2022 (10) TMI 904 - AT - Income Tax

Amalgamation Losses Transfer to Amalgamated Company: ITAT Decision

The ITAT dismissed the revenue's appeal, affirming the CIT(A)'s ruling that the accumulated losses of the amalgamating companies would transfer to the ... Scheme of amalgamation sanctioned by High Court - binding nature of court sanctioned scheme - treatment of carried forward losses on amalgamation - application of section 79 in case of change in shareholding due to amalgamation where management and control remain unchanged - operation of provisions relating to set off of losses under sections 72 and 74 following amalgamationScheme of amalgamation sanctioned by High Court - binding nature of court sanctioned scheme - treatment of carried forward losses on amalgamation - operation of provisions relating to set off of losses under sections 72 and 74 following amalgamation - application of section 79 in case of change in shareholding due to amalgamation where management and control remain unchanged - Whether accumulated losses of amalgamating companies belong to the amalgamated company and are available for set off under the respective heads despite change in shareholding consequent to amalgamation - HELD THAT: - The Tribunal upheld the conclusion that the scheme of amalgamation approved by the Hon'ble Calcutta High Court (effective from 01.04.2010) expressly deemed the accumulated losses of the transferor companies to be those of the transferee for all purposes, including the Income tax Act. The court sanctioned scheme carries statutory force and is binding on authorities; any objection by the revenue ought to have been raised during the High Court proceedings under the Companies Act and was not. The Tribunal relied on coordinate decisions of the Bench and relevant precedents to hold that where a merger scheme sanctioned by the Court assigns losses to the transferee, those losses belong to the amalgamated company and may be set off under the appropriate heads in accordance with the scheme. Applying these principles, the Tribunal held that sections 72 and 74 would govern the set off of such losses against the respective incomes of the amalgamated company; the revenue's reliance on section 79 (change in shareholding) did not prevail in the circumstances because management and control remained with the same group and the scheme sanctioned by the High Court was binding. The Tribunal accepted the lower authority's verification direction (that the AO should verify that losses were as declared and accepted earlier) but found no reason to disturb the CIT(A)'s allowance of the set offs. [Paras 4, 9]Accumulated losses of the amalgamating companies belong to the amalgamated company pursuant to the Court sanctioned scheme and are allowable for set off under the respective heads; the revenue's grounds are dismissed and the appeal is dismissed.Final Conclusion: The Tribunal affirmed the CIT(A)'s decision that the scheme of amalgamation sanctioned by the Calcutta High Court rendered the accumulated losses of the transferor companies the losses of the transferee; those losses are available for set off under the relevant heads (sections 72/74) and the revenue's appeal is dismissed. Issues Involved:1. Entitlement of the amalgamated company to the accumulated losses of the amalgamating companies.2. Applicability of Section 72 and 74 versus Section 78(2) of the Income-tax Act, 1961.3. Validity of the set-off of accumulated losses against the amalgamated company's income.4. Relevance of previous case laws cited by the revenue.5. Legitimacy of the CIT(A)'s order based on the materials on record.6. Burden of proof regarding the genuineness of the loss claimed by the assessee.Detailed Analysis:1. Entitlement of the Amalgamated Company to Accumulated Losses:The revenue challenged the CIT(A)'s decision that the accumulated losses of the amalgamating companies, including unabsorbed short-term and long-term capital losses and business losses, would belong to the amalgamated company. The CIT(A) based its decision on the merger scheme approved by the Hon'ble High Court of Calcutta, which stated that the accumulated loss incurred by the transferor (amalgamating company) shall be deemed to be that of the transferee (amalgamated company) for all purposes, including for the purpose of the Income-tax Act.2. Applicability of Section 72 and 74 versus Section 78(2):The revenue argued that the CIT(A) erred by applying Sections 72 and 74 for the set-off of accumulated losses, ignoring Section 78(2) of the Act. However, the CIT(A) and the ITAT both held that the provisions of Section 72 and 74 would come into play for the set-off of such accumulated losses, as the scheme of amalgamation approved by the High Court had a statutory effect and was binding on all parties, including the income-tax authorities.3. Validity of the Set-off of Accumulated Losses:The CIT(A) and the ITAT supported the set-off of accumulated losses against the amalgamated company's income, citing the binding nature of the High Court's order approving the amalgamation scheme. The ITAT referenced the case of Electrocast Sales India Ltd., where a similar issue was resolved in favor of the assessee, allowing the set-off of brought forward losses.4. Relevance of Previous Case Laws:The revenue cited cases such as Smt. Harjit Kaur and Eastern Dooars Tea Company Limited to argue against the set-off of losses. However, the CIT(A) and ITAT found these cases distinguishable and not applicable to the present case. Instead, they relied on the Delhi High Court's decision in CIT Vs. Select Holding Resorts Pvt. Ltd., which supported the assessee's position that carry forward losses cannot be denied if the management remains with the same set of people despite changes in shareholding due to merger.5. Legitimacy of the CIT(A)'s Order:The revenue contended that the CIT(A)'s order was arbitrary and did not consider the materials on record. However, the ITAT upheld the CIT(A)'s order, emphasizing that the scheme of amalgamation approved by the High Court was binding and that objections should have been raised during the court proceedings. The ITAT found no reason to interfere with the CIT(A)'s detailed findings.6. Burden of Proof Regarding the Genuineness of the Loss:The revenue argued that the CIT(A) erred in holding that the assessee had discharged its burden of proving the genuineness of the loss. The ITAT, however, agreed with the CIT(A)'s conclusion that the losses claimed by the assessee were genuine and belonged to the amalgamated company as per the High Court's approved scheme.Conclusion:The ITAT dismissed the revenue's appeal, upholding the CIT(A)'s decision that the accumulated losses of the amalgamating companies would belong to the amalgamated company and could be set off against the respective incomes of the amalgamated company under Sections 72 and 74 of the Income-tax Act. The ITAT emphasized the binding nature of the High Court's order approving the amalgamation scheme and found no merit in the revenue's objections.