The Delhi High Court has ruled that the Central government’s authority to relax restrictions outlined in Section 72A of the Income Tax Act, 1962 and Rule 9C of the Income Tax Rules 1962 is extraordinary, discretionary, and not normally subject to judicial review.
The Petitioner, Cargill India Private Limiited, requested that the aforementioned limitations be loosened for a three-year term, however the Revenue rejected this request. A division bench of Justices Vibhu Bakhru and Swarana Kanta Sharma noted during the hearing of a challenge to this Revenue ruling that the authority to relax a rule or condition is through an exception, and that the scope of such authority cannot be interpreted broadly.
The Court viewed that “It is necessary that the power is exercised reasonably and objectively. It is also well settled that the power to relax a Rule or a condition is required to be exercised only to the extent it is necessary. The necessity for using such power must obviously be dictated by the object of the Rules or condition sought to be relaxed.”
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It was observed that the discretionary power granted by Rule 9C(a) of the Rules must be used in accordance with the guidelines specified in the aforementioned proviso and while taking into account all pertinent considerations. It goes without saying that a court cannot evaluate the use of such discretionary power unless it determines that the use is arbitrary, irrational, malafide, or capricious. Only in cases where the decision is irrational and could not have been made by a reasonably informed group of people can the court step in. If the appropriate authority has erred and the judgment is based on extraneous or irrelevant factors or disregards pertinent factors, it may also be subject to judicial review.
Four distinct corporations were merged with the petitioner in accordance with the court-approved merger plan. The total losses and unabsorbed depreciation of the four combined enterprises as of the designated date were 141 crores. The petitioner requested a relaxation of the requirements outlined in Section 72A and Rule 9C, as well as the ability to set off and carry over the losses past the allotted period.
According to the petitioner, three of the merging companies had reached 50% of the installed capacity, while one company had failed to reach the required output level. It argued that although the company’s production capacity utilization had doubled, the threshold minimum level of 50% of the installed capacity had not been reached because of uncontrollable conditions.
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The High Court noted that there is a non obstante clause in Section 72A(2). Therefore, it concluded that the advantages of Section 72A (1) of the Act are not available if the requirements outlined in Section 72A (2) of the Act are not met. The High Court ruled that Rule 9C is just an enabling provision that gives the Central Government the authority to loosen the requirements.
In terms of Section 72A of the Act, the accumulated losses and unabsorbed depreciation of the amalgamated companies are deemed to be unabsorbed depreciation and losses of the amalgamated company for the previous year in which the amalgamation was effected. It also allows set-off and carry-forward of losses if certain conditions are satisfied, like amalgamation is for a genuine business purpose and the amalgamated company ensures the revival of the business of the amalgamating company.
Rule 9C sets out an objective parameter for availing the benefit of Section 72A of the Act – the achievement of 50% of the installed capacity of the industrial undertaking of the amalgamating company and maintaining the same till the end of five years from the date of amalgamation.
As a result, the Court denied the petition, stating that even after accounting for the longer time frame for meeting the requirement, the Petitioner had failed to meet the specified condition, which was to achieve production equal to at least 50% of the installed capacity of the amalgamating company’s undertaking.
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