Benefit of Section 35D once granted in initial year cannot be denied in Subsequent Years, rules ITAT [Read Order]

The Income Tax Appellate Tribunal ( ITAT ) ruled that the benefit of Section 35D of the Income Tax Act once granted in the initial year cannot be denied in subsequent years on an appeal against  Asian Hotels East Limited.

The Asian Hotels Limited (AHL) operated three separate and independent undertakings. Pursuant to a scheme of demerger approved by the  Delhi High Court, vide their order dated 13.01.2010, which became effective from 11.02.2010, one of the hotel undertakings situated at Kolkata stood transferred by way of demerger to M/s Vardhaman Hotels Ltd [which was renamed as M/s Asian Hotels (East) Ltd. i.e. the assessee from the appointed date 31.10.2009. The terms and conditions related to the transfer of the Kolkata undertaking to the assessee were set out the Scheme of Arrangement.

The effective date of the Scheme became 11.02.2010 and it was operational from the appointed date i.e. 31.10.2009. Accordingly, by operation of the approved scheme, the Kolkata undertaking along with all its assets and liabilities stood vested with the assessee from 31.10.2009.

Further, the profits and losses derived from the operation of’ the Kolkata Undertaking also stood automatically vested with the assessee retrospectively from 31.10.2009. The transferee company i.e. the assessee, therefore, prepared the accounts for the period 31.10.2009 to 31.03.2010.

The expenses having been incurred wholly and exclusively with the purpose of the demerger and to make the scheme of arrangement effective and operational was claimed by way of deduction on a pro-rata basis for five years term in terms of section 35DD of the Act with AY 2010-11 being the first year of claim.

The AO thereafter concluded that the deduction u/s 35DD of the Act was not permissible since it is allowable only when the terms of the scheme were fully complied with. The AO accordingly disallowed the demerger expenses of Rs.2,26,32,237/- claimed in terms of Section 35DD of the Act.

Aggrieved by the order of the AO, the assessee preferred an appeal before the Ld. CIT(A) was pleased to delete the same. Being aggrieved by the order of the Ld. CIT(A), the Revenue is now in appeal.

The order was pronounced by A. T. Varkey (Judicial Member) and A.L. Saini (Accountant Member) on an appeal by Revenue.

On relying upon the judgment of Supreme Court in the case of M/s Shashun Chemical & Drugs Ltd reported in 388 ITR 1 the Tribunal came into conclusion that once the claim u/s 35D of the Act was accepted in the initial year i.e. AY 1995-96, then the clock had started running in favor of the assessee which was to continue for the entire period of ten years and the benefit once granted in the initial year could not be denied in the subsequent years.