December 06, 2022
Set-off of Long-term Capital Loss and carry forward of MAT Credit allowed in scheme of amalgamation
Recently, the Pune Income Tax Appellate Tribunal (“ITAT” or “the Tribunal”) has inter-alia allowed set off of long-term capital loss of amalgamating company in hands of amalgamated company and carry forward of minimum alternate tax (“MAT”) credit of amalgaming company following the principle of succession.1
Capgemini Technology Services India Limited (“Taxpayer” or “Amalgamated Company”) is a company engaged in providing software development services and IT enabled services. Amalgamation of iGate Computer System Limited (“Amalgamating Company”) with Taxpayer was approved by the High Court (“HC”) through a scheme of amalgamation effective from April 01, 2012 (“Scheme”). The Assessing Officer (“AO”) observed that the Amalgamated Company had claimed brought forward long-term capital loss of Amalgamating Company in its income-tax return. The AO while noting provisions of section 72A2 of the Income-tax Act, 1961 (“ITA”) denied claim of such long-term capital loss by the Amalgamated Company. The AO also held that MAT credit of the Amalgamating Company is not covered under Section 72A of the ITA. Therefore, in the absence of any specific provision entitling the Amalgamated Company to avail MAT credit of Amalgamating Company, no such credit could be allowed in the hands of the Amalgamated Company. The Commissioner of Income-tax (Appeals) (“CIT(A)”)) concurred with the view of the AO.
On further appeal to the Tribunal, the Tribunal rejected the claim of the AO and the CIT(A) on basis of following reasons:
Set off of long-term capital loss brought forward from Amalgamating Company
Carry forward of MAT credit of Amalgamating Company
The Tribunal decision is welcomed. The order of the Tribunal is based on the general principles of succession and in this context the Tribunal has allowed the set off of long-term capital loss of amalgamating company in hands on amalgamated company and also allowed the carry forward of MAT credit by amalgamated company. This is in consonance with the approach adopted by the SC in another case4 wherein the SC noted that although the outer shell of the entity is destroyed in case of amalgamation, the corporate venture continues to exist in the form of a new or the existing transferee entity.
Section 72A of the ITA constitutes an exception to general rule that business loss can be carried forward and set off only by the assessee who has incurred the loss. In the past, courts have taken a view that in absence of a specific provision capital loss of amalgamating company should not be allowed in hands of amalgamated company.5 However, the Tribunal notes that all the benefits under the ITA due to the amalgamating company should devolve upon the amalgamated company because of principle of succession. The interpretation of the Tribunal that section 72A of the ITA merely provides some additional conditions / restrictions for allowability of business loss in case of amalgamation seems logical and in line with the approach of SC and provisions of Companies Act. Interestingly, the Tribunal effectively permits the set-off of long-term capital loss by substituting amalgamating company as the original assessee under section 74(1) to the amalgamated company. It will be interesting to see if courts agree with this interpretation of the Tribunal.
In relation to carry forward of MAT credit in case of amalgamation, in the past, several decisions have allowed the carry forward and set off of MAT credit of the amalgamating company to amalgamated company.6 However, in relation to demerger, there have been divergent rulings from Courts.7 Considering that section 115JAA(1A) specifically makes a mention to “assessee, being a company” with respect to computation of, one may need to analyze whether the principle in Tribunal’s decision can be extended to demerger cases as well (provided appropriate provisions are included in scheme of demerger) since in demergers the entity continues to exist after the relevant undertaking has been demerged.
(The authors would like to acknowledge and thank Krishna Agarwal (Paralegal) for his assistance to this hotline.)
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1 Capegemini Technology Services India Limited vs DCIT, ITA No.1857/PUN/2017
2 Section 72A of the ITA provides for the set off and carry forward only of the brought forward loss and unabsorbed depreciation of the amalgamating company in the hands of the amalgamated company
3 (1985) 155 ITR 152 (SC)
4 PCIT vs Mahagun Realtors (P) Ltd. Special Leave Petition (C) No. 4063 of 2020
5 Clariant Chemicals (I) Ltd. Vs ACIT  152 ITD 191 (Mumbai)
6 Caplin Point Laboratories Ltd. v. ACIT, order dated January 31, 2014 in ITA No.667/ Mds/ 2013; Ambuja Cements Ltd. v. DCIT  179 ITD 436 (Mumbai); Skol Breweries Ltd. v/s ACIT, ITA no.2313 of 2017 (Mum.) (Trib.)
7 In case of Adani Gas Ltd. v. ACIT (ITA Nos. 2241 & 2516/ Ahd/ 201), the Ahmedabad Tribunal allowed the transfer of MAT Credit to the resulting company on the condition that the benefit of MAT Credit would be confined on a pro rata basis only qua the demerged undertaking. However, in case of DCIT v. TCS E-Serve International Limited (ITA No. 2779/Mum/2018), in absence of a specific provision with respect to carry forward of MAT credit in the scheme of demerger, the Mumbai Tribunal allowed the demerged company to continue to avail MAT credit pertaining to its demerged SEZ units even after the demerger
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