Benefit of set-off of brought Forward Business Losses cannot be allowed on Non-genuine Demerger: ITAT [Read Order]

The Pune Bench of Income Tax Appellate Tribunal ( ITAT ) has held that benefit of set-off of brought forward business losses cannot be allowed on the non-genuine demerger.

Shri Shivraj B. Morey appeared for the revenue and Shri Ketan Ved appeared for the assessee.

The respondent-assessee is engaged in the business of sale and services of diesel engines, its spare parts and related equipment.  The return of income was filed on 23.11.2006 declaring a total income of Rs.55,44,54,789/- which was revised on 28.10.2007 at a total income of Rs.29,84,61,310/-. The assessment order was passed u/s 143(3) of the Income Tax Act, 1961 at the total income of Rs.49,78,29,562/- after disallowing set-off of brought forward business losses of Rs.16,54,99,878/- and unabsorbed depreciation losses of Rs.3,47,20,047/- about a demerged undertaking under sub-section (4) of section 72A of the Act.  The Assessing Officer also made the addition of Rs.6,60,520/- u/s 14A with which we are concerned. 

The Highway Solutions of Cummins Auto Services Ltd. (CASL) a 100% subsidiary of the respondent-assessee company was demerged and vested with the respondent-assessee company w.e.f. 01.04.2005.  The respondent-assessee claimed the set-off of brought forward business losses and unabsorbed depreciation losses relating to demerged undertaking against the taxable income as provided under sub-section (4) of section 72A of the Act. 

The Assessing Officer found that there was no intention to continue the business of demerged undertaking and held that the scheme of demerger was not carried out for genuine purpose as contemplated under sub-section (5) of section 72A of the Act.

The revenue contended that the motive behind the scheme of the demerger was only to avail the tax benefit and not for genuine purpose as the assets were held for sale and held that the respondent-assessee was not entitled to benefit of set-off of brought forward business losses and unabsorbed depreciation losses.

Shri Inturi Rama Rao, accountant member and Shri S S Viswanethra Ravi, judicial member observed that the scheme of demerger/amalgamation which was accorded approval by the Jurisdictional High Court does not automatically entitle the assessee to claim the set-off of brought forward business loss. 

The Tribunal observed that the CIT(A) had granted the benefit of set-off of brought forward business losses in a perfunctory manner without looking into the objects behind the enactment of provisions of section 72A and held that the order of CIT(A) was illegal and unreasonable.  The appeal filed by the Revenue was partly allowed.

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