2018 (3) TMI 473 - AT - Income Tax

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, ... Set-off and carry forward under sections 72 and 74 - applicability of section 72A to set-off of amalgamating companies' losses - binding effect of High Court-sanctioned scheme of amalgamation - notice to Central Government under section 394A and opportunity to object before sanction - doctrine of res judicata, acquiescence and estoppel against collateral challenge to court-sanctioned scheme - onus on revenue to prove understatement of sale consideration - acceptance of declared sale consideration and evidentiary burden on revenue (K.P. Varghese principle)Binding effect of High Court-sanctioned scheme of amalgamation - applicability of section 72A to set-off of amalgamating companies' losses - notice to Central Government under section 394A and opportunity to object before sanction - doctrine of res judicata, acquiescence and estoppel against collateral challenge to court-sanctioned scheme - set-off and carry forward under sections 72 and 74 - Accumulated losses of the amalgamating companies belong to the amalgamated company pursuant to the Court sanctioned scheme and are available for set off under the provisions governing capital and business losses. - HELD THAT: - The Tribunal found that clause 10(iii) of the scheme, sanctioned by the Hon'ble Calcutta High Court with effect from the appointed date, vested accumulated losses of the transferor companies in the transferee company. The Court sanctioned scheme, having statutory force, is binding on the revenue and third parties; objections by the Central Government (including the Income Tax Department) are to be made during the High Court proceedings under section 394A, and no such objection or appeal under section 391(7) was taken. The Tribunal held that non compliance with the condition in section 72A (ownership of an 'industrial undertaking') did not defeat the scheme's operative effect where the High Court, in sanctioning the arrangement, is taken to have considered public interest and representations. Principles of res judicata, acquiescence and estoppel were applied because the revenue had the opportunity to object before sanction and thereafter did not challenge the order; consequently the accumulated losses are to be treated as belonging to the amalgamated company and governed for set off by the provisions of sections 72 and 74 as applicable. [Paras 4]Grounds 1 and 2 allowed; accumulated losses of amalgamating companies are available to the assessee and to be dealt with under sections 72 and 74.Onus on revenue to prove understatement of sale consideration - acceptance of declared sale consideration and evidentiary burden on revenue (K.P. Varghese principle) - The long term capital loss claimed on sale of unquoted shares at the declared consideration is allowable and may be carried forward because the revenue failed to discharge the burden of proving understatement of consideration. - HELD THAT: - The assessee produced invoice and share transfer records evidencing sale at the declared price. The AO disputed the price without conducting enquiries of the purchaser or producing independent evidence to show a higher consideration. Applying the settled principle that the burden lies on the revenue to prove understatement of consideration, the Tribunal held that mere suspicion or conjecture by the AO was insufficient to disallow the loss. In absence of cogent material from the revenue contradicting the documented sale, the long term capital loss is admissible and permissible to be carried forward under the relevant provisions. [Paras 6]Ground 4 allowed; the long term capital loss without STT is admitted and can be carried forward.Procedural abandonment of a ground in appeal - Ground No. 3 of the appeal was not pressed and is dismissed as not pressed. - HELD THAT: - The assessee's representative expressly did not press Ground No.3 during hearing and the Tribunal recorded endorsement to that effect; accordingly the ground is dismissed as not pressed. [Paras 5]Ground No.3 dismissed as not pressed.Final Conclusion: The appeal is partly allowed: Grounds 1 and 2 are allowed (accumulated losses of the amalgamating companies are held to belong to the amalgamated company and are available for set off under sections 72 and 74), Ground 3 is dismissed as not pressed, and Ground 4 is allowed (the long term capital loss without STT is admitted and may be carried forward). 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.