Income Tax Appellate Tribunal - Bangalore
M/S Indus Fila Ltd.,, Bangalore vs Department Of Income Tax on 23 July, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT
AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER
ITA No.1193/Bang/2011
Assessment year : 2008-09
The Deputy Commissioner of Vs. M/s. Indus Fila Ltd.,
Income Tax, No.107, Industrial Suburb,
Circle 11(4), II Stage, Yeshwanthpur,
Bangalore. Bangalore - 560 022.
PAN: AAACI 5893C
APPELLANT RESPONDENT
Appellant by : Shri Sarangan, Sr. Counsel
Respondent by : Shri Farahat Hussain Qureshi, CIT-II(DR)
Date of hearing : 23.07.2012
Date of Pronouncement : 31.07.2012
ORDER
Per N.V. Vasudevan, Judicial Member
This appeal by the revenue is against the order dated 19.09.2011 of the CIT(Appeals)-I, Bangalore relating to assessment year 2008-09.
2. Grounds No.1, 5 & 6 are general in nature and requires no adjudication. The other grounds of appeal raised by the revenue reads as under:-
ITA No.1193/Bang/2011Page 2 of 10
"2. The learned CIT(Appeals) was not justified in allowing the assessee to set off of loss of amalgamating company (M/s. Tulip Apparels) with the profits of the appellant amalgamated company, without appreciating the facts and circumstances under which the same was disallowed by the Assessing Officer.
3. The learned CIT(Appeals) erred in allowing the relief without appreciating that the amalgamating company (M/s. Tulip Apparels) had already filed its return of income on 29.9.2008 for AY 2008-09 and that petition before the Hon'ble High Court for approval of merger was also after the due date for filing the return of income for the concerned Assessment Year by the assessee (amalgamated) company.
4. The learned CIT(A) erred in allowing the relief without considering that it is a case of colorable device considering the fact that the Board Resolution is itself taken on 31.1.2009, i.e., much after the due date for filing the return of income in the case of the assessee and after nine months from the end of the relevant financial year."
3. The assessee is a company which is engaged in the business of manufacture of readymade garments. There was another company by name 'Tulip Apparels Pvt. Ltd.' ("TAPL" for short). This company was also engaged in similar line of business as that of the assessee. In fact, the assessee has been doing job work for TAPL. TAPL could not carry on its business profitably. The assessee and TAP therefore decided that it would be in the best interest of both the companies that TAPL merge with the assessee. The amalgamation could help achieve optimum utilization of single manpower, infrastructure, production and logistic facilities. The assessee will also have the benefit of trained and skilled manpower, which will enable the assessee to expand its garment manufacturing operations. The two companies therefore decided to amalgamate. The proposal was ITA No.1193/Bang/2011 Page 3 of 10 that TAPL will merge with the assessee and cease to be a separate entity on merger with the assessee.
4. On 11.03.08, the Board of Directors of the assessee resolved that the assessee will merge with TAPL subject to approval of shareholders of the assessee and TAPL, the Hon'ble High Court, stock exchange and other regulatory authorities. On 12.03.2008, the assessee informed the BSE as well as NSE regarding the proposed merger of TAPL with the assessee. A scheme of amalgamation of TAPL with the assessee was formulated, as per the said scheme with effect from the appointed day which was fixed in the scheme as 31.03.2008, TAPL will cease to be an entity and all the assets & liabilities of TAPL shall vest with the assessee. TAPL will stand dissolved without winding up. Between the appointed day till the date on which the scheme finally takes effect i.e., the effective date, the business which is carried on by TAPL shall be deemed to have been carried on for and on behalf of assessee and in trust for the assessee. Since the scheme of amalgamation required the sanction of the Hon'ble High court of Karnataka, TAPL as well as the assessee filed petition for sanction of the scheme of amalgamation in Company Petition No.97/2009 & Company Petition No.80/2009. By an order dated 06.02.2010, the Hon'ble High Court of Karnataka sanctioned the scheme of amalgamation as proposed by TAPL and the assessee.
5. The assessee filed the return of income for the A.Y. 2008-09 declaring business income of Rs.31,36,33,145. Consequent to the sanction of scheme of amalgamation by the Hon'ble High Court, the assessee filed letter before the Assessing Officer wherein the assessee ITA No.1193/Bang/2011 Page 4 of 10 claimed set off of carried forward losses of TAPL against the income declared by the assessee. This claim was made in view of the provisions of section 72A of the Act, which provides that where there is amalgamation, then the accumulated loss or unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected. We have already seen that the amalgamation was effected on 31.03.2008 which is the appointed day under the scheme of amalgamation which the Hon'ble High Court had sanctioned. TAPL has a loss of Rs.41,18,72,846. The assessee claimed in the course of assessment proceedings that the business income declared by the assessee should be set off against the loss of TAPL and if so set off, there will be no chargeable total income of the assessee.
6. The Assessing Officer examined the aforesaid claim of the assessee, he was of the view that the process of amalgamation has been used as a tool to wipe off the profits of a profit making entity against the loss of another entity. Thereafter, the AO proceeded to make the following observations:-
(a) The appointed date as per the scheme of amalgamation was 31.03.2008 and the Board of Directors of the transferee company viz., the assessee, approved the same only in their meeting held on 31.01.2009. Therefore the appointed day was arbitrarily fixed as 31.03.2008.
(b) The assessee failed to prove that during the assessment year 2008-09 or earlier to that date, the assessee and TAPL negotiated for amalgamation.
(c) TAPL existed as a company with the Registrar of Companies upto 09.03.2010 and therefore from 31.03.2008 to 08.03.2010, ITA No.1193/Bang/2011 Page 5 of 10 TAPL was in existence and carried on its business under the control of its Board of Directors.
(d) By the process of amalgamation, the assessee adopted a device seeking to set off the amalgamated losses of TAPL against its profits.
(e) The wisdom in fixing the effective date of scheme of amalgamation as 31.03.2008 was also questioned.
(f) The assessee did not file a revised return of income after the approval of the scheme of amalgamation by the Hon'ble High Court of Karnataka which was on 06.02.2010. The assessee could have filed a valid revised return of income u/s. 139(4) of the Act till 31.03.2010.
(g) Because of the set off of loss, the assessee had to pay taxes only as per the provisions of section 115JB i.e., MAT.
7. After making the aforesaid observations, the AO finally observed as follows:-
"8.7 In view of the foregoing, it is concluded that the setting off of the losses is a colourable device and treated as such. To avoid the payment of taxes on the whopping profit of Rs.31,36,33,145, the assessee had resorted on the scheme of amalgamation and made a wrong claim of set off from the losses of another related party Therefore the set off of the losses is hereby disallowed and the same amount is added back to the income of the assessee."
8. The assessee preferred an appeal before the CIT(Appeals) and submitted that consequent to the sanction of the scheme of amalgamation, the loss of TAPL had to be adjusted against the income of the assessee company, both under normal computation of income as well computation u/s. 115JB of the Act. The assessee also pointed out that by virtue of the provisions of section 72A of the Act, the assessee was entitled to the claim of set off. The assessee also highlighted that it was not possible for the AO ITA No.1193/Bang/2011 Page 6 of 10 to question the scheme of amalgamation, which has been duly sanctioned by the Hon'ble High Court. The steps taken by the assessee for the amalgamation were also highlighted. The assessee also pointed out that even though the court's sanction in a scheme of amalgamation comes at a later point of time, but the scheme of amalgamation takes effect from the effective date, unless the order of High Court sanctioning the scheme provides for a different effective date. The assessee also relied on the decision of the Hon'ble Supreme Court in the case of Marshall Sons & co. (India) Ltd. v. ITO 223 ITR 809, wherein the Hon'ble Supreme Court has held that amalgamation takes effect on the date of transfer specified in the scheme and not on the date of court's order. The court further held that the income of the transferor company from the date of transfer would be the income of transferee company.
9. The ld. CIT(Appeals) after considering the aforesaid submissions of the assessee, was of the view that the claim made by the assessee for set off of losses had to be allowed. He further observed as follows:-
"6.1 Though in the scheme of amalgamation, the effective date is mentioned as 31.03.2008 but it is seen that the date has really no connection with the scheme of amalgamation. It is seen that the terms of scheme of amalgamation appear to have been finalized on 31.01.2009, long after the transfer date 31.03.2008, as provided on the page no.3 and 4 of the scheme of amalgamation as quoted below:
'The Board of directors of transferee company (i.e. Indus Fila), in its meeting held on 31.01.2009 approved and adopted the scheme of amalgamation wherein M/s. Tulip Apparels Pvt. Ltd. (the transferor company) incorporated under the Act and having its registered office in the state of Karnataka is proposed to be merged with the Transferee company. The transferee company made an application in C.A. No.169/2009 whence this court by ITA No.1193/Bang/2011 Page 7 of 10 order dated 06.04.2009 directed the convening and holding of the meetings of its shareholders and creditors, both secured and unsecured. By another application in C.A. No.224/2009, this court order dated 25.05.2009 permitted the change in chairman of the said meeting.'
10. Aggrieved by the order of the CIT(Appeals), the revenue has preferred the present appeal before the Tribunal.
11. The ld. DR reiterated the stand of the Assessing Officer as reflected in the order of assessment, while the ld. counsel for the assessee reiterated the stand of the assessee as put forth before the CIT(Appeals).
12. We have considered the rival submissions. The Hon'ble Supreme Court in the case of Marshall Sons & Co. (India) Ltd. (supra) had to deal with a question as to the authority of the ITO calling upon the transferee company to file return of income for the period after the amalgamation has taken effect. The Hon'ble Supreme Court has observed as follows:-
" ..... that since the company courts had not only sanctioned the scheme of amalgamation as presented to them, but had also not specified any other date as the date of transfer/amalgamation, it followed that the date of amalgamation/date of transfer was the date specified in the scheme as the transfer date. In such a situation, it would not be reasonable to say that the scheme of amalgamation took effect on and from the date of the order sanctioning the scheme. The business carried on by the subsidiary company should be deemed to have been carried on for and on behalf of the appellant-company. This was the necessary and the logical consequence of the court sanctioning the scheme of amalgamation as presented to it. The order of the court sanctioning the scheme, the filing of the certified copies of the orders of the court before the Registrar of Companies, the allotment of shares, etc., might have all taken place subsequent to the date of amalgamation/transfer, yet the date of amalgamation in the circumstances of this case would be January 1, 1982.ITA No.1193/Bang/2011 Page 8 of 10
Therefore, the notices issued by the Income-tax Officer were not warranted in law." (emphasis laid)
13. The ratio laid down by the Hon'ble Supreme Court in the aforesaid decision is that the amalgamation takes effect from the appointed date as mentioned in the scheme of amalgamation which was duly sanctioned by the Hon'ble High Court without any change. The scheme also envisages that between the appointed day till the date on which the scheme finally takes effect i.e., the effective date, the business which is carried on by TAPL shall be deemed to have been carried on for and on behalf of assessee and in trust for the assessee. Therefore the amalgamation takes effect from 1.3.2008. As a naturally corollary, all losses of amalgamating company will be deemed to be the loss of the amalgamating company. In view of the aforesaid decision of the Hon'ble Supreme Court, we are of the view that the AO exceeded his jurisdiction in question the appointed day fixed under the scheme of amalgamation which is duly sanctioned by the Hon'ble High Court. Besides, there is contemporaneous evidence on record to show that the scheme of amalgamation had been proposed by the assessee as early as 11.03.2008 and such proposals have been duly communicated to the stock exchange (NSE & BSE). Apart from the above, in the notes to accounts for the period ending 2008-09, the assessee had duly highlighted the fact that the accounts of the assessee was prepared on a stand alone basis without setting off of losses of TAPL, because the proposal for amalgamation was still pending for consideration by the Hon'ble High Court.
ITA No.1193/Bang/2011Page 9 of 10
14. In the light of above, we are of the view that the observations of the Assessing Officer expressing doubts regarding the scheme of amalgamation being a device to avoid taxes are all without any basis and are in the realm of suspicion and surmises. With regard to the non-filing of revised return of income, we are of the view that the provisions of section 72A are applicable, notwithstanding anything contained in other provisions of the Act and the set off of accumulated losses and unabsorbed depreciation of the amalgamating company is deemed to be the loss or unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation has taken effect. In the present case, amalgamation is deemed to have been effected on 31.03.2008 and consequently the claim of the assessee for set off had to be allowed. The objections of the revenue as projected in the grounds of appeal in this regard therefore are devoid of any merit. The fact that TAPL filed the return of income for A.Y. 2008-09 is also of no consequence. In the light of the aforesaid discussion, we are of the view that the order of the ld. CIT(A) does not call for any interference, consequently the appeal by the revenue is dismissed.
Pronounced in the open court on this 31st day of July, 2012.
Sd/- Sd/-
( N. BARATHVAJA SANKAR ) ( N.V. VASUDEVAN )
VICE PRESIDENT Judicial Member
Bangalore,
Dated, the 31st July, 2012.
Ds/-
ITA No.1193/Bang/2011
Page 10 of 10
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file
By order
Senior Private Secretary
ITAT, Bangalore.