Accumulated losses vest in amalgamated company; set-off allowed under ss.72, 74; s.72A objection rejected, long-term capital loss permitted

ITAT KOLKATA - AT held that accumulated losses of the amalgamating companies vest in the amalgamated assessee pursuant to the scheme approved by the HC, thus allowing set-off under ss.72 and 74; the CIT-A's objection under s.72A was rejected and Grounds 1-2 were allowed. The tribunal also reversed disallowance of a long-term capital loss where the revenue failed to discharge its burden; applying the SC's ratio on burden of proof, it held the disallowance was based on conjecture and allowed long-term capital loss of Rs.62,12,753/-, permitting carry-forward under s.74.

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Issues Involved:
1. Set-off of brought forward losses of amalgamating company in the hands of the amalgamated company.
2. Disallowance of Long Term Capital Loss without Securities Transaction Tax (STT).

Issue-wise Detailed Analysis:

1. Set-off of Brought Forward Losses:

The primary issue in the appeal was whether the revenue's action in not granting the benefit of brought forward losses of the amalgamating company to the amalgamated company was justified. The assessee filed a revised return claiming unabsorbed short-term capital loss and unabsorbed business loss from the amalgamating companies. The Assessing Officer (AO) denied the set-off, invoking section 79 of the Income Tax Act. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted that section 79 was not applicable but denied the claim on the ground that the amalgamating companies did not own an 'industrial undertaking' as defined under section 72A of the Act.

The Tribunal noted that the scheme of amalgamation was approved by the Calcutta High Court, which included a clause allowing the accumulated losses of the amalgamating companies to be carried forward and vested with the amalgamated company. The Tribunal emphasized that the scheme, once sanctioned by the High Court, becomes binding on all parties, including statutory authorities. The Tribunal cited several judicial precedents, including decisions from the Gujarat High Court, Bombay High Court, and the Supreme Court, to support the view that the revenue cannot object to the scheme after its sanction unless an appeal is filed under section 391(7) of the Companies Act, 1956.

The Tribunal concluded that the accumulated losses of the amalgamating companies would belong to the amalgamated company as per the scheme approved by the High Court. Therefore, the provisions of section 72 and section 74 of the Act would apply, allowing the set-off of these losses against the respective incomes of the assessee. The Tribunal allowed the grounds raised by the assessee on this issue.

2. Disallowance of Long Term Capital Loss without STT:

The second issue was the disallowance of Long Term Capital Loss of Rs. 62,12,753/- on the sale of unquoted shares. The AO disallowed the loss, questioning the sale price of Rs. 2 per share, as the same shares were sold earlier at Rs. 13.50 per share. The CIT(A) upheld this disallowance.

The Tribunal noted that the assessee had provided sufficient documentation, including the invoice and extracts from the Register of Shareholders, to support the sale transaction. The Tribunal held that the AO had not conducted any further investigation or provided any material evidence to contradict the assessee's claim. The Tribunal cited the Supreme Court's decision in K.P. Varghese, emphasizing that the onus is on the revenue to prove any understatement of consideration.

The Tribunal found that the disallowance was made based on mere suspicion without any concrete evidence. Consequently, the Tribunal held that the assessee was entitled to claim the long-term capital loss and allowed the loss to be carried forward for set-off against future long-term capital gains under section 74 of the Act. The Tribunal allowed the ground raised by the assessee on this issue.

Conclusion:

The Tribunal allowed the appeal of the assessee partly, granting the set-off of brought forward losses from the amalgamating companies and the claim of long-term capital loss without STT. The decision emphasized the binding nature of the High Court's sanction of the amalgamation scheme and the requirement for the revenue to provide concrete evidence when disputing the assessee's claims.

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