Case: M/S. Ballarpur Industries Limited Vs. Commissioner of Income Tax, Vidarbha, Nagpur

R.K. Deshpande, J.1. One Modern Stramit (I) Ltd., a sick company, was closed down by the end of the year 1986. It was referred to the Board for Industrial and Financial Reconstruction (BIFR) on 30-9-1989 under Section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). A scheme for rehabilitation in respect of it, was prepared under Section 19 of SICA and a proposal for its amalgamation in the assessee-M/ s. Ballarpur Industries Ltd. (BILT) was accepted and accordingly, the amalgamation took place with effect from 141991.2.The statement of unabsorbed business loss, depreciation, etc., as on 3131991 of the erstwhile Modern Stramit (I) Ltd. (amalgamating company) prepared was as under:Asstt. YearBusiness LossDepreciationTotal1985-8618,79,50416,39,60235,19,1061986-8722,53,70514,09,48536.63,1901987-88---1988-8933,61,67220,58,89854,20,5701989-9022,67,73928,92,15151,59,8901990-9121,93,85120,72,70242,66,5531991-9221,83,98310,63,90632,47,899Add: Depn. Claimed in A.Y. 1987-88 totally disallowed.1,41,40,4641,11,36,7442,52,77,208-12,19,10312,19,103Admissible losses u/s 72(a) restricted to the tax relief of Rs.75.00 lakhs i.e. equivalent loss.1,41,40,4641,23,55,8472,64,96,3111,41,40,4643,52,2901,44,92,754Balance inadmissible u/s 72(A)01,20,03,5571,20,03,557 The claim of the assessee was for written down value of Rs.1,20,03,557/- of the assets of the amalgamating company and the consequent claim was for depreciation of Rs.27,09,294/- for the Assessment Year 1992-93. The Assessing Officer allowed the claim of depreciation to the extent of Rs.3,52,290/- and rest of the claim for depreciation was rejected by the assessment order dated 2421995. The Commissioner of Income Tax (Appeals), Nagpur (CIT) maintained this decision on 2621996 and the Income Tax Appellate Tribunal, Nagpur Bench also confirmed it on 30-9-2002. Hence, both these Income Tax Appeals No.27 and 135 of 2003 arise out of the proceedings for the Assessment Years 1992-93 and 1993-94, against these decisions of the Tribunal and the authorities below. It is an admitted position and conceded by the parties that questions (I) to (III) on which the appeals were admitted are covered in favour of the Revenue and against the appellant by judgment and order dated 182017 passed by this Court in I.T.R. No.11 of 2002. Accordingly, we answer questions (I) to (III) in favour of the Revenue. 3. In these appeals, we are required to decide the following questions of law framed by this Court on 18-6-2007:IV) Whether Income Tax Appellate Tribunal erred in confirming the disallowance of depreciation amounting to Rs.27,09,294/- in respect of assets of M/s Modern Stramit (I) Limited, a company amalgamated with the appellant company in terms of the order of BIFRV) Whether the Incometax Appellate Tribunal erred in confirming the disallowance of depreciation on the value of assets of the amalgamating company not actually allowed under Section 32 read with Section 43(6) and Section 72A of the Incometax Act, 1961VI) Without prejudice to ground no. (iv) and (v) above whether the Tribunal erred in not allowing the benefit of unabsorbed depreciation despite the fact that provision of section 72A of the Incometax Act, 1061 read with Sections 18 and 32(2) of the Sick Industrial Companies (Special Provision) act, 1985 have been complied with 4. The denial of benefit of depreciation of Rs.27,09,294/ is on the basis of the order dated 651992 passed by BIFR in exercise of its jurisdiction under Section 32(2) of SICA read with Section 72A(2)(ii) of the Income Tax Act, 1961, as it existed on that date. The relevant portion of the order passed by BIFR on 6-5-1992 is reproduced below:BILT would be eligible from 1st April 91 to carry forward business loss and unabsorbed depreciation of Modern Stramit (I) Ltd. under the provision of section 72A of the I.T. Act. The tax benefit under the section, however, would be to a maximum of Rs.75 lakhs.The Assessing Officer holds that since the maximum benefit as far as tax is concerned was specified by BIFR, there was no way the assessee could get benefit beyond what was the intention of BIFR. Since the tax benefit had been specified under Section 72A of the Income Tax Act, the assessee could not go beyond the purview and claim additional depreciation and on what had worked out to be inadmissible under Section 72A of the Income Tax Act read with the terms of the order dated 6-5-1992 passed by BIFR. The Assessing Officer, therefore, disallowed the claim for depreciation of Rs.27,09,294/- and added it in the income of the assessee for the Assessment Year 1992-93.5. The CIT in appeal, referring to the decision of the Division Bench of this Court in the case of Commissioner of Income Tax v. Hindustan Petroleum Corporation Ltd., reported in (1991) 187 ITR 0001, holds that though the appellant in the said decision was held entitled to enhancement of written down value of the assets, the said decision cannot be applied to the facts of the present case, for the reason that it was delivered before insertion of Section 72A of the Income Tax Act, which now specifically lays down as to how and in what circumstances the amalgamated company can avail the benefit of carry forward business loss and unabsorbed depreciation of the amalgamated company. The CIT holds that the Assessing Officer has allowed the carry forward business loss and unabsorbed depreciation of the amalgamated company to the assessee to the extent of Rs.75,00,000/-, and to allow the claim of the assessee for depreciation on the value of Rs.1,20,03,557/- would be against the order of BIFR passed under Section 72A(i)(c) of the Income Tax Act.6. The Income Tax Appellate Tribunal confirms the decisions of the authorities below. It holds that the provision of Section 72A of the Income Tax Act is a special provision dealing with the issues of carry forward and set off accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation and as per the phraseology used in the said Section, this provision has overriding effect on any other provisions of the Act. The Tribunal holds that the maxim generalia specialibus non derogant is applicable and the said provision under Section 72A of the Income Tax Act shall override the provisions of Sections 32(2) and 43(6) of the said Act.7.In para 51 of the judgment, the Tribunal holds as under:51. Nevertheless, even with the limitation of Rs.75.00 lakhs in terms of tax relief, the Assessee company could have absorbed the entire unabsorbed depreciation of amalgamating company amounting to Rs.1,23,55,847/- by giving preference to it over the unabsorbed business loss. However, it chose to exhaust the business loss first which resulted in a portion of the unabsorbed depreciation to the extent of Rs.1,20,03,557/-, remaining inadmissible. In these facts and circumstances, it cannot be said that the Assessee Company was otherwise entitled for more benefits without the application of Section 72A and that the benefits allowed to the Assessee Company as per the BIFR order issued in accordance with the provisions of Section 72A has a result of taking away any benefit which otherwise was available to the Assessee.8. The Tribunal has thus held that it was permissible for the assessee-Company to have absorbed the entire unabsorbed depreciation of amalgamating company amounting to Rs.1,23,55,847/by giving preference to it over unabsorbed business loss. However, it chose to exhaust the business loss first, which resulted in a portion of the unabsorbed depreciation on the value of Rs.1,20,03,557/- remaining inadmissible. It holds that the assessee was not entitled to more benefits than the limitation of Rs.75,00,000/- specified in the order passed by BIFR on 6-5-1992.9. Shri Dewani, the learned counsel appearing for the assessee-company, heavily relied upon the decision of the Division Bench of this Court in the case of Hindustan Petroleum Corporation Ltd., cited supra, to urge that in terms of Section 32(2) read with Section 43(6) and the Explanations 2A and 3 of the Income Tax Act, the asseseecompany was entitled to depreciation of Rs.27,09,294/- on the value of the assets of Rs.1,23,55,847/- taken over of the amalgamating company.10.We have gone through the said decision. The assessment year involved in the said decision was of 197576 and the contention raised was that the unabsorbed depreciation of Rs.21,42,815/- of the amalgamating company be treated and/or allowed as the depreciation of the current year, as the amalgamating company became nonexistent, and the depreciation of these assets was allowable in the hands of the assessee. The Tribunal did not accept the claim of the assessee and it was held that the written down value of the assets taken over by the assessee-company from amalgamating company, was the actual cost of assets to amalgamating company as reduced not only by the depreciation actually allowed but also the depreciation determined but not given effect to.11. Finding fault with the aforestated view taken by the Tribunal in the case of Hindustan Petroleum Corporation Ltd., cited supra, this Court holds that the legal position about the unabsorbed depreciation is that it is not carried forward as such and is added to the depreciation for the following previous year and deemed to be part of that allowance. However, it is implicit in the scheme of Section 32(2) that such a thing would happen only if the assessee continues to carry on its business in the following year or years. This Court has held that for the Assessment Year 1975-76, the unabsorbed depreciation could not, under Section 32(2), be treated and/or allowed as the depreciation of the current year of the nonexistent amalgamating company, and that is why the depreciation on these assets is claimed by and is allowable in the hands of the assessee only.12. In our view, the Tribunal and the authorities below have rightly held that the decision of this Court in Hindustan Petroleum Corporation Ltd., cited supra, is not applicable in the present case, for the reason that the said decision was not dealing with the impact of Section 72A of the Income Tax Act on the provision of Section 32(2) or 43(6) of the said Act. The requirements of Section 32(2) read with Section 43(6) of the Income Tax Act, which permit the amalgamating Company to claim its unabsorbed depreciation, get eclipsed by the provision of Section 72(A)(1)(c) of the said Act, which has been given overriding effect and the power to put such restrictions is conferred upon BIFR under Section 32(2) of SICA. In the present case, this power has been exercised by BIFR, putting a cap of Rs.75,00,000/- with an object not only to see that there is a revival of sick industry but also to provide capital incentive to amalgamated company to claim unabsorbed loss of the amalgamating company.13. The object and purpose of introducing Section 72A under the Income Tax Act is considered by the Division Bench of Delhi High Court in its judgment in the case of IEL Ltd. v. Union of India & Ors., reported in (1992) 195 ITR 0232. The relevant portion of this judgment in para 10 is reproduced below:10. ... While examining the application under s. 72A, the purpose and intent of insertion of the section has to be kept in view. Sec. 72A was enacted with a view to provide an incentive to robust companies to take over and amalgamate with the companies which would otherwise become a burden on the economy. It is no doubt true that when a declaration under s. 72A is granted, the amalgamated company does receive benefits, inasmuch as it is able to take advantage of the unabsorbed depreciation and accumulated losses. But this is precisely the incentive which is given to the healthy companies and, we feel, that the legislative intent of giving such incentive should not ordinarily be set at naught. The Specified Authority and the Central Government should take an overall view of the matter and come to a pragmatic and practical conclusion as to whether the conditions specified in s. 72A are satisfied or not. We may here note that where the provisions of s. 72A are not misused, there is further safeguard which are provided in s. 72A of the Act. Once a declaration under s. 72A has been accorded, then before getting the benefit under that provision, the amalgamated company has to fulfill the conditions specified in subs. (2) of s. 72A. One of the important conditions stipulated in subs. (2) of s. 72A is obtaining of a certificate from the Specified Authority to the effect that adequate steps had been taken by the amalgamated company for the rehabilitation or revival of business of the amalgamating company. In other words, the benefit of s. 72A will not be obtained if the sole idea of amalgamating was not the revival of the amalgamating company but was only to take benefit of the carry forward losses and unabsorbed depreciation. The revival of a sick unit or positive efforts in this behalf are the preconditions to the benefits under s. 72A being availed of. We, therefore, feel that an application under s. 72A should be considered most sympathetically from a businessmans point of view. If a company has become commercially insolvent or is likely to become commercially insolvent, then every effort should be made to prevent such a situation from arising and if an amalgamation takes place and conditions under subs. (1) of s. 72A are satisfied, then we see no reason as to why a declaration should not be accorded.14. The Division Bench of Delhi High Court has held in the aforesaid decision that once the declaration is granted under Section 72A of the Income Tax Act, the amalgamated company thus received the benefit inasmuch as it is able to take advantage of the unabsorbed depreciation and accumulated losses. Upon fulfillment of the conditions specified in subsection (2) of Section 72A, it holds that the benefit of Section 72A will not be obtained if the sole idea of amalgamating was not the revival of the amalgamating company but was only to take benefit of the carry forward losses and unabsorbed depreciation. This decision supports the view which we have taken.15. We put a specific question to Shri Bhattad, the learned counsel appearing for the Department, as to whether the assessee would be entitled to such claim of unabsorbed depreciation in the absence of the provision of Section 72 of the Income Tax Act, and his answer is in the affirmative. We also put a specific question to Shri Dewani, the learned counsel appearing for the assessee, as to whether the assessee would be entitled to claim the unabsorbed loss of Rs.1,41,40,464/- of the amalgamating company during the Assessment Year 1992-93 in the absence of the provision of Section 72A of the Income Tax Act, and his answer is in the negative.16. Thus, the undisputed position is that in the absence of the provisions of Section 72A of the Income Tax Act, the assessee would be entitled to written down value of Rs.1,23,55,847/- of the assets of the amalgamating company for the Assessment Year 1992-93 and consequently to claim the depreciation of Rs.27,09,294/-. In the absence of the provision of Section 72A of the Income Tax Act, the assessee would not be entitled to claim unabsorbed loss of Rs.1,41,40,464/- of the amalgamating company for the Assessment Year 1992-93. The assessee exercised the discretion of exhausting the business loss first, as a result of which, the claim for depreciation of Rs.3,52,290/- only remained admissible.17. Taking overall view as aforestated, we hold that the Income Tax Appellate Tribunal did not commit an error in confirming the disallowance of depreciation amounting to Rs.27,09,294/- in respect of the assets of M/s. Modern Stramit (I) Ltd., a Company amalgamated with the appellant-Company, in terms of the order dated 6-5-1992 passed by BIFR. The question of law at serial No.(IV) is answered accordingly. The other questions of law do not survive.

Decision:
0[ds]12. In our view, the Tribunal and the authorities below have rightly held that the decision of this Court in Hindustan Petroleum Corporation Ltd., cited supra, is not applicable in the present case, for the reason that the said decision was not dealing with the impact of Section 72A of the Income Tax Act on the provision of Section 32(2) or 43(6) of the said Act. The requirements of Section 32(2) read with Section 43(6) of the Income Tax Act, which permit the amalgamating Company to claim its unabsorbed depreciation, get eclipsed by the provision of Section 72(A)(1)(c) of the said Act, which has been given overriding effect and the power to put such restrictions is conferred upon BIFR under Section 32(2) of SICA. In the present case, this power has been exercised by BIFR, putting a cap of Rs.75,00,000/with an object not only to see that there is a revival of sick industry but also to provide capital incentive to amalgamated company to claim unabsorbed loss of the amalgamating company.The Division Bench of Delhi High Court has held in the aforesaid decision that once the declaration is granted under Section 72A of the Income Tax Act, the amalgamated company thus received the benefit inasmuch as it is able to take advantage of the unabsorbed depreciation and accumulated losses. Upon fulfillment of the conditions specified in subsection (2) of Section 72A, it holds that the benefit of Section 72A will not be obtained if the sole idea of amalgamating was not the revival of the amalgamating company but was only to take benefit of the carry forward losses and unabsorbed depreciation. This decision supports the view which we have taken.15. We put a specific question to Shri Bhattad, the learned counsel appearing for the Department, as to whether the assessee would be entitled to such claim of unabsorbed depreciation in the absence of the provision of Section 72 of the Income Tax Act, and his answer is in the affirmative. We also put a specific question to Shri Dewani, the learned counsel appearing for the assessee, as to whether the assessee would be entitled to claim the unabsorbed loss of Rs.1,41,40,464/of the amalgamating company during the Assessment Yearin the absence of the provision of Section 72A of the Income Tax Act, and his answer is in the negative.16. Thus, the undisputed position is that in the absence of the provisions of Section 72A of the Income Tax Act, the assessee would be entitled to written down value of Rs.1,23,55,847/of the assets of the amalgamating companyfor the Assessment3 and consequently to claim the depreciation of Rs.In the absence of the provision of Section 72A of the Income Tax Act, the assessee would not be entitled to claim unabsorbed loss of Rs.1,41,40,464/of the amalgamating companyfor the Assessment. The assessee exercised the discretion of exhausting the business loss first, as a result of which, the claim for depreciation of Rs.3,52,290/only remained admissible.17. Taking overall view as aforestated, we hold that the Income Tax Appellate Tribunal did not commit an error in confirming the disallowance of depreciation amounting to Rs.27,09,294/in respect of the assets of M/s. Modern Stramit (I) Ltd., a Company amalgamated with thein terms of the order dated651992 passed byBIFR. The question of law at serial No.(IV) is answered accordingly. The other questions of law do not survive.