltd. Kolkata Kolkata (Appellant) (Respondent) (PAN:AAACU 3880 F)

For the Appellant : Shri Debasis Roy, JCIT For the Respondent : Shri R.P.Agarwala, Sr.Advocate & Shri K.K.Chhaparia, FCA

Date of hearing : 02.02.2015. Date of pronouncement: 12.02.2015.

ORDER

Per Shri Shamim Yahya, AM :

This appeal by the department is directed against the order of ld.CIT(A)-VIII, Kolkata dated 07.07.2011 and pertains to Assessment Year 2006-07.

2. The grounds of appeal read as under :-

"1. (a) That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing set off of brought forward business loss and unabsorbed depreciation amounting to Rs.84,22,538/- in the assessee of the amalgamated company for assessment year 2006-07, even the amalgamation was effective with effect from 01.04.2004 as per the order of the Hon'ble Calcutta High Court and the date of amalgamation thus falls within a period less than three years from the date of incorporation of the amalgamating company.

(b) That on the facts and circumstances of the case and in law, the Ld.CIT(A) has incorrectly applied the provisions of section 72A(2) (a)(i) of the Income-tax Act, 1961.

2. That on the facts and circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance of Rs.77,829/- being the employees' contribution to PF and ESI deposited after expiry of due date prescribed in the respective PF/ESI Acts.

3. That the appellant craves leave to add, modify, alter or rescind any of the grounds of appeal at the time of hearing of the case."

3. Apropos ground No.1 - Setting off of brought forward business loss and unabsorbed depreciation.

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3.1. In this case the assessee is a private limited company engaged in the business of manufacturing & exporting of leather goods and manufacturing of pen tips and trading of pen tips. In this case vide order of Hon'ble High Court at Calcutta dated 6th July 2005, Surya Kiran Udyog Private Limited (amalgamating company) was amalgamated with the assessee company (amalgamated company) with effect from 01.04.2004. The assessee company has consolidated the account of Surya Kiran Udyog Private Limited with itself and a single return of income was filed for the year. During the year, the assessee company has set off unabsorbed depreciation of amalgamating comp any of Rs.84,22,538/- against the income for the year. As per the return, the amalgamating company had brought forward low and unabsorbed depreciation as below :

A) Other Business Loss carried forward Assessment Year Brought Forward Set Off Carried Forward 2003-04 Rs.7,30,681/- Rs.7,30,681/-

B) Depreciation Loss carried forward Assessment Year Brought Forward Set Off Carried Forward 2003-04 Rs. 82,33,211/- Rs.82,33,211/- 2004-05 Rs. 79,91,135/- Rs. 1,89,327/- Rs.78,01,808/- 2005-06 Rs. 16,20,251/- Rs.16,20,251/- Total Rs.1,78,44,597/- Rs.84,22,538/- Rs.94,22,059/-

In the return, the losses of amalgamating company was treated as loss of the assessee company u/s 72A of Income tax Act read with Rule 9C of Income tax Rules. Before the AO, the assessee vide its letter dated 08-12-2008 has stated that both the companies have satisfied the conditions of amalgamation. As per the provisions of Section 72A, the amalgamating company has to satisfy the following two condition in order that loss/unabsorbed depreciation of such company shall be treated as loss/unabsorbed depreciation of amalgamated company :

1) The amalgamating company should be engaged in the business in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years.

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2) The amalgamating company has held continuously as on the date of amalgamation at least 3/4th of the Book value of the Fixed Assets held by it for two years prior to the date of amalgamation.

3.2. In the assessment order, the AO has disallowed claim u/s 72A of brought forward loss and unabsorbed depreciation by observing as under :

"9.b) The date of incorporation of M/.s. Surya Kiran Udyog Pvt. Ltd., the amalgamating company is 13-09-2001. The amalgamation order of the Hon'ble High Court at Kolkata is dated 06-07-2005. The assessee received the certified true copy of the order on 25.08.2005 and it was filed with Registrar of Companies, for both the companies in ROC Form No.21, on 05-09-2005. As per this order, the effective date of amalgamation is 01-04-2004.

9.c) The three year period from the date of incorporation will end on 12-09-2004. There was no business at all from date of incorporation to 31-03-2002, the assessee was in the process of starting the plant. It is clear that M/s.Surya Kiran Udyog Pvt. Ltd., the amalgamating company was not engaged in the business, in which amalgamated loss occurred or depreciation was unabsorbed, for three years or more. Therefore, the assessee company is not entitled to claim set off of losses of M/.s.Surya Kiran Udyog Pvt. Ltd., the amalgamating company.

10. Also, the second condition mentioned above is not satisfied by the amalgamating company. From the assets as per Schedule of the Fixed Assets attached to the Return of Income for Assessment year 2003-04 as well as from assessee's submission dated 26- 12-2008, it is seen that the Book Value of assets held as on 01-04-2002 is Rs.25,67,587/-. Whereas the value of assets as on 01-04-2004 is Rs.6,75,08,461/-. For this reason, also the assessee company is not allowable to claim set off of Business Loss and Unabsorbed Depreciation of M/.s. Surya Kiran Udyog Pvt. Ltd., the amalgamated company.

11. As seen from the above, the only aim in amalgamation is to claim the benefit of losses of the amalgamating company. Therefore, the claim of set off of Brought Forward Business Loss and Brought Forward Unabsorbed depreciation amounting to Rs.84,22,538/- is disallowed and added to the assessee's income. Penalty proceedings u/s 271(1)(c) of the Income tax Act, 1961 read with Explanations there under, are separately initiated, for furnishing inaccurate particulars of its income."

3.4. Against the above order assessee appeal before the ld. CIT(A). Before the ld. CIT(A) assessee submitted that AO has taken narrow interpretation of the phrase engaged in the business. The assessee also submitted that the Court's order became effective on 05.09.2005 (the date when certified copy of the order was filed with the Registrar of Companies). The assessee also referred to section 391(3) of the Companies Act. The assessee also referred to ITAT decision in the case of DCIT vs Gujarat NRE Coke Limited 115 TTJ 822. Considering the above the ld. CIT(A) decided the issue in favour of the assessee holding as under :-

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"I have gone through the assessment order and submissions made by the appellant. I agree with the A/R that the phrase 'engaged in the business' cannot be interpreted narrowly in view of the jurisdictional ITAT decision in the case of Gujarat NRE Coke Limited (supra). Thus, I held that the amalgamating company was engaged in the manufacturing of ball pen tips for more than three years.

Regarding the second condition as to whether the amalgamating company was carrying three-fourth of the book value of fixed assets continuously for two years or more, the A/R referred to the audited final accounts of amalgamating company for the year ended 31-03-2002, 31-03-2003 and 31-03-2004. He pointed out that Section 72A(2)(ii) require 75% of the fixed assets to be held continuously for more than two years. In other words, out of fixed assets as on 31-03-2002, at least 75% should continue beyond 31-03-2004. It is evident from the assessmet order that fixed assets was rs.25,67,587/- as on 31-03- 2008. In looking at the balance sheet of 31-03-2003 and 31-03-2004 it is seen that the sale of fixed assets two years were as follows :

Financial Year Sale 2002-03 Nil 2003-04 Rs.78,483/-

Thus, by deducting the sale figures it is seen that the appellant company was carrying about 97% of fixed assets (continuously) for two years as per calculation below :

Rs.25,67,587/- Rs.78,483/- = 96.94% Rs.25,67,587/-

Thus the AO has erred in interpreting the provisions. I hold that more than three fourth of fixed assets held by the appellant company two years prior to amalgamation was continuously being held upto the date of amalgamation.

In the background of the discussions above, I hold that the appellant company was satisfying the conditions of Section 72A of Income Tax Act and thus was entitled to brought forward loss and unabsorbed deprecation of amalgamating company. Thus ground no.2 and ground no.3 are decided in the favour of the assessee."

Against the above order the revenue is in appeal before us.

4. We have heard both the counsel and carefully perused the records. During the course of hearing it was put before the ld. Counsel of the assessee that the Hon'ble High Court's order relating to the amalgamation was with effect from 01.04.2004. In this view of the matter it cannot be said that the amalgamating company was engaged in the business for a period of three years or more as required by section 72A(2)(a)(i) of the Act so as to enable the amalgamating company to set off the brought forward loss and unabsorbed depreciation. To this the ld. Counsel of the assessee referred to the order of the Hon'ble High Court on the amalgamation. He referred to Schedule-A of the said order containing the definition part thereof. Definition 3 and 4 read as under :-

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"3. "The Transfer Date" means the 1 st day of April, 2004.

4. "Effective Date" means the date when the certified copy of the order sanctioning the scheme of Amalgamation is filed with the Registrar of Companies, West Bengal, by both the companies."

Referring to the above, the ld. Counsel of the assessee submitted that the effective date should be taken as the date when the order sanctioning the scheme of amalgamation is filed with the Registrar of Companies and as soon as in this case the same was filed on 05.09.2005, the Court's order became effective on 05.09.2005. Hence the date incorporation of the business of the amalgamated company should be taken up to this dated i.e. 05.09.2005. Further the ld. Counsel supported the order of ld. CIT(A).

5. The ld. DR, on the other hand, relied upon the order of the AO.

6. We have carefully considered the submissions and perused the records. At the outset, we may gainfully refer to the provision of section 72A(2) of the Act as under:

"[(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 -

(a) The amalgamating company -

(i) Has been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years;

(ii) Has held continuously as on the date of the amalgamation at least three-fourths of the book value of fixed assets held by it two years prior to the date of amalgamation ;

(b) The amalgamated company -

(i) Holds continuously for a minimum period of five years from the date of amalgamation at least three-fourths of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation;

(ii) Continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation;

(iii) Fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.]"

6.1. We may also gainfully refer to section 391 (3) and 393(4) of the Companies Act, 1956 :

"391 (3) An order made by the [Tribunal] under sub-sec. (2) shall have no effect until a certified copy of the order has been filed with the Registrar."

"393(4) Where default is made in complying with any of the requirements of this section, the company and every officer of the company who is in default, shall be ITA No.1295/Kol/2011 6 M/s.Unique International Pvt.Ltd.

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punishable with fine, which may extend to fifty thousand rupees; and for the purpose of this sub-section any liquidator of the company and any trustee of a deed for securing the issue of debentures of the company shall be deemed to be an officer of the company:

Provided that a person shall not be punishable under this sub-section if he shows that the default was due to the refusal of any other person, being a director, managing director, manager or trustee for debenture holders, to supply the necessary particulars as to his material interests."

6.2. We find that in this case the amalgamating company namely M/s.Surya Kiran Udyog Pvt. Ltd was incorporated on 13.09.2001. No particulars have been furnished in this regard as to since when the amalgamating company was engaged in the business. AO has observed that there was no business from the date of incorporation up to 31.03.2002 and the assessee was in the process of starting a plant. The brought forward depreciation is for A.Yrs.2003-04 and 2004-05 and the brought forward business loss was for A.Yr.2003-04. AO has held that the amalgamating company was not engaged in the business in which amalgamated loss accrued or depreciation is unabsorbed for three or more years. As against the above the ld. CIT(A) has referred to the decision of the ITAT in the case of DCIT vs Gujarat NRE Coke Limited, for the proposition that the company can be said to be engaged in the business from the point in time when the business is said to have commenced. As soon as an activity which is the essential activity in the course of carrying on the business is started the business must have commenced. Now after referring to the assessee's submissions on the above decision of the ITAT ld. CIT(A) has laconically held as under :-

"I have gone through the assessment order and submissions made by the appellant. I agree with the A/R that the phrase 'engaged in the business' cannot be interpreted narrowly in view of the jurisdictional ITAT decision in the case of Gujarat NRE Coke Limited (supra). Thus, I held that the amalgamating company was engaged in the manufacturing of ball pen tips for more than three years.

6.3. Now we find that in the decision referred by the ld. CIT(A) of the ITAT the proposition was that as soon as an activity which is the essential activity in the course of carrying on the business which is started the business can be said to have commenced. Further it was submitted that the ITAT judgment was passed in line with the principle laid down by Hon'ble Gujarat High Court in the case of CIT vs Saurashtra Cement & Chemical Industries Limited 91 ITR 170 (Guj) and Andhra ITA No.1295/Kol/2011 7 M/s.Unique International Pvt.Ltd.

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Pradesh High Court in the case of CIT vs Sponge Iron India Limited 111 CTR (AP)67.

6.4. The Hon'ble Andhra Pradesh High Court in the case of Sponge Iron India Ltd. (supra) has held that the business of manufacturing sponge iron is said to have commenced after exploration of iron ore suitable for production of sponge iron. In the case of Saurashtra Cement & Chemical Industries the Hon'ble Gujarat High Court has held that commencement of the business in the case of the cement manufacturing can be said to have commenced when extracting land sought from each land. Now we find that the exposition emanating from the above decision is that the essential activity has to be commenced in the course of carrying on business then it can be said that the business has commenced. In the present case no particulars have been furnished as from when the amalgamating company commenced its business. Neither the assessee has made any submissions in this regard, nor the ld. CIT(A) has given any finding in this regard. By no stretch of imagination the date of incorporation alone can be taken as the date that the business is commenced. As against the above the AO has given a finding that the amalgamating company was not engaged in any business from the date of incorporation up to 31.3.2002. Further the facts available on record only show that the unabsorbed deprecation and unabsorbed business loss was claimed from A.Yr.2003-04. Hence as per the details available on record there was no justification for the ld. CIT(A) to hold that the amalgamating company was engaged in the manufacturing of ball point pens for more than three years. Hence in our considered opinion since the ld. CIT(A)'s order is not based upon examination of the correct facts, and the material on record did not prove that the amalgamating company was engaged in the manufacturing of ball point pens for more than three years, in our considered opinion the order of the ld. CIT(A) that the assessee has complied with the provision of section 72A(2)(a)(i) of the Act is not sustainable.

6.5. Even if we take the date of incorporation of the amalgamating company as the date of commencement of business we find that the amalgamating company was incorporated on 13.09.2001 and the date of amalgamation as per the provision of ITA No.1295/Kol/2011 8 M/s.Unique International Pvt.Ltd.

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section 394(2) of the Act is 1st April, 2004 which is the date of transfer as approved by the Hon'ble High Court. It cannot be said that three years have elapsed between this period. Hence from this angle also the amalgamating company cannot be said to have been engaged in business in which the loss or depreciation occurred for three or more years. Hence the assessee is not liable for the benefit u/s 72A(2)(a)(i) of the Act on this plank as well.

6.6. As regards the contention of the ld. Counsel of the assessee that the effective date of the order should be the date when the certified copy of the sanctioning scheme of amalgamation is filed with the Registrar of Companies Act, we find that the same does not support the case of the assessee. What is to be considered for the purpose of benefit u/s 72A(2)(a)(i) of the Act is what is the effective date of transfer. In other words what is the date of amalgamation. The date of transfer as approved by the Hon'ble High Court for the purpose of amalgamation is 01.04.2004. This is the date of amalgamation as approved by the Hon'ble High Court. The subsequent filing of return registering merger order with the R.O.C. cannot have the effect of extending the date of transfer as approved by the Hon'ble High Court.. From this date all the asset properties and liabilities of the transferor company stood transferred. This proposition is amply fortified by the provision of Rule 9C of the IT Rules which deals with condition for carry forward of set off of amalgamated companies and unabsorbed depreciation allowance in case of amalgamation. It also refers to the date of amalgamation.

6.7. Thus in the background of aforesaid discussion we find that there is no evidence on record to prove that amalgamating company was engaged in business in which the accumulated loss occurred or depreciation remains unabsorbed for three or more years as on the date of amalgamation. Hence the order of ld. CIT(A) on this account is not sustainable since the assessee has not complied with the provision of section 72A(2)(a)(i) of the Act.

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7. Apropos ground no.2 : deletion of disallowance regarding employees' contribution to PF and ESI.

7.1. On this issue the AO had made the disallowance on the ground that employees' contribution to PF & ESI were made beyond the due date of payment and hence the AO had disallowed a sum of Rs.71,393/- and Rs.6,436/- respectively.

7.2. Before the ld. CIT(A) the assessee submitted that the act permits the employer to make the deposit for some delay and the assesee placed reliance upon the Hon'ble Apex Court's decision in the case of CIT vs Vinay Cement Limited 213 CTR 268 (SC), for the proposition that the benefit will be given to the assessee if the actual payment is made before the return filed.

Against the above order revenue is in appeal before us.

8. We have heard both the counsel and carefully perused the records. We find that the proposition law in this regard is settled by the Hon'ble Apex Court in the case of CIT vs Vinay Cement Limited (supra). If the contributions are made before the due date of filing the return no disallowance is to be made. In this case we note that the actual dates of payment are not available on record. Hence we remit this issue to the file of AO. AO shall examine the actual date of payments and allow the payments if the same are done before the due date of filing the return.

9. In the result the appeal filed by the Revenue stands partly allowed for statistical purposes.

Order pronounced in the court on 12.02.2015.

Sd/- Sd/- [ Mahavir Singh ] [Shamim Yahya] Judicial Member Accountant Member

Date: 12.02.2015. R.G.(.P.S.) ITA No.1295/Kol/2011 10 M/s.Unique International Pvt.Ltd. A.Yr.2006-07

Copy of the order forwarded to:

1. M/s. Unique International Pvt. Ltd., 30, J.L.Nehru Road, Kolkata-700016.

2 D.C.I.T., Circle-8, Kolkata.

3. CIT(A)- VIII, Kolkata 4. CIT - Kolkata.

5. CIT-DR, Kolkata Benches, Kolkata

True Copy, By order,

Deputy /Asst. Registrar, ITAT, Kolkata Benches