DCIT 1(2), MUMBAI vs. NOCIL LTD, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “H”, MUMBAI BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER ITA No.3529/MUM/2013 (Assessment Year 2004-05) The DCIT 1(2), Room No.535, 5th Floor, Aaykar Bhavan,M.K.Road, Mumbai 400 020 ...... Appellant Vs. M/s. NOCIL Limited, Mafatlal House, 3rd Floor, HT Parekh Marg, Backbay Reclamation, Mumbai -400 020 .... Respondent

C.O.No.138/Mum/2014 (Arising out of ITA No.3529/Mum/2013, A.Y.2004-05)

M/s. NOCIL Limited, Mafatlal House, 3rd Floor, HT Parekh Marg, Backbay Reclamation, Mumbai -400 020 .... Cross Objector

Vs. The DCIT 1(2), Room No.535, 5th Floor, Aaykar Bhavan,M.K.Road, Mumbai 400 020 ..Appellant in appeal Revenue by : Shri Rahul Raman Assessee by : Mrs. Arti Vissanji Date of hearing : 30/03/2017 Date of pronouncement : 24/05/2017

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ORDER PER G.S.PANNU,A.M:

The captioned appeal filed by the Revenue and Cross Objection by the assessee pertaining to assessment year 2004-05 are directed against an order passed by CIT(A)-2, Mumbai dated 04/02/2013, which in turn, arises out of an order passed by the Assessing Officer under section 143(3) r.w.s. 147 of the Income Tax Act, 1961 (in short ‘the Act’) dated 16/12/2010.

“1) On the facts and in the circumstances of the case in law, the L. CIT(A) erred in accepting the assessee's plea that there was no demerger of its PPD and PCD divisions without appreciating that under the relevant Scheme approved by the Hon'ble Bombay High Court, the transfer of the 11 two divisions has been defined as demerger. 2) On the facts and in the circumstances of the case and in law, the Ld, CIT(A) erred in not appreciating that in respect of the demerger of the PCD division, the assessee company had the option to subscribe to the shares of the resulting company or to an immediate consideration in lieu there of and assessee opted for the latter and therefore, the condition of Section 2(19AA) stood fulfilled. 3) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the assessee is eligible for set, off and carry forward of brought forward business losses without appreciating that the two divisions were demerged and therefore, as the relevant' business was no longer carried on by the assessee, it was not eligible for set off and carry forward of the business losses of the erstwhile undertakings as per Section 72A(4) of the Act. 4) On the facts and in the circumstances of the case and in law, the Ld, CIT(A) erred in allowing the assessee deduction for brought forward unabsorbed depreciation of its demerged undertaking, without appreciating that brought forward unabsorbed depreciation pertakes the character of current depreciation and therefore, since the concerned undertakings have been demerged, the depreciation was not allowable to the assessee as per Section 72A(4) of the Act. 5) On the facts and in the circumstances of the case and in law, the Ld, CIT(A) erred in not appreciating that the Hon'ble Bombay High Court's order dated 08-06-2005, approving the scheme of transfer denoted as "Demerger" required the assessee to company with all the conditions as envisaged in the Scheme of the conditions

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stipulated in the "demerger" have been duly complied with by the assessee company.” 3. Grounds of appeal raised by the assessee in its cross objection read as under:-

“1. On the facts and in the circumstances of the case and in law the Learned Commissioner of Income Tax (Appeals) ought to have held that the reassessment proceedings initiated by the Ld. Assessing Officer are improper and bad-in-law and accordingly the order passed by him dated 16th December, 2010 under Section 143(3) read with Section 147 is bad-in-law and has to be quashed”. 4. Although the Revenue has raised multiple Grounds of appeal, but in sum and substance, the singular issue raised by the Revenue is against the decision of the CIT(A) in holding that the provisions of Sec. 72A(4) of the Act are not attracted with regard to the restructuring undertaken in terms of the scheme of arrangement/demerger approved by the Hon'ble Bombay High Court vide order dated 8.6.2005.

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the balance of accumulated loss and unabsorbed depreciation relating to various assessment years 1999-2000 to 2002-03 was allowed to be carried forward. Subsequently, the Assessing Officer issued a notice u/s 148 of the Act dated 30.3.2010 reopening the assessment on the ground that in the assessment finalised on 29.12.2006 assessee was allowed to carry forward the unabsorbed business loss and depreciation in contravention of the provisions of Sec. 72A(4) of the Act. In the ensuing assessment finalized under section 143(3)/147 of the Act dated 16/12/2010, the total income has been assessed at Rs.49,03,01,730/-. In determining such income, the Assessing Officer denied the set off of brought forward business loss of Rs.1234.83 lacs & 2969.61 lcas pertaining to assessment years 1999-2000 and 2000-01 respectively as also the unabsorbed depreciation of Rs.1415.14 lacs pertaining to assessment year 1998-99. Apart therefrom, the Assessing Officer noted that a business loss of Rs.5437.77 lacs pertaining to 1999-2000 to 2002-03 and the unabsorbed depreciation of Rs.10645.39 lacs for such years was not allowed to be carried forward in terms of section 72A(4) of the Act.

5.1 Section 72A of the Act contains provisions relating to carry forward losses 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(4) of the Act, which reads as under:-

(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;

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(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.” 5.2 Sub-section(4) of section 72A is in respect of a case of demerger and prescribes that the accumulated losses and unabsorbed depreciation of the demerged company shall be allowed to carry forward in the hands of the resulting company only in case such losses or unabsorbed depreciation is relatable to the undertaking transferred to the resulting company. In a case where the loss or unabsorbed depreciation is not directly relatable to the undertaking transferred to the resulting company, the same shall be apportioned between the demerged company and the resulting company in the same proportion in which assets of the undertaking has been retained by the demerged company and transferred to the resulting company and shall be allowed to be carried forward and set-off in the hands of the demerged company or resulting company, as the case may be. The background and the reason for which the Assessing Officer has invoked section 72A(4) of the Act can be understood as follows. The respondent assessee had three divisions namely, Petro Chemical Division inclusive of Polymer (PCD), Rubber Chemical Division (RCD); and, the Plastic Product Division (PPD). In terms of sections 391to 394 of the Companies Act, 1956 a scheme of demerger was proposed, which was approved by the Hon'ble Bombay High Court vide order dated 08/06/2005 and appointed date was fixed, being 30/09/2003. In terms of the said arrangement, specified fixed assets and liabilities of PCD division were transferred to Relene Petrochemicals Pvt. Ltd., whereas the specified fixed assets of PPD division were transferred to NOCIL Petrochemicals Pvt. Ltd.

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Such movable and immovable properties and liabilities of the PCD and PPD divisions which were not transferred to Relene Petrochemicals Pvt. Ltd. and/or NOCIL Petrochemicals Pvt. Ltd. continued to belong and remain vested with the assessee company. In lieu of the said transfer of specified assets and liabilities of PCD and PPD division, assessee company received consideration from Relene Petrochemicals Pvt. Ltd..& NOCIL Petrochemicals Pvt. Ltd. in terms of the Scheme of arrangement. In the aforesaid background, the Assessing Officer has invoked the provisions of section 72A(4) of the Act on the ground that accumulated loss and unabsorbed depreciation pertaining to the PCD and PPD divisions could not be allowed to be carried forward and set-off in the hands of the assessee company. This has been effectuated by the Assessing Officer in the reassessment proceedings. The aforesaid was challenged in appeal before the CIT(A), who has since set-aside the action of the Assessing Officer. The pertinent plea of the assessee before the CIT(A) was that the provisions of section 72A(4) of the Act could not be invoked with respect to the scheme of arrangement in question, which has been approved by the Hon'ble Bombay High Court vide order dated 8/6/2005. According to the assessee provisions of section 72A(4) of the Act could not be invoked in this case, because the scheme of arrangement does not result in a ‘demerger’ as understood for the purposes of section 72A(4) r.w.s. 2(19AA) of the Act. The CIT(A) took note of the aforesaid plea of the assessee and held that the transfer of divisions in terms of the scheme approved by the Hon'ble Bombay High Court does not constitute a ‘demerger’ as defined in section 2(19AA) of the Act and hence the provisions of section 72A(4) were not attracted in the present case. The

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relevant finding of the CIT(A) in this regard can be appreciated on going through the following discussion:-

“5.19. I agree with the appellant company that- (i) The transfer of Divisions under the Scheme, duly approved by the Bombay High Court vide its Order dated 8th June, 2005 does not constitute "demerger" as defined in section 2(19AA) of the Act. Hence, the-appellant is not a "demerged company" as defined in Section 2(19AAA) and the transferee companies cannot be considered as a "resulting company" as defined in Section 2(41A) of the Act because of the following reasons: a) In this case all the property of the undertaking have not become the property of the company to which the specified assets and liabilities of the undertaking are transferred. b) Similarly, all the liabilities of the undertaking have not become the liabilities of the company to which the specified assets and liabilities of the undertaking are transferred. c) The company which took over the specified assets and the liabilities of the undertaking has not issued shares to the share holders of the appellant company. d) Section 19AA(b) is also not satisfied. (iii) Hence, the provisions of sub-section (4) of Section 72A of the Act are not attracted in relation to the said transfer under the Scheme. That being so, the accumulated business losses and unabsorbed depreciation relating to the transferred divisions have to be remain with the appellant for set off against its income.” Against the aforesaid decision of the CIT(A), Revenue is in appeal before us.

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out that the restriction contained therein with regard to the accumulated losses and unabsorbed depreciation gets triggered only when there is a scheme of demerger, which results in a ‘demerged company’ and a resulting company. Quite clearly, the ‘demerger’ in relation to a company envisages transfer pursuant to section 391 to 394 of the Companies Act, 1956 and has been defined in section 2(19AA) of the Act as under:-

“2(19AA) "demerger", in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 39410 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that— (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 being 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 shareholders of the demerged company on a proportionate basis except where the resulting company itself is a shareholder of the demerged company; (v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company; (vi) the transfer of the undertaking is on a going concern basis; (vii) the demerger is in accordance with the conditions, if any, notified under sub-section (5) of section 72A by the Central Government in this behalf.”

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7.1 Similarly, a ‘demerged company’ is defined as per section 2(19AAA) of the Act to mean that company whose undertaking is transferred pursuant to demerger to a resulting company. The expression resulting company has also been defined in section 2(41A) of the Act meaning one or more companies( including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a scheme of demerger and the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger . A conjoint reading of the meaning of the expression ‘demerger’, ‘demerged company’ and the ‘resulting company’ signifies the manner in which section 72A(4) of the Act is to be understood since the three expressions find a place therein. The scheme of arrangement is to be understood as ‘demerger for the purposes of section 2(19AA) of the Act only if the conditions prescribed therein are satisfied. One of the conditions prescribed is that all the properties and the liabilities relatable to the undertaking should be transferred by the demerged company to the resulting company by virtue of the demerger. Factually speaking, in the present case, there is no dispute to the fact that the scheme of restructuring approved by the Hon'ble Bombay High Court involved transfer of only the specified assets and liabilities of the PCD and PPD divisions to the Relene Petrochemicals Pvt. Ltd, and NOCIL Petrochemicals Ltd. respectively. The aforesaid fact was very much before the Assessing Officer and has been eloquently brought out by the CIT(A) in his order, to which there is no dispute. Therefore, on this aspect itself one can conclude that the scheme of arrangement in question does not

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qualify to be a ‘demerger’ in terms of section 2(19AA) of the Act. Another factual aspect which has been noted by the CIT(A) is to the effect that in the present scheme of arrangement, the consideration in lieu of the transfer of specified assets and liabilities of the two divisions is received by the assessee company, whereas in order to qualify to be a ‘demerger’ in terms of section 2(19AA) of the Act, the consideration to be paid by the resulting company is by way of issuance of shares to the shareholders of the demerged company. On these factual findings of the CIT(A), there is no negation by the Revenue. Be that as it may, it is quite clear that the factual matrix clearly points out that the instant scheme of arrangement is not a ‘demerger’ as defined in section 2(19AA) of the Act; thus, assessee also does not qualify to be a ‘demerged company’ as specified in section 2(19AAA) of the Act and Relene Petrochemicals Pvt. Ltd, and NOCIL Petrochemicals Ltd. also do not qualify to be ‘resulting companies’ within the meaning of section 2(41A) of the Act.

In the above background, the provisions of sub-section(4) of section 72A of the Act are not attracted in relation to the instant scheme of arrangement.

7.3 Notably, the points raised by the Revenue before us do not meet with any of the findings recorded by the CIT(A), which are based on the applicable legal position and, therefore, we do not find any justification to interfere with the ultimate decision of the CIT(A). In this view of the matter, the decision of the CIT(A) in holding that the accumulated loss and unabsorbed depreciation relating to the transferred divisions have to remain with the assessee company for set-off and carry forward for set-off in future years, deserves to be affirmed. We hold so.

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Order pronounced in the open court on 24/05/2017

Sd/- Sd/- (AMARJIT SINGH) (G.S. PANNU) JUDICIAL MEMBER ACCOCUNTANT MEMBER Mumbai, Dated 24/05/2017 Vm, Sr. PS Copy of the Order forwarded to : 1. The Appellant , 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai Guard file. 6. BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai