DCIT (LTU), NEW DELHI vs. M/S. MAWAWAN SUGAR LTD., NEW DELHI

Dcit Ltu V Mawawan Sugar Ltd Ita 820 Del 2010 A Y 2003-04

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “E”: NEW DELHI BEFORE SHRI H.S.SIDHU, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 820/Del/2010 (Assessment Year: 2003-04) DCIT (LTU), Mawana Sugar Ltd, (Presently Known as M/s. Siel Ltd., 5th NBCC Plaza, Vs. Pusp Vihar, Floor, Kirti Mahal, 19, New Delhi Rajendra Place, New Delhi PAN:AAHCS4120R (Appellant) (Respondent) Appellant by : Sh. Trandeep Singh, CA Respondent by : Sh.Balwan Chauhan, Sr. DR Date of Hearing 26.11.2015 Date of pronouncement 04.12.2015 O R D E R PER PRASHANT MAHARISHI, A. M. 01. The present appeal filed by the revenue is directed against the order of learned CIT(A)-IX, New Delhi dated 30.09.2009 passed for the assessment year 2003-04. The revenue raised the following grounds of appeal: “1. On the facts and in the circumstances of the case, the ld CIT(A) has erred in holding that there was valid ‘demerger’ u/s 2(19AA) of the Act. 2. On the facts and in the circumstances of the case, the ld CIT(A) has erred in holding that the assessee is to be allowed carry forward of loss and unabsorbed deprecation of Rs.46,57,12,585/-“ 02. This company was incorporated on 26.12.2002 I under the name and style of Siel Sugar sugars Limited and subsequently the name of this assessee was changed w.e.f 16.06.2004 to Mawana Sugars Limited. The facts in brief of the case are that the assessee was engaged in the business of manufacture and sale of sugar. The assessee filed return of income on 24.10.2003 declaring loss of Rs. 26,79,18,903/-. The case was selected for scrutiny and processed u/s 143(1) on 19.02.2004. Notices u/s 143(2) was issued. The assessing officer noticed in his order that the assessee failed to furnish accurate particulars of its income by wrongly claiming carry

DCIT LTU V Mawana Sugars Limited ITA 820 Del 2010 AY 2003-04 forward of brought forward losses, during the year under consideration. The assessing officer completed assessment at total loss of Rs.26,79,18,903/-. 03. According to the scheme of arrangement u/s 391 and 394 of The Companies Act 1956 as approved by Hon. Delhi high court vide its order dated 26/08/2003, sugar business of siel limited ( demerged Company) was transferred to Siel Sugars Limited ( Resulting company as per section 2 (19AAA) ) (assessee) w.e.f. 1.10.2002. Assessee pleaded during assessment proceedings that there is demerger of sugar business of siel Limited in to siel sugar limited as provided u/s 2 (19AA) of the Income tax Act and therefore unabsorbed business losses and unabsorbed depreciation is required to be carried forward in terms of section 72A(4) of the Income Tax Act. However AO was of the view that the scheme of arrangement is not a demerger as provided u/s 2(19AA) of the Income tax act because a. Ratio of assets and liabilities transferred to the demerged company are not accordance with the definition of demerger. b. Assessee could not link all liabilities of demerged company to resulting company with respect to bank and financial institutions. c. Issue of shares to resulting company as well as the transfer of reserve are disproportionate Therefore AO did not allow the benefit of section 72A (4) of the Income tax act to Resulting company and did not allow the carry forward of business losses an unabsorbed depreciation for A Y 2000-01 to 2002-03 amounting to Rs 46,57,12,585/-. 04. Aggrieved the assessee filed an appeal before the learned Commissioner of Income-tax (Appeals), who observed that the assessee company was entitled to set off and carryover of unabsorbed business loss and depreciation in term of section 72A(4) of the Act. The assessee company had already submitted working of unabsorbed depreciation and business loss available to it on the basis of demerger of two sugar undertakings vide Page | 2

DCIT LTU V Mawana Sugars Limited ITA 820 Del 2010 AY 2003-04 tax audit report submitted with the return. The assessee company has duly calculated the amount of unabsorbed business loss and depreciation in proportion to assets vested in the assessee company and remained in the demerged company. The assessing officer did not raise any issue regarding quantification of the amount. Therefore the learned Commissioner of Income-tax (Appeals) allowed the carry forward of depreciation and business loss amounting to Rs.46,57,12,585/-. Aggrieved the revenue is before us. 05. Ld DR submitted that AO has given a finding for not considering the scheme of arrangement of demerged company and result ting company as falling within the definition of demerger u/s 2(19AA0 of the income tax act and therefore no benefit of section 72A (4) can be given to the assessee. He relied on the order of AO for this. 06. Ld AR of the assessee submitted that CIT (A) has considered all the issue and held that assessee is entitled to the benefit of 72A(4) of the Act. He further submitted that in case of demerged company revenue has accepted the demerger u/s 2 (19AA) of the act and in case of resulting company , assessee revenue is pleading that it is not demerger. For supporting this he placed before the bench copy of the assessment order u/s 143(3) for AY 2003-04 in case of demerged Company where in it is held that transfer of assets to resulting companies falls under the category of demerger only holding transaction of transfer of assets as not transfer u/s 47 (vib) of the Income tax act and no capital loss was allowed to the assessee. 07. We have carefully considered the rival contention as well as the scheme of filed before Honourable Delhi High court in Company petition no . 107 of 2003 as well as the assessment order in case of demerged company M/s Siel Limited. For considering the claim of the assessee u/s 74A(4) rws 2(19AA0 of the Income tax act it is necessary to puruse the respective provision of the law which are as under :-

Section 2 (19AA) and 2 (19AAA)

DCIT LTU V Mawana Sugars Limited ITA 820 Del 2010 AY 2003-04 (19AA) "demerger", in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 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 ; (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. Explanation — 1. For the purposes of this clause, "undertaking" shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. Explanation — 2. For the purposes of this clause, the liabilities referred to in sub- clause (ii), shall include-- (a) the liabilities which arise out of the activities or operations of the undertaking ; (b) the specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking ; and (c) in cases, other than those referred to in clause (a) or clause (b), so much of the amounts of general or multipurpose borrowings, if any, of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger. Explanation — 3. For determining the value of the property referred to in sub-clause (iii), any change in the value of assets consequent to their revaluation shall be ignored. Explanation — 4. For the purposes of this clause, the splitting up or the reconstruction of any authority or a body constituted or established under a Central, State or Provincial Act, or a local authority or a public sector company, into separate authorities or bodies or local authorities or companies, as the case may be, shall be deemed to be a demerger if such split up or reconstruction fulfils such conditions as may be notified in the Official Gazette, by the Central Government ; (19AAA) "demerged company" means the company whose undertaking is transferred, pursuant to a demerger, to a resulting company ; Section 72A (4) Page | 4

DCIT LTU V Mawana Sugars Limited ITA 820 Del 2010 AY 2003-04 PROVISIONS RELATING TO CARRY FORWARD AND SET OFF OF ACCUMULATED 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. (5) The Central Government may, for the purposes of this Act, by notification in the Official Gazette, specify such conditions as it considers necessary to ensure that the demerger is for genuine business purposes. (7) For the purposes of this section,-- (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 reorganization of business or amalgamation or demerger had not taken place. 08. Ld CIT (A) has dealt with all the issues raised by AO and has held that :- “7.7 . Position with regard to compliance of conditions of section 2(19AA) of the Act is discussed in the following paras :-

i) The first condition as prescribed in section 2(19AA) of the Act is that all the property of the undertaking transferred by the demerged company becomes property of the resulting company. As per the SOA approved by Hon'ble High Court running business of two sugar undertakings have been transferred to the appellant company. It has been provided in clause (c) of Part II of the Scheme that business of two sugar undertakings shall vest in the appellant company upon sanction of the Scheme. Details of the assets of sugar undertakings transferred to the appellant company are as given in Page | 5

DCIT LTU V Mawana Sugars Limited ITA 820 Del 2010 AY 2003-04 Annexure II of the Scheme. Further, it has also been specifically mentioned in para 1 of Part 5 of the Scheme that w.e.f. the appointed date, the undertakings of the sugar group together and in particular with all the moveable and immovable assets of what-so-ever nature and capable to passing of physical delivery or otherwise be vested in the appellant company. Accordingly, assets relating to sugar undertakings have vested in the appellant company. From the assessment order, I find that the AO has also not raised any issue regarding vesting of properties of undertakings in the appellant company. Accordingly, first condition provided in section 2(19AA) of the Act stands complied with.

ii) Second condition provided is that all the liabilities relating to undertakings have been transferred to the resulting company by virtue of de-merger. In the assessment order, the AO has observed that appellant company has not been able to link all the liabilities transferred by the demerged company i.e. Siel Ltd. to the appellant company. It has also been stated that liability transferred, especially loans of banks & financial institutions cannot be linked with the demerged company. The appellant company with regard to these observations of the AO has submitted that all the liabilities relating to sugar undertakings have been duly transferred to the appellant company. In this regard, the appellant has referred to Annexure II of the Scheme wherein Schedule of Assets & Liabilities transferred to appellant company has been given. As per details, loans of Rs.180.05 crore and unsecured loans of Rs.2.55 crore totaling Rs.182.60 crore have been transferred to appellant company. The appellant company has further referred to Balance Sheet of demerged company as on 30.9.2002, the appointed date of demerger (Page 75 - 83 of the Paper Book). On Page 77 details of secured & unsecured loans of sugar business and other business of Siel Ltd. have been given. As per these details secured and unsecured loans consisted of following amounts:-

Secured Loans. Amount in crores Rs. Bank loans 24.02 Cash credit/overdrafts 59.28 Loan from Fin. Institutions 96.75 TOTAL 180.05 Unsecured Loans: Deposits - others 1.12 Short term loans 1.43 TOTAL 2.55 It has been submitted that above figures given in the Balance Sheet as on 30.9.2002 fully tally with the figures given in Annexure II of the SOA which has been duly approved by the High Court of Delhi.

Further, the Id. counsel has invited my attention to the Sub-clause (a) of Clause (v) of Part III of the SOA wherein it has been specifically provided that working capital facilities obtained from working capital providers for sugar units namely Mawana Sugar Works and Titawai Sugars Complex shall be allocated to the appellant company. Loans from banks and cash credits/overdrafts mentioned above aggregating Rs.83.30 crore (24.02+ 59.28) are for working capital requirement as also mentioned in Annexure II of SOA and details of which are given above with reference to the Balance Sheet as on 30.9.2002 are specifically relating to sugar units and have been transferred to the appellant company. Loans from financial institutions amounting to Rs.96.75 crore are also specifically mentioned in SOA on Page 31 under clause (c) of Part III, which consists of term loans of Rs.73.90

DCIT LTU V Mawana Sugars Limited ITA 820 Del 2010 AY 2003-04 crore and zero coupan debentures of Rs.22.85 crore. Institution wise details of above mentioned term loan of Rs.73.90 crore and zero coupan debentures of Rs.22.85 crore, which are also specifically related to sugar units have been given in institution-wise details (also submitted to AO as per assessment record).

As regards unsecured loans of Rs.2.55 crore, it has been submitted that amount of Rs.1.12 crore represent the deposits received in sugar units as per break up given in Balance Sheet. Further amount of Rs.1.43 crore also is specifically related to sugar units as per balance sheet and same has been stated to be in the nature of Sales Tax Department loans and loans from Sugar Development Fund. These loans are also reflected in the unit-wise Balance Sheet of demerged company as on 31.3.2002, though the figures on the above date are somewhat different.

In view of the above details submitted by the appellant company which have been duly verified with the copy of Balance Sheets submitted as on 30.9.2002 as well as on 31.3.2002 and have also been specifically mentioned in the SOA, I am fully satisfied that liabilities relating to sugar units have been transferred to the appellant company. The AO has not made any analysis with regard to liabilities transferred by demerged company to the appellant company and has not given any basis of her observation that liabilities transferred are not as per conditions provided in section 2(19AA) of the Act. Accordingly, in my view conditions with regard to transfer of loans have been fully complied with.

iii) Third condition provided in section 2(19AA) of the Act is that properties & loans of the undertakings transferred by the demerged companies are at the values appearing in the books of accounts of demerged company immediately before demerger. As discussed in (i) & (ii) above, properties as well as liabilities have been transferred by the demerged company at the same amounts which were appearing in the books of demerged company. Accordingly, in my view the AO has also not pointed out any variation in the figures of assets & liabilities of sugar undertakings mentioned in the books of demerged company and taken in the books of the appellant company.

iv) The fourth condition provided in section 2(19AA) of the Act is to the effect that the resulting company issues shares to shareholders of demerged company on a proportionate basis. Though the AO has made a statement that demerger does not meet the requirement but no reasons for arriving at this conclusion has been given. According to the appellant, it was explained to the AO during the assessment proceedings that as per SOA, the company had to issue 3 shares for 4 shares held by a shareholder in demerged company. Total share capital of Siel Ltd. was Rs.41.26 crore against the same the appellant has allotted share capital of Rs.30.95 crore. Accordingly, condition regarding allotment of share capital has been strictly complied with. It has stated that SOA has been sanctioned by the Hon'ble High Court vide its order dated 26.8.03. The appointed date for the purpose of SOA has been 1.10.02. Accordingly, all the assets and liabilities deemed to have been transferred to the appellant company w.e.f. 1.10.2002. In view of above position, Balance Sheet in the case of appellant company has been prepared on 31.3.2003 and return of income for A.Y. under appeal (2003-04) was filed. Since, the order of High Court was dated 26.8.2003, actual allotment of share capital to shareholders could have been made only after order of the court. In the Balance Sheet as on Page | 7

DCIT LTU V Mawana Sugars Limited ITA 820 Del 2010 AY 2003-04 31.3.2003, the amount of share capital to be allotted/subsequently allotted has been shown as capital suspense and a note in respect thereof as Note No. 8 to Schedule 12 has been given in the Balance Sheet. The appellant company has also submitted copy of resolution dated 5.9.2003 passed in the meeting of the Board of Directors of appellant company fixing record date for the purpose of allotment of share capital to the shareholders in the ratio of 3 shares for every 4 equity shares held in Siel Ltd. as on 30.10.2003. Further, a copy of resolution passed on 30.12.2003 allotting the share capital has been submitted. Return filed in Form No.2 for allotment of share capital with ROC has also been submitted as an evidence of allotment of share capital pursuant to SOA as approved by the High Court of Delhi vide its order dated 26.8.2003. In view of the above facts, it is very clear that the appellant has allotted the share capital on proportionate basis to shareholders of demerged company in term of SOA. Hence, conditions regarding allotment of share capital on proportionate basis has also been complied with.

v) Fifth condition of section 2(19AA) is also regarding allotment of share capital by resulting company. It provides shareholders holding not less than 3/4th in value of shares in the demerged company become shareholders of resulting company by virtue of demerger. Since, share capital has been allotted to all the shareholders of demerged company, this condition has also been duly complied with.

vi) Sixth condition is that transfer of the undertakings is on a going concern basis. There is no doubt as regards compliance of this condition in the facts of the case of the appellant. As per the SOA business of 2 sugar undertakings has been transferred to the appellant company on a going concern basis.

vii) Last condition is that demerger is in accordance with the conditions, if any, notified under sub- section (5) of section 72A by the Central Government. Sub-section (5) provides that the Central Govt. may for the purpose of this Act, by notification in the official gazette specify such conditions, as if consider necessary to ensure that demerger is for genuine business purposes. So far no condition has been notified by the Central Govt. under this sub-section. Therefore, there is no question of non- compliance here. In any case, since the SOA has been approved by the Hon'ble Delhi High Court, no question can be raised regarding its genuineness.

7.8 The AO in the order has also made observation to the effect that the ratio in which the reserves have been transferred by the demerged company are at absolute variance with the ratio in which capital has been transferred. Further, she has observed that vide SOA immovable properties and investments have also been transferred to other companies namely Shivaji Marg properties and Siel Holdings Ltd. It has also been observed that lenders were also part of SOA. On the basis of these observations, she has stated that object of SOA was quite different. The appellant in this regard has submitted that these observations have no legal sanctity and have no bearing as regards compliance of conditions for transfer of running business of 2 sugar undertakings to the appellant company in term of section 2(19AA) of the act. The appellant company has made detailed submissions in respect of each of the above mentioned observations of the AO.

DCIT LTU V Mawana Sugars Limited ITA 820 Del 2010 AY 2003-04 7.9 I have considered these observations of the AO in light of conditions provided in section 2(19AA) of the Act. Each of the conditions provided therein has been duly discussed above. There is no condition provided in section 2(19AA) of the Act to the effect that through same SOA assets cannot be transferred to any other company or restructuring of loans cannot be made. I find that transfer of properties and investments to other companies namely Shivaji Marg properties and Siel Holdings Ltd. have no bearings as regards transfer of undertakings to the appellant company. In respect of transfer of reserves also, there is no condition provided in section 2(19AA) of the Act. In fact, it has been correctly submitted that reserve is only a balancing figure and it is the difference between the assets & liabilities transferred. 7.10 In view of the above discussion, I do not see any violation to any of the conditions provided in section 2(19AA) of the Act. Transfer of business of two sugar undertakings to the appellant company by M/s Siel Ltd. is to be considered as case of demerger in term of section 2(19AA) of the Act. Hence, Ground No. 3 of appeal is hereby allowed.” No infirmity in the order of CIT A() was drawn to our notice by revenue. We are also of the view that CIT (A) has dealt with all the issue raised by AO and giving a categorical finding holding that assessee is eligible for carry forward of unabsorbed loses and unabsorbed depreciation. Further as in the case of demerged company revenue has already taken a stand that the transaction is of Demerger, now it cannot be allowed to take a different stand in case of resulting assessee Company. Revenue cannot blow hot and cold in same breathe. Therefore we confirm the order of CIT (A) and hold that it was a valid demerger as defined u/s 2(19AA) of the Income tax act and assessee company is eligible for benefit of Section 72A (4) for carry forward of losses and unabsorbed depreciation of Rs. 46,57,12,585/-. In the result both the grounds of appeal of revenue is dismissed. 09. In the result appeal of revenue is dismissed. Order pronounced in the open court on 04.12.2015. -Sd/- -Sd/- (H.S.SIDHU) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:04/12/2015 A K Keot Copy forwarded to

DCIT LTU V Mawana Sugars Limited ITA 820 Del 2010 AY 2003-04 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi