D.K. Srivastava, A.M.: Department has filed present appeal against order passed by learned CIT(A) on 7th June, 2004 on following ground: "On facts and in circumstances of case and in law, learned CIT(A) has erred in allowing claim of unabsorbed loss on capital expenditure on scientific research and development of demerged company and treating same as accumulated loss/ depreciation loss as per provisions of s. 32(2) and hence to be treated at par for purpose as contemplated under s. 71A(4) of IT Act." Briefly stated, facts of case are that M/s Maharashtra Hybrid Seeds Co. Ltd. (demerged company) had vegetable seeds division, which was separated by way of demerger duly approved by Hon ble Bombay High Court vide its order dt. 20th Sept., 2000 w.e.f. 1st April, 2000. As result of aforesaid demerger, resulting company, i.e., M/s Mahyco Vegetable Seeds L t d . (assessee) was created. Before demerger, there was unabsorbed depreciation amounting to Rs. 10,83,07,548 and unabsorbed capital expenditure on scientific research amounting to Rs. 22,65,78,201, aggregating in all to Rs. 33,48,85,749 in hands of demerged company. Total assets before demerger stood at Rs. 1,22,95,28,000. While demerging M/s Maharashtra Hybrid Seeds Co. Ltd., bifurcation of assets was carried out as per claim approved by Hon ble High Court. As per aforesaid bifurcation, demerged company, i.e., M/s Maharashtra Hybrid Seeds Co. Ltd. retained assets of value of Rs. 1,09,76,53,000, which worked out to 89.27 per cent of total value of all assets while resulting company, i.e., assessee company, took over assets of value of Rs. 13,18,73,000, which worked out to 10.73 per cent of total value of all assets of demerged company, i.e., Maharashtra Hybrid Seeds Co. Ltd. In ratio of aforesaid division of assets of demerged company, unabsorbed depreciation and unabsorbed capital expenditure on scientific research have been distributed between demerged company and resulting company. As per aforesaid ratio, Rs. 9,66,90,848 being 89.27 per cent of Rs. 10,83,07,548 of unabsorbed depreciation was allotted to demerged company while sum of Rs. 1,16,16,700 being 10.73 per cent of Rs. 10,83,07,548 of unabsorbed depreciation was allotted to assessee company, i.e., resulting company. Likewise, unabsorbed capital expenditure on scientific research of Rs. 22,65,78,200 was allocated between demerged company and assessee company in aforesaid ratio, which worked out to Rs. 20,22,76,192 in hands of demerged company and Rs. 2,43,02,009 in hands of assessee company. assessee, i.e., resulting company, claimed benefit of s. 72A(4) r/w s. 35(4) of IT Act in respect of unabsorbed expenditure on scientific research also. AO allowed benefit of s. 72A(4) in respect of unabsorbed depreciation allocated to assessee but denied that benefit to assessee in respect of unabsorbed expenditure on scientific research amounting to Rs. 2,43,02,009 allocated to assessee upon demerger of demerged company, with following observations: "In response, assessee s representative vide letter dt. 17th Feb., 2003 filed its explanation and same was considered carefully. assessee company vehemently tried to strengthen its claim of deduction under s. 72A(4) of IT Act with main emphasis on provisions contained under s. 35(4) of IT Act. From assessee s submissions it is observed that assessee is treating loss of unabsorbed expenditure on scientific research on same footing as business loss. This is not in consultation with provisions of IT Act. business loss cannot be equated with loss on expenditure on scientific research. capital expenditure on scientific research never become part of P&L a/c as same is not computed under head Profits and gains of business or profession and hence does not amount to accumulated loss. same is weighted deduction allowed to assessee company under prescribed provisions of IT Act. business loss is, therefore, clearly distinguishable from capital expenditure on scientific research. Now, it is also required to examine, just for satisfaction of assessee company as to whether unabsorbed loss on capital expenditure on scientific research claimed by assessee company can be termed as depreciation loss and treatment of carrying forward and set off be offered accordingly as assessee has very much reliance on provisions under s. 35(4) of IT Act. In this context, it is pertinent and essential to refer to provisions contained in s. 72(2) of IT Act, which reads as under: "Sec. 72. (1)........... (2) where any allowance or part thereof is, under sub-s. (2) of s. 32 or sub- s. (4) of s. 35 to be carried forward, effect shall first be given to provisions of this section." On plain reading of this section makes it abundantly clear that unabsorbed depreciation loss under s. 32(2) and unabsorbed expenditure on scientific research under s. 35(4) are clearly distinguishable. provisions for carrying forward and set off of same is also separately mentioned in Act. Both these losses cannot be merged together or change priority of set off. loss under s. 35(4) cannot be equated with loss under s. 32(2) of IT Act. assessee s contention that unabsorbed loss on scientific research is allowed to be carried forward under s. 35(4) and set off under provisions of s. 72A(4) of IT Act is therefore not tenable. In view of aforesaid discussion, assessee s unabsorbed loss on capital expenditure on scientific research neither constitutes accumulated loss or deprecation loss and is therefore not covered by s. 72A(4) of IT Act. assessee company is therefore not entitled to carry forward and set off this loss of Rs. 2,43,02,009 against income of assessee company. claim of assessee is therefore disallowed." assessee carried matter in appeal before learned CIT(A). learned CIT(A) considered matter in detail and decided issue in favour of assessee. Aggrieved by order of learned CIT(A), Department is now in appeal before this Tribunal. In support of appeal, learned Departmental Representative has relied upon assessment order while learned counsel for assessee has relied upon order of learned CIT(A). We have heard parties. It is not in dispute that assessee was allocated sum of Rs. 2,43,02,009 on account of unabsorbed expenditure on scientific research upon demerger of Maharashtra Hybrid Seeds Co. Ltd. short question is whether assessee is entitled to benefit of s. 72A in respect of aforesaid amount? In order to resolve controversy, it is necessary to refer to provisions of ss. 35(4), 32(2), 72 and 72A(4) of IT Act. Sec. 35(4) of IT Act, as it stood at relevant point of time, read as under: "35. Expenditure on scientific research. (1)...... (2)..... (3)..... (4) provisions of sub-s. (2) of s. 32 shall apply in relation to deductions allowable under cl. (iv) of sub-s. (1) as they apply in relation to deductions allowable in respect of depreciation." Sec. 35(4) takes care of situation where deduction on account of capital expenditure on scientific research cannot be absorbed by profits of relevant accounting years. In such situation, it entitles assessee to carry forward such unabsorbed portion of capital expenditure on scientific research in same manner as unabsorbed depreciation under s. 32(2), till it is set off and absorbed against future profits. Sub-s. (2) of s. 32 reads as under: "32. Depreciation. (1) ...... (2) Where in assessment of assessee full effect cannot be given to any allowance under cl. (ii) of sub-s. (1) in any previous year owing to there being no profits or gains chargeable for that previous year or owing to profits or gains being less than allowance, then, allowance or part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance), as case may be, (i) shall be set off against profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year, (ii) if unabsorbed depreciation allowance cannot be wholly set off under cl. (i), amount not so set off shall be set off from income under any other head, if any, assessable for that assessment year; (iii) if unabsorbed depreciation allowance cannot be wholly set off under cl. (i) and cl. (ii), amount of allowance not so set off shall be carried forward to following assessment year and (a) it shall be set off against profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; (b) if unabsorbed depreciation allowance cannot be wholly so set off, amount of unabsorbed depreciation allowance not so set off shall be carried forward to following assessment year not being more than eight assessment years immediately succeeding assessment year for which aforesaid allowance was first computed: Provided that time-limit of eight assessment years specified in sub-cl. (b) shall not apply in case of company for assessment year beginning with assessment year relevant to previous year in which said company has become sick industrial company under sub-s. (1) of s. 17 of Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with assessment year relevant to previous year in which entire net worth of such company becomes equal to or exceeds accumulated losses. Explanation For purposes of this clause, net worth shall have meaning assigned to in cl. (ga) of sub-s. (1) of s. 3 of Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986)." It is clear on bare perusal of s. 32(2) that benefit contemplated by said provision is available in assessment of assessee and not of anyone else. It is equally clear that, in order to avail benefit of carry forward and set off under s. 32(2)(iii), it is essential that business or profession for which allowance was originally computed continues to be carried on by him, i.e., by same assessee, in previous year relevant for that assessment year. Sec. 72(2) of IT Act, as it stood at relevant point of time, read as under: "72. Carry forward and set off of business losses. (1)..... (2) Where any allowance or part thereof is, under sub-s. (2) of s. 32 or sub- s. (4) of s. 35, to be carried forward, effect shall first be given to provisions of this section." It deserves to be noted that legal fiction of treating unabsorbed depreciation as depreciation of subsequent year under s. 32(2) has been specifically made subject to provisions of ss. 72(2) and 73(3). If assessee has unabsorbed depreciation under s. 32(2) as well as unabsorbed business loss carried forward under s. 72(1), s. 72(2) provides that unabsorbed losses shall have precedence and be set off, so far as sufficiency of income to be set off against permits. It is only after carried forward business loss is set off, and there yet remains positive income, that unabsorbed depreciation would come in for set off. What s. 72(2) contemplates is that if there is some unabsorbed loss carried forward to be set off, and there is also some unabsorbed depreciation allowance carried forward to be set off, former shall get priority Aluminium Corporation of India Ltd. vs. CIT (1958) 33 ITR 367 (Cal) and CIT vs. Ahmedabad Electricity Co. Ltd. (1973) 89 ITR 77 (Bom). It is thus quite clear that provisions for carry forward and set off of unabsorbed depreciation are contained in s. 32(2) alone and not in s. 72. Likewise, provisions for carry forward and set off of unabsorbed capital expenditure on scientific research are contained in s. 35(4) r/w s. 32(2) of IT Act and not in s. 72 of IT Act. aforesaid discussion makes it amply clear that law maintains clear distinction between business loss, on one hand and unabsorbed depreciation/unabsorbed expenditure on capital research, on other. Therefore, it is not possible for us to hold that business loss in respect of which benefit of carry forward and set off is provided in s. 72, includes unabsorbed depreciation or unabsorbed capital expenditure on scientific research. Sec. 72A(4) of IT Act reads as under: "72A. Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc. (1)....... (2).............. (3) ............. (4) Notwithstanding anything contained in any other provisions of this Act, in case of demerger, accumulated loss and allowance for unabsorbed depreciation of demerged company shall (a) where such loss or unabsorbed depreciation is directly relatable to undertakings transferred to resulting company, be allowed to be carried forward and set off in hands of resulting company; (b) where such loss or unabsorbed depreciation is not directly relatable to undertakings transferred to resulting company, be apportioned between demerged company and resulting company in same proportion in which assets of undertakings have been retained by demerged company and transferred to resulting company, and be allowed to be carried forward and set off in hands of demerged company or resulting company, as case may be. (5)...... (6)...... (7) For purposes of this section, (a) accumulated loss means so much of loss of predecessor firm o r proprietary concern or amalgamating company or demerged company, as case may be, under head Profits and gains of business or profession (not being loss sustained in speculation business) which such predecessor firm or proprietary concern or amalgamating company or demerged company, would have been entitled to carry forward and set off under provisions of s. 72 if reorganisation of business or amalgamation or demerger had not taken place; (aa)....... (b) unabsorbed depreciation means so much of allowance for depreciation of predecessor firm or proprietary concern or amalgamating company or demerged company, as case may be, which remains to be allowed and which would have been allowed to predecessor firm or proprietary concern or amalgamating company or demerged company, as case may be, under provisions of this Act, if reorganisation of business or amalgamation or demerger had not taken place." first and foremost feature of s. 72A(4) is that it opens with non obstante clause to effect "notwithstanding anything contained in any other provisions of this Act" and thus overrides any other provision of 1961, Act. In case of demerger, provisions enacted in sub-s. (4) of s. 72A come into play. accumulated loss [as defined in s. 72A(7)(a)] and allowance for unabsorbed depreciation [as defined in s. 72A(7)(b)] of demerged company are, where such loss or unabsorbed depreciation is directly relatable to undertakings transferred to resulting company, allowed to be carried forward and set off in hands of resulting company. In case where such loss or unabsorbed depreciation is not directly relatable to undertakings transferred to resulting company, accumulated loss and unabsorbed depreciation are required to be apportioned between demerged company and resulting company in same proportion in which assets of undertaking have been retained by demerged company and transferred to resulting company, and be allowed to be carried forward and set off in hands of demerged company or resulting company, as case may be. Thus, benefit of s. 72A(4) is admissible in respect of (i) accumulated loss and (ii) allowance for unabsorbed deprecation, as defined in s. 72A(7) of IT Act. assessee, being resulting company, shall be entitled to carry forward and set off unabsorbed portion of capital expenditure on scientific research allocated to it provided it falls either under "accumulated loss" or "the allowance for unabsorbed depreciation" as defined in s. 72A(7) of IT Act. term "accumulated loss" has been exhaustively defined in cl. (a) of s. 72A(7) to mean so much of loss, inter alia, of demerged company under head "Profits and gains of business or profession" (not being loss sustained in speculation business) which such amalgamating company would have been entitled to carry forward and set off under provisions of s. 72 if demerger had not taken place. As already stated earlier in this order, s. 72 allows carry forward and set off of business losses and not of unabsorbed depreciation or unabsorbed capital expenditure on scientific research. assessee can claim benefit of carry forward and set off of unabsorbed capital expenditure on scientific research under s. 35(4) r/w s. 32(2) of IT Act and not under s. 72 of IT Act. Sec. 72(2) simply lays down priority in that loss relating to business will be set off first. Therefore, benefit of carry forward and set off of unabsorbed expenditure on scientific research can be claimed only under s. 35(4)/32(2) of IT Act and not under s. 72. In other words, accumulated loss referred to in s. 72A(4) is restricted to only those losses of demerged company computed under head "Profits and gains of business or profession" (not being speculation loss) which such demerged company would have been entitled to carry forward and set off under provisions of s. 72 if demerger had not taken place. Since provisions of s. 72 are not applicable for carrying forward and setting off of unabsorbed portion of capital expenditure on scientific research, it is demerged company alone, which can claim benefit under s. 32(2) on fulfilment of conditions prescribed therein. Such unabsorbed portion of capital expenditure on scientific research in hands of demerged company cannot form part of accumulated loss under s. 72A(4) and hence resulting company, i.e., assessee company cannot claim that unabsorbed portion of expenditure on capital research should be treated as part of accumulated loss and consequently allowed to it under s. 72A(4) of IT Act. AO, in our view, has correctly held that accumulated loss as defined in s. 72A(7)(a) does not include unabsorbed capital expenditure on scientific research and therefore benefit of s. 72A(4) cannot be extended to unabsorbed capital expenditure on scientific research. term "unabsorbed depreciation" has been exhaustively defined in s. 72(A)(7)(b) of IT Act so as to mean so much of allowance for depreciation of demerged company, which remains to be allowed, and which would have been allowed to demerged company if demerger had not taken place. scope of "unabsorbed depreciation" as defined in s. 72A(7)(b) is thus restricted to allowance for depreciation of demerged company and therefore does not extend to, either expressly or even by necessary implication, cover unabsorbed portion of expenditure on scientific research under s. 35. It is important to note that aforesaid definition of "unabsorbed depreciation" under s. 72A(7)(b) does not refer to s. 32(2) or 35(4) of IT Act but restricts, in plain terms, scope of "unabsorbed depreciation" to so much of allowance for depreciation of demerged company which remains to be allowed and which would have been allowed to demerged company if demerger had not taken place. It is therefore not possible to include unabsorbed capital expenditure on scientific research within ambit of "unabsorbed depreciation" as defined in s. 72A(7). In view of foregoing, it transpires that there is nothing either in definition of "accumulated loss" or "unabsorbed depreciation" as given under s. 72A(7) to enable us to hold that unabsorbed portion of capital expenditure on scientific research is covered by any of aforesaid definitions. On other hand, there is deliberate omission in incorporating provisions of s. 35(4) or 32(2) in aforesaid definitions given in s. 72A(7) of IT Act. It is therefore not possible to include unabsorbed capital expenditure on scientific research allocated to assessee in its status as resulting company either in "accumulated loss" or "unabsorbed deprecation" to enable it to carry forward and set off said expenditure under s. 72A(4). Resultantly, order of learned CIT(A) is reversed and that of AO restored. Appeal filed by Department is allowed. *** INCOME TAX OFFICER, 1(2)-3, MUMBAI v. MAHYCO VEGETABLE SEEDS LTD.