Order dt.29.07.2020 T.C.A.No.415/2017 1/20 IN HIGH COURT OF JUDICATURE AT MADRAS DATED: 29.07.2020 CORAM HON'BLE DR.JUSTICE VINEET KOTHARI AND HON'BLE MR.JUSTICE KRISHNAN RAMASAMY T.C.A.No.415 of 2017 Principal Commissioner of Income Tax 4 No.121, Mahatma Gandhi Road, Chennai - 600 034 ... Appellant vs. M/s. Lotte India Corporation Ltd, 4/169, Rajiv Gandhi Salai (OMR), Kandanchavadi Bus Stop, Perungudi Taluk, Chennai - 600096. ... Respondent Prayer ::- Appeal filed against order of Income Tax Appellate Tribunal, Madras Bench, dated 28.09.2016 in ITA Nos.524/Mds/2016. For appellant : Mr.Karthik Ranaganathan For respondent : Mr.Sandeep Bagmar ORDER (Made by DR.VINEET KOTHARI, J.) Court was held by Video Conference, as per Resolution of Full Court dated 3 July 2020, by Judges at their respective residence and counsel, staff of Court appearing from their respective residences. http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 2/20 2. Revenue has filed this appeal under Section 260A of Act for assessment year 2006-07 against order of learned Income Tax Appellate Tribunal Bench, dated 28.09.2016 in ITA Nos.524/Mds/2016 whereby learned Tribunal allowed benefit of carry forward of losses under Section 72(A) of Act to respondent Assessee which is amalgamated company in respect of brought forward losses of amalgamating company viz., M/s.Confectionary Specialties Limited (for short, M/s.CSL ) 3. following purported substantial questions of law are raised by Revenue for our consideration :- 1. Whether on facts and circumstances of case Appellate Tribunal is correct in law in holding that Unabsorbed depreciation relating to assessment year 2001-02 and assessment years prior thereto can be set off in subsequent years, without any limit, as per amended provision of section 32[2] of Income Tax Act? 2. Whether Tribunal was correct in deleting dis-allowance on claim of setting off of brought forward unabsorbed depreciation amounting to Rs.l,19,02,780/- pertaining to Asst Years 1999-2000 and 2000-2001 ? http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 3/20 4. learned Tribunal, in paragraphs 13 and 14 of its order, has given following finding in this regard :- 13. We have heard both sides, perused materials on record and gone through orders of authorities below. assessee has claimed unabsorbed depreciation of assessment years 1999-2000 and 2000-01 in assessment year under consideration. In view of modification to provisions of section 32(2) of Act with effect from 01.04.2002, whereby, unabsorbed depreciation loss gets merged with subsequent years depreciation and becomes current depreciation of subsequent year, assessee can claim unabsorbed depreciation loss only from assessment year 2002-03. In other words, unabsorbed depreciation losses, starting from assessment year 2002-03 will be carried forward to subsequent assessment and becomes part of subsequent year s depreciation. Therefore, Assessing Officer denied claiming unabsorbed depreciation loss pertaining to assessment years 1999-2000 and 2000-01 against total income of current assessment year. ld. CIT(A) directed Assessing Officer to allow unabsorbed depreciation of assessment years 1999-2000 and 2000-01 claimed in assessment year 2010-11 by following decision of Tribunal in case of Best & Crompton Engineering Ltd. (supra), wherein Tribunal has followed decision of Hon ble Gujarat High Court in case of General Motors India (P.) Ltd. v. DCIT 354 ITR 244, By filing copy of order of Tribunal in case of Binny Ltd. v. ACIT (supra), ld. Counsel for assessee has submitted that http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 4/20 issue involved in appeal is squarely covered in favour of assessee. We have also perused above decision of Tribunal, wherein, it was held as under: 7. next ground raised by assessee in this appeal is that Commissioner of Income- tax(Appeals) erred in confirming disallowance of Rs.8,25,66,340/- relating to unabsorbed depreciation without considering facts and circumstances of case. 8. facts of case are that Assessing Officer disallowed set off brought forward depreciation by observing that claim of loss u/s.32(2) included unabsorbed depreciation relating to assessment years prior to 1986-87 and that in current assessment year viz. 2008-09 unabsorbed depreciation prior to assessment year 2000-01 cannot be set off. For this purpose, he relied on judgment of Tribunal Special Bench, Mumbai in case of Times Guaranty Ltd. (40 SOT 14). Commissioner of Income-tax (Appeals) confirmed same. Against this, assessee is in appeal before us. 9. We have heard both parties. It is brought to our notice that same issue was considered by Gujarat High Court in case of CIT vs. (44 taxmann.com 204), wherein they considered their earlier judgment in case of http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 5/20 General Motors India (P.) Ltd. v. DCIT(354 ITR 244), wherein it was held as under: last question which arises for consideration is that whether unabsorbed depreciation pertaining to A.Y. 1997- 98 could be allowed to be carried forward and set off after period of eight years or it would be governed by Section 32 as amended by Finance Act 2001? reason given by Assessing Officer under section 147 is that Section 32(2) of Act was amended by Finance Act No.2 of 1996 w.e.f. A.Y. 1997- 98 and unabsorbed depreciation for A.Y. 1997-98 could be carried forward up to maximum period of 8 years from year in which it was first computed. According to Assessing Officer, 8 years expired in A.Y. 2005-06 and only till then, assessee was eligible to claim unabsorbed depreciation of A.Y.1997-98 for being carried forward and set off against income for A.Y. 2005-06. But assessee was not entitled for unabsorbed depreciation of Rs.43,60,22,158/- for A.Y. 1997-98, which was not eligible for being carried forward and set off against income for A.Y. 2006-07. Prior to Finance Act No.2 of 1996 unabsorbed depreciation for any year was allowed to be carry forward indefinitely and by deeming http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 6/20 fiction became allowance of immediately succeeding year. Finance Act No.2 of 1996 restricted carry forward of unabsorbed depreciation and setoff to limit of 8 years, from A.Y.1997-98. Circular No.762 dated 18.2.1998 issued by Central Board of Direct Taxes (CBDT) in form of Explanatory Notes categorically provided, that unabsorbed depreciation allowance for any previous year to which full effect cannot be given in that previous year shall be carried forward and added to depreciation allowance of next year and be deemed to be part thereof. So, unabsorbed depreciation allowance of A.Y. 1996-97 would be added to allowance of A.Y. 1997- 98 and limitation of 8 years for carry- forward and set-off of such unabsorbed depreciation would start from A.Y. 1997-98. We may now examine provisions of section 32(2) of Act before its amendment by Finance Act 2001. section prior to its amendment by Finance Act, 2001, read as under:- Where in assessment of assessee full effect cannot be given to any allowance under clause (ii) of sub-section (1) in any previous year owning to there being no profits or gains chargeable http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 7/20 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 clause (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 clause (i) and Clause (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 http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 8/20 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-clause (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-section (1) of section 17 of Sick Industrial Company (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 it in clause (ga) of sub-section (1) of section 3 of Sick Industrial Companies (Special Provisions) Act, 1985. aforesaid provision was introduced by Finance (No.2) Act, 1996 and further amended by Finance Act, 2000. provision introduced by Finance (No.2) Act was clarified by Finance http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 9/20 Minister to be applicable with prospective effect. Section 32 (2) of Act was amended by Finance Act, 2001 and provision so amended reads as under :- Where, in assessment of assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to profits or gains chargeable for that previous year, owing to profits or gains chargeable being less than allowance, then, subject to provisions of sub- section (2) of section 72 and sub-section (3) of section 73, allowance or part of allowance to which effect has not been given, as case may be, shall be added to amount of allowance for depreciation for following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be allowance of that previous year, and so on for succeeding previous years. purpose of this amendment has been clarified by Central Board of Direct Taxes in Circular No.14 of 2001. relevant portion of said Circular reads as under :- http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 10/20 Modification of provisions relating to depreciation: 30.1 Under existing provisions of section 32 of Incometax Act, carry forward and set off of unabsorbed depreciation is allowed for 8 assessment years. 30.2 With view to enable industry to conserve sufficient funds to replace plant and machinery, specially in era where obsolescence takes place so often, Act has dispensed with restriction of 8 years for carry forward and set off of unabsorbed depreciation. Act has also clarified that in computing profits and gains of business or profession for any previous year, deduction of depreciation under section 32 shall be mandatory. 30.3 Under existing provisions, no deduction for depreciation is allowed on any motor car manufactured outside India unless it is used (i) in business of running it on hire for tourists, or (ii) outside in assessee's business or profession in another country. 30.4 Act has allowed depreciation allowance on all imported motor cars acquired on or after 1st April, 2001. http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 11/20 30.5 These amendments will take effect from 1st April, 2002, and will, accordingly, apply in relation to assessment year 2002-03 and subsequent years. CBDT Circular clarifies intent of amendment that it is for enabling industry to conserve sufficient funds to replace plant and machinery and accordingly amendment dispenses with restriction of 8 years for carry forward and set off of unabsorbed depreciation. amendment is applicable from assessment year 2002-03 and subsequent years. This means that any unabsorbed depreciation available to assessee on 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in accordance with provisions of section 32(2) as amended by Finance Act, 2001 and not by provisions of section 32(2) as it stood before said amendment. Had intention of Legislature been to allow unabsorbed depreciation allowance worked out in A.Y. 1997-98 only for eight subsequent assessment years even after amendment of section 32(2) by Finance Act, 2001 it would have incorporated provision to that effect. However, it does not contain any such provision. Hence keeping in view purpose of amendment of section 32(2) of Act, purposive and harmonious interpretation has to be taken. http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 12/20 While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to language of section without leaning to side of assessee or revenue. But if legislature fails to express clearly and assessee becomes entitled for benefit within ambit of section by clear words used in section, benefit accruing to assessee cannot be denied. However, Circular No.14 of 2001 had clarified that under Section 32(2), in computing profits and gains of business or profession for any previous year, deduction of depreciation under Section 32 shall be mandatory. Therefore, provisions of section 32(2) as amended by Finance Act, 2001 would allow unabsorbed depreciation allowance available in A.Y. 1997-98, 1999-2000, 2000-01 and 2001-02 to be carried forward to succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till A.Y. 2002-03 then it would be carried forward till time it is set off against profits and gains of subsequent years. Therefore, it can be said that, current depreciation is deductible in first place from income of business to which it relates. If such depreciation amount is larger than amount of profits of that business, then such excess comes for absorption from profits and gains from any other business http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 13/20 or business, if any, carried on by assessee. If balance is left even thereafter, that becomes deductible from out of income from any source under any of other heads of income during that year. In case there is still balance left over, it is to be treated as unabsorbed depreciation and it is taken to next succeeding year. Where there is current depreciation for such succeeding year unabsorbed depreciation is added to current depreciation for such succeeding year and is deemed as part thereof. If, however, there is no current depreciation for such succeeding year, unabsorbed depreciation becomes depreciation allowance for such succeeding year. We are of considered opinion that any unabsorbed depreciation available to assessee on 1st day of April 2002 (A.Y. 2002-03) will be dealt with in accordance with provisions of section 32(2) as amended by Finance Act, 2001. And once Circular No.14 of 2001 clarified that restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, unabsorbed depreciation from A.Y.1997-98 upto A.Y.2001- 02 got carried forward to assessment year 2002-03 and became part thereof, it came to be governed by provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 14/20 profits and gains of subsequent years, without any limit whatsoever. In view of this, we are of opinion that carry forward of unabsorbed depreciation concerning assessment year 2001-02 and assessment years prior thereto can be set off in subsequent years without any set time limit. Accordingly, this ground of appeal is allowed. 13. At time of hearing, ld. DR could not controvert above findings of Tribunal or filed any order of higher Court decision having modified or reversed above order of Tribunal. Hence, respectfully following above decision, we are of opinion that ld. CIT(A) has rightly directed Assessing Officer to allow unabsorbed depreciation of assessment years 1999-2000 and 2000-01 in assessment year under consideration. Thus, ground raised by Revenue is dismissed. 5. learned counsel for Revenue also brought to our notice findings of learned Commissioner of Income Tax (Appeals) in its order dated 21.12.2015 for next assessment year 2007-08 in which learned Commissioner of Income Tax (Appeals) has given categorical finding that Assessee in fourth year of its operation after its merger with effect from 1.4.2003, has achieved more than 100% of its installed capacity, as production of toffees in 4th year. Paragraph 3 of said order of Commissioner of http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 15/20 Income Tax (Appeals), including figures of production, are quoted below for ready reference :- 3) Achievement of prescribed production level by Amalgamated Company Notwithstanding our contents in paragraph 'I 'above, we wish to submit that learned AO summarily disregarded evidence and material submitted before him substantiating compliance with Section 72A read with Rule 9C viz. achievement of production of 50% of installed capacity in 4th year i.e. AY 2007-08 and maintenance of same in 5th year i.e. AY 2008-09. In pursuance of amalgamation which was effective from 1 April 2003; all assets, along with plant and machinery, was taken over from facility of CSL at Chennai by Lotte India and integrated into its own production line. Specifically, machinery owned by CSL which produced Stick Pack and Flow Packs, was cohesively used by Lotte India in its manufacturing facility at NeIlikuppam, South Arcot District Tamil Nadu for purpose of wrapping confectionaries manufactured. Thus by utilizing Stick Pack and Flow Pack packaging machinery of CSL, Lotte India could achieve desired level of production as prescribed. To substantiate above, relevant factual information is tabulated below for your kind reference - Sl.No. Particulars Quintals 1 Installed Capacity ascertained by CSL only for 12,000 evaluating synergies on amalgamation 2 As per Rule 9C level of production to be achieved 6,000 by fourth year of amalgamation, being AY 2007- 08 is atleast 50% of installed capacity of CSL 3 Production of toffees by Lotte India in FY 2002- 61,885 03, prior to amalgamation 4 Production of toffees by Lotte India in AY 2007- B 89,428 08, being fourth year since amalgamation 5 Actual increase in production archived by Lotte (B-A) 27,543 India consequent to amalgamation in AY 2007- 08 On comparing (5) and (2) it can be ascertained that Lotte India's http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 16/20 Sl.No. Particulars Quintals production is more than 100% of installed capacity of CSL 6 Maintenance of 50% production required up to 6,000 5th Year, AY 2008-09 7 Production of toffees by Lotte India in AY2008- C 76,749 09 being fifth year since amalgamation 8 Actual increase in production achieved by Lotte (C-A) 14,864 India consequent to amalgamation by AY 2008- 09 On comparing (8) and (6) it can be ascertained that Lotte India's production is more than 100% of installed capacity of CSL. Thus Lotte India has maintained minimum production level in fifth year, despite recession and market slump, increase in raw material price which lowered production production of toffees by Lotte India in years mentioned above can be verified from audited financial statements of relevant years. In this regard, we have enclosed following for your kind reference - Particulars Annexure Copy of extract of relevant page of financial statement for year 5 ended 31 March 2003, showing production of toffees by Lotte India in FY 2002-03, prior to amalgamation Copy of extract of relevant page of financial statement for year 6 ended 3 I March 2007, showing production of toffees by Lotte India in AY 2007-08, be in fourth ear since amalgamation Copy of extract of relevant page of financial statement for year 7 ended 3 I March 2008, showing production of toffees by Lotte India in AY 2008-09, be in fifth ear since amalgamation Based on above, Company submits that condition with respect to achievement of 50% of installed capacity of CSL has been complied with by Lotte India in 4"' year i.e. AY 2007-08 and it has also continued to maintain minimum level of production upto 5th year i.e. AY 2008-09. http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 17/20 6. relevant provisions of Section 72A read with Rule 9C are very clear in this regard. These provisions clearly stipulate that after merger, within four years, amalgamated company should achieve at least 50% of installed capacity of production. Though learned Tribunal, in its order, has not discussed facts and figures as discussed by Commissioner of Income Tax (Appeals) in its order quoted above, it has observed that non filing of prescribed Form No.62 for third Assessment Year, after amalgamation, namely AY 2006-07, is not relevant, because mark of 50% of installed capacity of production can be achieved at any point of time within four years after date of merger, which is 01.04.2003 in present case. Even though exact date of crossing over mark of 50% cannot be ascertainable in present case, but fact is undisputed that in fourth year, amalgamated company achieved more than 100% of its installed capacity of production. We do not think that requirement of filing of requisite information in Form No.62 for third assessment year can be said to be condition precedent or mandatory condition to allow Assessee to carry forward such losses under Section 72A of Act. said condition of filing Form No.62, at best, is only directory and non compliance thereof would not disentitle Assessee to claim such carry forward losses to be set off against profits of Assessee company. There is no dispute before us that fact of crossing of 50% of installed capacity of its production stood http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 18/20 achieved by Assessee in present case in fourth year, as would be clear from order of Commissioner of Income Tax (Appeals) for AY 2007- 08, which is produced on record and quoted above. 7. In view of this clear finding of fact, which remains uncontroverted with any contra material brought on record by Assessing Authority, we are of clear opinion that no substantial question of law, as claimed by Revenue Department in present appeal filed by it, arises for our consideration. 8. appeal filed by Revenue is thus found to be without merit and is liable to be dismissed and same is accordingly dismissed. No costs. (V.K.,J.) (K.R.,J.) 29.07.2020 kpl/tar http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 19/20 To Income Tax Appellate Tribunal, Madras Bench http://www.judis.nic.in Order dt.29.07.2020 T.C.A.No.415/2017 20/20 DR.VINEET KOTHARI, J. and KRISHNAN RAMASAMY, J. (tar) T.C.A.No.415 of 2017 29.07.2020 http://www.judis.nic.in Principal Commissioner of Income-tax 4, Chennai v. Lotte India Corporation Ltd