EMBIO LTD,MUMBAI vs. ACIT (OSD) 10(1), MUMBAI

PER G.S. PANNU, VICE PRESIDENT :

“I. TREATING AMALGAMATION IS NOT FOR GENUINE PURPOSE ACCORDINGLY SECTION 72A R.W.R. 9C BENEFIT NOT GRANTED:- 1. The Learned CIT(A) erred in concluding that amalgamation with

2 ITA.No.2629/Mum/2015 M/s. Embio Limited Karnataka Malladi Biotics Ltd (‘KMBL’) is not for genuine purpose and accordingly rejected the claim u/s 72A rw Rule 9C. 2. The Learned CIT(A) ought not to have concluded that amalgamation with KMBL is not for genuine purpose. 3. The appellant requires to be granted benefit u/s 72A rw Rule 9C.

II. CONCLUDING THAT PROVISIONS OF SECTION 72A RW RULE 9C ARE NOT COMPLIED WITH:- 1. The Learned CIT(A) erred in concluding that provisions of section 72A rw Rule 9C are not complied with and accordingly benefit are not granted. 2. The Learned CIT(A) ought not to have concluded that provisions of section 72A rw Rule 9C are not complied with. 3. The appellant requires to be granted benefit u/s 72A rw Rule 9C.

III. FULFILMENT OF CONDITIONS U/S 72A RW RULE 9C TO BE SEEN AT END OF FOUR YEARS i.e. IN A.Y. 2012-13:- 1. The Learned CIT(A) erred in confirming disallowances of set-off of brought forward losses claimed by virtue of Section 72A rw Rule 9C before the end of 4 years from the end of year of amalgamation.

IV. DISALLOWANCE OF SET-OFF OF BROUGHT FORWARD LOSSES U/S 72A RW RULE 9C OF KMBL OF RS. 9,42,58,442/-:- 1. The Learned CIT(A) has erred in confirming the disallowing set- off of brought forwards losses u/s 72A rw Rule 9C of KMBL of Rs. 9,42,58,442. 2. The set-off of brought forward losses u/s 72A of Rs. 9,42,58,442 ought to be allowed. 3. The disallowance of set-off of brought forward losses u/s 72A

3 ITA.No.2629/Mum/2015 M/s. Embio Limited of KMBL of Rs. 9,42,58,442 requires to be deleted.

V. TREATING THE WITHDRAWAL OF SET OFF CLAIMED IN AY 2009-10 AS DEEMED INCOME IN AY 2009-10:- 1. The Learned CIT(A) erred in directing AO to treat the withdrawal of set-off of brought forwards losses u/s 72A of KMBL of Rs. 8,67,99,116 claimed in AY 2009-10 as deemed income in AY 2009-10 based on the wrong conclusion that the amalgamation was not for genuine purpose. 2. The Learned CIT(A) erred in directing AO to withdraw the claim granted in AY 2009-10 of Rs. 8,67,99,116/- on the reasoning that amalgamation was not genuine. 3. The direction given for A.Y. 2009-10 for withdrawal of set off of losses u/s 72A rw Rule 9C requires to be quashed.

VI.NON ADJUDICATION OF ADDITIONAL GROUND OF APPEAL WITH RESPECT TO DEDUCTION OF 80G:- 1. The Learned CIT(A) erred in not adjudicating the additional ground of appeal with respect to non allowance of deduction u/s 80G. 2. The deduction u/s 80G requires to be allowed. The appellant craves to leave to add, alter or modify its grounds of appeal before the hearing.”

4 ITA.No.2629/Mum/2015 M/s. Embio Limited claim of deduction u/s 80G of the Act.

5 ITA.No.2629/Mum/2015 M/s. Embio Limited r.w.r. 9C of the Rules, with respect to carry forward and setoff of accumulated losses and unabsorbed depreciation of amalgamating company.

5.1 Section 72A of the Act contains provisions relating to carry forward and set off of accumulated losses and unabsorbed depreciation in cases of amalgamation, demerger, etc. In the case before us, the issue relates to the invoking of section 72A(2) of the Act, which reads 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.”

5.2 Further, Rule 9C of the Rules enumerates the conditions prescribed for the purposes of clause (iii) of sub-section (2) of section 72A of the Act, which reads as under:-

6 ITA.No.2629/Mum/2015 M/s. Embio Limited [Conditions for carrying forward or set-off of accumulated loss and unabsorbed depreciation allowance in case of amalgamation. 9C. The conditions referred to in clause (iii) of sub-section (2) of section 72A shall be the following, namely:— (a) the amalgamated company, owning an industrial undertaking of the amalgamating company by way of amalgamation, shall achieve the level of production of at least fifty per cent of the installed capacity of the said undertaking before the end of four years from the date of amalgamation and continue to maintain the said minimum level of production till the end of five years from the date of amalgamation: Provided that the Central Government, on an application made by the amalgamated company, may relax the condition of achieving the level of production or the period during which the same is to be achieved or both in suitable cases having regard to the genuine efforts made by the amalgamated company to attain the prescribed level of production and the circumstances preventing such efforts from achieving the same; (b) the amalgamated company shall furnish to the Assessing Officer a certificate in Form No. 62, duly verified by an accountant, with reference to the books of account and other documents showing particulars of production, along with the return of income for the assessment year relevant to the previous year during which the prescribed level of production is achieved and for subsequent assessment years relevant to the previous years falling within five years from the date of amalgamation. Explanation.—For the purposes of this rule,— (a) “installed capacity” means the capacity of production existing on the date of amalgamation; and (b) “accountant” means the accountant as defined in the Explanation below sub-section (2) of section 288 of the Income-tax Act, 1961.” [underlined for emphasis by us]

5.3 Sub-section(2) of section 72A r.w.r. 9C of the Rules is in respect of a case of amalgamation and provides that the accumulated losses and unabsorbed depreciation of the amalgamating company shall be allowed to be carry

7 ITA.No.2629/Mum/2015 M/s. Embio Limited forward and set off in the hands of the amalgamated company only in case following conditions are satisfied by the amalgamated company: a) that it 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; b) that it continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation; and, c) that it fulfils the conditions prescribed under Rule 9C of the Rules. In case of non-fulfilment of the above conditions, the amalgamated company shall not be allowed to carry forward and set-off the accumulated losses and unabsorbed depreciation of the amalgamating company. The background and the reason for which the Assessing Officer has invoked section 72A r.w.r. 9C of the Rules can be understood as follows. In terms of sections 391to 394 of the Companies Act, 1956 a scheme of amalgamation between assessee and KMBL was proposed, which was approved by the Hon'ble Bombay High Court vide order dated 24/03/2009 and appointed date was fixed, being 01/04/2008. In terms of the said arrangement, assessee got amalgamated with the KMBL and accordingly it brought forward accumulated losses and unabsorbed depreciation of Rs. 32.61 Crore of the amalgamating company. During the year under consideration, the assessee claimed set off of brought forwarded losses of amalgamating company of Rs. 9,42,58,442/- against its business income. The set off of brought forwarded business losses of amalgamating company of Rs. 8,67,99,116/- was claimed by the assessee in assessment year 2009-10. In the course of assessment proceedings the Assessing Officer analysed the provisions of section 72A r.w.r. 9C of the Rules and observed that as per Form 62 filed by the assessee, it has manufactured only 10.76% of the total capacity utilisation of Mandya Unit (undertaking of amalgamating

8 ITA.No.2629/Mum/2015 M/s. Embio Limited company), during the period 01/04/2009 to 21/06/2009. In the aforesaid background, the Assessing Officer has invoked the provisions of section 72A r.w.r. 9C of the Rules on the ground that assessee has not achieved the 50% level of production of the installed capacity of the undertaking of the amalgamating company during the relevant year and thus carried forward business losses and unabsorbed depreciation pertaining to the amalgamating company could not be allowed to be set off in the hands of the assessee company. The aforesaid decision of the Assessing Officer was challenged in appeal before the CIT(A), who confirmed the action of the Assessing Officer. A pertinent plea of the assessee before the CIT(A) was that the provisions of section 72A r.w.r. 9C of the Act could not be invoked in the year under consideration and can be looked into only at the end of fourth year from the date of amalgamation; that the provisions of section 72A r.w.r 9C of the Rules could not be invoked in the instant year to deny the benefit of set off of accumulated losses and unabsorbed depreciation. In case of non-compliance with the conditions stipulated in the aforesaid section, it is only at the end of fourth year, that the set-off claimed by the assessee shall be treated as income of the assessee, and that too for the fourth year. The CIT(A) did not agree with the aforesaid plea of the assessee and upheld the action of the Assessing Officer. Against the aforesaid decision of the CIT(A), assessee is in appeal before us.

9 ITA.No.2629/Mum/2015 M/s. Embio Limited r.w.r. 9C of the Rules held that the conditions stipulated in the said section need to be examined only at the end of the fourth year and not earlier. The Ld. AR of the assessee also submitted a chart showing comparison of facts between assessee’s case and that of Bayer Material Science P. Ltd’s case (Supra).

10 ITA.No.2629/Mum/2015 M/s. Embio Limited the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with. In the instant case, the year under consideration is the second year of amalgamation and due to labour disputes the production level was below fifty percent of the installed capacity. In this factual background, the Assessing Officer denied set off of accumulated losses of the amalgamating company in the hands of the assessee as level of production during the year under consideration was below fifty-percent and also denied the benefit of set off of losses already granted to the assessee in Assessment Year 2009-10. The CIT(A) has upheld the action of the Assessing Officer. The moot point is as to whether in the year under consideration, being the second year of amalgamation, was the Assessing Officer justified in invoking provisions of section 72A r.w.r. 9C of Rules to hold that assessee has not met the conditions stipulated therein, and thereby disallow the set-off of accumulated losses and unabsorbed depreciation of the amalgamating company. The appellant has assailed the aforesaid, based on the provisions of section 72A of the Act, and also the decision of our co-ordinate bench in the case of Bayer Material Science P. Ltd (Supra). The relevant provisions provide for a period of four years from the date of amalgamation for achieving the fifty-percent level of production. The present year is the second year of amalgamation and thus, condition of desired level of production is irrelevant for the year under consideration. Further, Ld. AR has drawn our attention to the provision of sub-section (3) section72A of the Act, which reads as under:

“(3) In a case where any of the conditions laid down in sub-section (2) are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to

11 ITA.No.2629/Mum/2015 M/s. Embio Limited tax for the year in which such conditions are not complied with.”

As observed by us earlier, the condition of minimum level of production is to be seen at the end of four year and in case of non-fulfilment of the same, the set off of accumulated losses and unabsorbed deprecation, already claimed, shall be chargeable to tax as income of the fourth year as per sub-section 3 of section 72A of the Act.

8.1 Now coming to the decision relied upon by the Ld. AR in the case of Bayer Material Science P. Ltd (Supra). Before we decide the applicability of the ratio laid down in the said decision, it is pertinent to discuss the facts of the said case. Briefly stated, a concern by the name of M/s. Bayer Specialty Products Pvt. Ltd. (BSPPL) got amalgamated with the assessee-company therein. The assessee claimed a set off of loss of Rs. 12.53 crore u/s 72A of the Act. The Assessing Officer considered the provisions of section 72A and came to the conclusion that no set off of such loss was permissible due to the reasons, which, inter alia, included the reason that the assessee-company did not achieve the level of production of at least 50% of the installed capacity of the amalgamating company before the end of four years from the date of amalgamation and that it further failed to demonstrate that it continued to maintain the said minimum level of production till the end of five years from the date of amalgamation, as laid down in Rule 9C(a) of the Rules. In the said case, the amalgamation took place on 01/04/2003 and a period of three years and nine months had already expired from that date till the passing of the assessment order. The CIT(A) upheld the order of the Assessing Officer. On appeal by the assessee before the Tribunal, it allowed the appeal of the assessee. The relevant paragraph of the said decision is reproduced

12 ITA.No.2629/Mum/2015 M/s. Embio Limited hereunder: “6. The other point considered by the authorities below marring the benefit u/s 72A(1) is that the assessee company failed to lead evidence that the amalgamation was to ensure the revival of the business of the amalgamating company. Objections of the AO in points nos. (iii) and (iv) of para 3 of this order about the violation of the conditions prescribed in Rule 9C are also related to this very aspect of the matter. The case of the AO is that the assessee failed to substantiate the steps taken by it to revive business of BTPU and further it did not satisfy the twin conditions as per rule 9C, being, achieving the stipulated level of production of at least fifty percent of the installed capacity of BTPU and furni 50% of the installed capacity of the amalgamating company before the end of four years from the date of amalgamation and continue to maintain the said minimum level of production till the end of five years from the date of amalgamation. The second clause states that the amalgamated company shall furnish to the Assessing Officer a certificate in Form No. 62 duly verified by an Accountant showing particulars of production along with return of income “for the assessment year relevant to the previous year during which the prescribed level of production is achieved and for the subsequent assessment years relevant to previous years falling within five years from the date of amalgamation”. On going through clause (a) of Rule 9C, we find that the amalgamated company is required to achieve the level of production of at least 50% of the installed capacity of the undertaking of the amalgamating company `before the end of four years from the date of amalgamation’. A cursory perusal simply divulges that the requirement of achieving production of at least 50% of the installed capacity of the undertaking is to be fulfilled before the end of four years from the date of amalgamation. This production level may be achieved in the first year or second year or third year or even before the end of the fourth year. There is nothing in the phraseology of the Rule that the said level of production must be achieved in the very first year of amalgamation as has been held by the AO in the extant case. The Assessing Officer noticed that the amalgamation took place on 1.4.2003 and from that date a period of three years and nine months had already passed till the passing of the assessment order, but the assessee failed to produce and submit any details relating to production to substantiate its claim. In

13 ITA.No.2629/Mum/2015 M/s. Embio Limited principle, we do not approve the view canvassed by the Assessing Officer as approved in the first appeal to press for enforcing compliance of achieving desired production before the end of stipulated period. Going even by the standard of the Assessing Officer himself, the period of four years had not expired at the time of completion of the assessment. The Assessing Officer is required to restrict himself only to the year before him for considering as to whether there is any violation of section 72A(2). As the previous year relevant to assessment year under consideration is not the fourth year from the date of amalgamation, the Assessing Officer was not required to examine this aspect at that stage. 9. The further opinion of the Assessing Officer that the assessee failed to place on record any material indicating the revival of business of the amalgamating company, in our considered opinion, is unwarranted in the year in question. The mention of ensuring the revival of the business of the amalgamating company in section 72A(2)(b)(iii) is only with reference to fulfilment of the conditions as prescribed in Rule 9C. Meaning of the revival of business of the amalgamating company is `prescribed’ in clause (a) of rule 9C itself, which talks of achieving the desired level of production of the undertaking within the specified period. In other words, there is no other stipulation for establishing that the amalgamated company took steps to revive the undertaking of the amalgamating company independent of clause (a) of rule 9C. On satisfaction of the condition of achieving the desired level of production of the amalgamating company, the condition of ensuring revival of the business of the amalgamated company automatically gets satisfied. Ex consequent, revival of the business of the amalgamated company can be adversely viewed only at the end of fourth year from the date of amalgamation. We, therefore, hold that it is pre-mature to require the material for demonstrating efforts taken by the amalgamated company for reviving the business of amalgamating company. 9. Here it is interesting to note the prescription of sub-section (3) of section 72A, which provides that: `In a case where any of the conditions laid down in sub-section (2) are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with’. Sub-section (3) is a correcting

14 ITA.No.2629/Mum/2015 M/s. Embio Limited provision and gives logical meaning to consequences flowing from the failure to comply with the requirements with in the specified number of years as set out in sub-section (2) after having availed the benefit of set off and carry forward of accumulated loss of the amalgamating company as per sub-section (1) of section 72A. It transpires on a conjoint reading of sub-sections (2) and (3) of section 72A that the amalgamated company is entitled to set off and carry forward the brought forward business losses and unabsorbed depreciation of the amalgamating company from the very first year of the amalgamation. If, however, the conditions given in clause (b) of section 72A(2) are not fulfilled within the prescribed time, then the set off as allowed in the earlier year(s) shall be deemed to be the income of the amalgamated company of the last year stipulated for compliance of such conditions. 10. Thus it can be seen that amalgamated company is required to achieve the level of production of at least 50% of the installed capacity of the amalgamating company before the end of four years from the date of amalgamation. After availing the benefit of set off and carry forward of the brought forward business losses and unabsorbed depreciation of the amalgamating company by the assessee company in the very first year of the amalgamation as per sub-section (1) of section 72A, if it fails to achieve the desired level of production up to the end of the fourth year from the date of amalgamation, the benefit of set off claimed and allowed in the first year shall become income of such later year. We do not find any problem with the claim of set off and carry forward of accumulated loss etc. of the amalgamating company during the interregnum.” (underlined for emphasis by us)

8.2 In the present case, the amalgamation took place w.e.f. 01/04/2008. The year under consideration, being Assessment Year 2010-11, is the second year of amalgamation. The assessee claimed set–off of losses u/s 72A of the Act in its return of income for Assessment Year 2009-10 and Assessment Year 2010-11. It achieved more than 50% of production in the first year. However, it failed to achieve more than 50% of the production in the second year i.e. under year consideration due to labour disputes.

15 ITA.No.2629/Mum/2015 M/s. Embio Limited The other conditions of section 72A r.w.r. 9C of the Act with respect to holding three-fourth of the book value of the assets of the amalgamating company, furnishing of certificate of an Accountant in Form 62 showing level of production, etc. were complied with. Further, at the time of completion of assessment the period of four years had not expired from the date of amalgamation. As such, the facts of the present case are identical to the facts in the case of Bayer Material Science P. Ltd (Supra). Thus, case of the assessee is squarely covered by the decision of this Tribunal in the case of Bayer Material Science P. Ltd (Supra).

16 ITA.No.2629/Mum/2015 M/s. Embio Limited

Order pronounced in the open court on 10th May, 2019.

Sd/- Sd/- (SANDEEP GOSAIN) (G.S. PANNU) JUDICIAL MEMBER VICE PRESIDENT Mumbai, Date : 10th May, 2019 *SSL* Copy to : 1) The Appellant 2) The Respondent 3) The CIT(A) concerned 4) The CIT concerned 5) The D.R, “F” Bench, Mumbai 6) Guard file By Order

Dy./Asstt. Registrar I.T.A.T, Mumbai