ASSOCIATED BREWERIES & DISTILLERIES LTD, MUMBAI V. ASS CIT (OSD) 3(1)(1), MUMBAI

ITA 625/MUM/2013

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 3327 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-02-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2002-2003
• Appeal Filed On: 23-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N S JANG
• Keywords: Gift; Depreciation; Opportunity of being heard; Proportionate interest; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 32; 2; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A MUMBAI BEFORE SHRI PAWAN SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 625/MUM/2013 ASSESSMENT YEAR: 2002 - 03 M/S ASSOCIATED BREWERIES & DISTILLERIES LTD. MUMBAI (NOW KNOWN AS UNITED BREWERIES LTD.) C/O KALYANIWALLA & MISTRY, ARMY & NAVY BUILDING, 3 RD F LOOR, 148, M.G. ROAD, FORT, MUMBAI - 400001. VS. DY. COMM. OF INCOME TAX - 3(1) ROOM NO. 607, 6 TH F LOOR, AAYAKAR BHAVAN M.K. ROAD, MUMBAI - 400020. PAN NO. AAACA8876B APPELLANT RESPONDENT ASSESSEE BY : MR. M.M. GOLVALA, AR REVENUE BY : MR. N.S. JANGPANGI, CIT - DR DATE OF HEARING : 16/11 /2018 DATE OF PRONOUNCEMENT : 13/02/2019 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2002 - 03. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - 5, MUMBAI [IN SHORT CIT(A) ] AND ARISES OUT OF THE ASSESSMENT COMPLETED U/S 143(3) OF TH E INCOME TAX ACT 1961, (THE ACT). M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 2 2. THE 1 ST GROUND OF APPEAL THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.17,57,894/ - PAID BY WAY OF LEGAL FEES. HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE, THE APPELLANT SUBMITS THAT THE DISALLOWANCE BE DELETED 3. BRIEFLY STATED, THE FACTS ARE THAT THE ASSESSEE - COMPANY H AD DEBITED RS.36,14,325/ - AS MISCELLANEOUS EXPENSES IN ITS PROFIT & LOSS ACCOUNT. THE ASSESSING OFFICER (AO), ON PERUSAL OF THE DETAILS FILED BY THE ASSESSEE , OBSERVED THAT A SUM OF RS.17,57,894/ - HAD BEEN PAID TO M/S CRAWFORD BAILLEY & CO. THE ASSESSEE FAILED TO FILE BEFORE THE AO THE BILLS OF PROFESSIONAL SERVICES RENDERED BY THE ABOVE CONCERN. THEREFORE, THE AO DISALLOWED THE ABOVE SUM OF RS.17,57,894/ - AS C APITAL EXPENDITURE. 4. IN APPEAL, THE LD. CIT(A) REMANDED THE MATTER TO THE FILE OF THE AO FOR MAKING AN INQUIRY AND SUBMITTING A REPORT. AFTER RECEIPT OF THE REMAND REPORT, THE LD. CIT(A) OBSERVED THAT THE ASSESSEE HAD ENCLOSED COPY OF THE BILL DATED 13. 02.2001 PURPORTEDLY RAISE D BY M/S CRAWFORD BAILLEY & CO., HOWEVER, THERE IS NO SIGNATURE ON THE BILL. FURTHER, HE OBSERVED THAT AN EXAMINATION OF THE ENDORSEMENT ON THE COPY OF THE BILL SHOWS THAT IT WAS RAISED ON 13.02.2011, BUT RECEIVED ON 22.02.2001. TH US THERE IS NO GROUND FOR CLAIMING THESE EXPENSES IN AY 2002 - 03. THEREFORE, THE LD. CIT(A) CONFIRMED THE DISALLOWANCE OF RS.17,57,894/ - MADE BY THE AO. 5. THE LD. COUNSEL OF THE ASSESSEE SUBMITS THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE BILL O F SOLICITORS WERE UNTRACEABLE, HOWEVER, THE SAID BILL WAS LOCATED AND FILED BEFORE THE LD. CIT(A) . M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 3 REGARDING ITS CLAIM, IT IS STATED BY HIM THAT CRYSTALLIZATION HAPPENED ON RECEIPT AND PASSING OF BILL. THE LD. COUNSEL ALSO RELIED ON THE DECISION IN CIT V. BOMBAY DYING & MFG. CO. LTD . (219 ITR 521) (SC) AND CIT V. AKME ELECTRONICS & CONTROL PVT. LTD . 267 ITR 396 (GUJ) . 6. ON THE OTHER HAND, THE LD. DR SUBMITS THAT SINCE THE BILLS DO NOT PERTAIN TO THE FINANCIAL YEAR IN QUESTION, THE SAID EXPENSES HAVE BEEN RIGHTLY DISALLOWED BY THE AO AND LATER ON CONFIRMED BY THE LD. CIT(A). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIALS ON RECORD. IN THE CASE OF BOMBAY DYING & MFG. CO. LTD . (SUPRA), IT IS HELD THAT THE EXPENDITURE INCURRED TOWARDS PROFESSIONAL CHARGES OF THE SOLICITORS FIRM FOR THE SERVICES RENDERED IN CONNECTION WITH THE AMALGAMATION WAS IN TH E COURSE OF CARRYING ON OF THE ASSESSEES BUSINESS AND, THEREFORE, DEDUCTIBLE AS REVENUE EXPENDITURE. IN AKME ELECTRONICS & CONTROL PVT. LTD . (SUPRA), IT IS HELD THAT THE LEGAL EXPENSES WITH REFERENCE TO AMALGAMATION ARE REVENUE EXPENDITURE. IN THE INSTANT CASE, IT IS FOUND THAT THE SAME RELATES TO PRIOR PERIOD WHICH CRYSTALLIZED ON RECEIPT AND PASSING OF THE BILLS IN THE CURRENT YEAR. THEREFORE, WE HOLD THE FEES OF RS.17,57,894/ - PAID TO CRAWFORD BAILLEY & CO . AS AN ALLOWABLE EXPENDITURE. THUS THE 1 ST GROU ND OF APPEAL IS ALLOWED. 8. THE 2 ND GROUND OF APPEAL THE LD. CIT(A) ERRED IN CONFIRMI NG THE DISALLOWANCE OF INTEREST AMOUNTING TO RS.12,74,377/ - , U/S 36. M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 4 THE 3 RD GROUND OF APPEAL THE LD. CIT(A) FAILED TO CONSIDER THAT THE APPELLANT HAD RECEIVED INTEREST - FREE FUNDS FAR IN EXCESS OF THE I NTEREST - FREE LOANS ADVANCED . 9. THE AO , ON PERUSAL OF THE BALANCE SHEET OBSERVED THAT THE ASSESSEE HAD BORROWED AN AGGREGATE LOAN AMOUNT OF RS.31,31,56,600/ - (SECU RED LOANS: RS.7,09,81,562/ - AND UNSECURED LOAN : RS.24,21,75,038/ - ). IN THE BALANCE SHEET AN AMOUNT OF RS.8,97,38,209/ - HAS BEEN SHOWN UNDER LOANS AND ADVANCES. IN RESPONSE TO A QUERY RAISED BY THE AO, THE ASSESSEE FILED A REPLY DATED 19.02.2005 STATING THAT: THE ASSESSEE HAS BORROWED INTEREST - FREE LOAN FROM UNITED BREWERIES LTD., THE SAME WAS UTILIZED FOR BUSINESS PURPOSE AND FOR ADVANCING INTEREST - FREE ADVANCE OF RS.1.86 CRORE TO ITS SUBSIDIARY COMPANY I.E. LONDON PILSNER BREWERIES PVT. LTD. FOR BUSI NESS PURPOSE . THE ASSESSEE COMPANY HAS BORROWED FUNDS FROM CENTRAL BANK OF INDIA AND BANK OF BARODA FOR THE WORKING CAPI TAL REQUIREMENT OF THE COMPANY. HOWEVER, THE AO WAS NOT CONVINCED WITH THE ABOVE EXPLANATION OF THE ASSESSEE AND HELD THAT THE BORROWED FUND HAD BEEN ADVANCED WITHOUT CHARGING INTEREST. THE TOTAL LOAN TAKEN WAS RS.31,31,56,600/ - AND THE LOAN GIVEN WAS RS.2,03,70,301/ - . THE TOTAL INTEREST PAID WAS RS.1,95,91,249/ - . THE AO, WORKING ON PROPORTIONATE INTEREST @ 12%, MADE A DISALLOWANCE OF RS.12,74,377/ - . 10. IN APPEAL, THE LD. CIT(A) HELD THAT THE INTEREST - FREE ADVANCES GIVEN TO SISTER CONCERNS/DIRECTORS WERE NOT WHOLLY AND EXCLUSIVELY FOR B USINESS PURPOSE. ALSO THE ASSESSEE FAILED TO PROVE THAT THE SAID AMOUNT M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 5 OF INVESTMENT WAS OUT OF SURPLUS FUNDS . T HEREFORE, THE LD. CIT(A) CONFIRMED THE DISALLOWANCE OF RS.12,74,377/ - MADE BY THE AO. 11. THE LD. COUNSEL OF THE ASSESSEE SUBMITS THAT THE COMP ANY WAS RUN AND MANAGED BY THE IRANI FAMILY TILL 19.01.2001. THEREAFTER, IT WAS TAKEN OVER BY THE UB GROUP. IT IS STATED THAT THE UB GROUP, DURING THE YEAR ENDED 31.03.2001 (THE PRECEDING FINANCIAL YEAR) INTRODUCED RS. 25.40 CRORES BY WAY OF SHARE CAPITAL I N THE FORM OF 25,40,000 CUMULATIVE REDEEMABLE PREFERENCE SHARES. IN THE PRECEDING YEAR, THERE WAS A REDUCTION IN THE LOAN FUNDS FROM RS.27.22 CRORES TO RS.15.71 CRORES. IT IS SUBMITTED BY HIM THAT THE PRESUMPTION DRAWN BY THE AO THAT THE MONIES WERE OUT OF BORROWED FUNDS IS ERRONEOUS . CONSIDERING THE FACT THAT THE NEW SHAREHOLDER INTRODUCED CAPITAL OF RS.25.40 CRORES , THE ONUS LIES ON THE DEPARTMENT TO SHOW THAT THE ADVANCES MADE BY THE ASSESSEE - COMPANY WERE FROM BORROWED FUNDS. IT IS STATED THAT INTEREST - F REE FUNDS WERE MADE AVAILABLE BY THE UB LTD. TO THE ASSESSEE BY THE END OF THE IMPUGNED ASSESSMENT YEAR. IT IS STATED THAT THE NEW INVESTOR PROVIDED FURTHER FUNDING TO THE TUNE OF RS.19 CRORES THROUGH HIS CURRENT ACCOUNT. THE AMOUNTS INVOLVED IN THE ADVANC ES MADE TO THE SUBSIDIARY COMPANIES WERE AROUND RS.2 CRORES. RELYING ON THE DECISION IN THE CASE OF MUNJAL SALES CORPORATION V. CIT 298 ITR 298 (SC), CIT V. RELIANCE UTILITIES & POWER LTD. 313 ITR (BOM), THE LD. COUNSEL SUBMITS THAT THE INTEREST - FREE FUNDS AVAILABLE IN THE INSTANT CASE WERE ALMOST RS.45 CRORES AND THE AMOUNT ADVANCED WAS ONLY RS.2.03 CRORES. THUS THE LD. COUNSEL SUBMITS THAT THE DISALLOWANCE OF RS.12,74,377/ - MADE BY THE AO BE DELETED. M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 6 12. ON THE OTHER HAND, THE LD. DR SUPPORTS THE ORDER PASSED BY THE LD. CIT(A). 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. WE FIND THAT IN THE INSTANT CASE THE ASSESSEE HAD MORE OWN FUNDS THEN THE ADV ANCES MADE TO COMPANY UNDER THE SAME MANAGEMENT. THE INFERENCE DRAWN BY THE AO AND THE LD. CIT(A) THAT THE ADVANCES MADE BY THE ASSESSEE TO COMPANIES UNDER THE SAME MANAGEMENT IS NOT FOR BUSINESS PURPOSE IS NOT SUPPORTED BY ANY EVIDENCE. SUCH BEING THE FAC TS, FOLLOWING THE RATIO LAID DOWN IN RELIANCE UTILITIES & POWER LTD. (SUPRA), WE DELETE THE DISALLOWANCE OF RS.12,74,377/ - MADE BY THE AO. THUS THE 2 ND & 3 RD GROUND S OF APPEAL ARE ALLOWED. 14. THE 4 TH , 5 TH , 6 TH , 7 TH & 8 TH GROUND OF APPEAL THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 4,14,75,062 / - OUT OF ADVERTISEMENT EXPENSES. THE LD. CIT(A) ERRED IN HOLDING, THAT BRAND BUILDING EXPENDITURE WAS REQUIRED TO BE DISALLOWED AS CAPITAL EXPENDITURE. THE LD. CIT(A) FAILED TO CONSIDER THAT THE ADVERTISEMENT EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF THE SAME BUSINESS WHICH THE APPELLANT HAD CARRIED ON FOR MORE THAN 25 YEARS. THE LD. CIT(A) ERRED IN ASSUMING JURISDICTION TO MAKE AN ENHANCEMENT, WITHOUT ISSUING NOTICE, AS REQUIRED BY S ECTION 251(2). M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 7 IN ANY EVENT, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN MAKING A FURTHER ADDITION IN RESPECT OF ADVERTISING EXPENSES TO THE TUNE OF RS.41,47,506/ - . 15. THE AUDITOR IN SCHEDULE 11(N OTES TO A CCOUNTS ) AT PARA 4 HAS STATED THAT THE BRAND LAUNCH EXPENDITURE DURING THE YEAR AMOUNTING TO RS.4,14,75,062/ - HAS BEEN TREATED A S DEFERRED REVENUE EXPENDITURE. THE AO , DURING THE COURSE OF ASSESSMENT PROCEEDINGS , FOUND THAT THE EXTENT OF EXPENSES INCURRED ON ADVER TISEMENT WAS TO ESTABLISH THE BRAND SAN MIGUEL . THE AO DREW THE CONCLUSION THAT THE ASSESSEE - COMPANY HAD SIGNED A TECHNICAL COLLABORATION AGREEMENT WITH SAN MIGUEL CORPORATION OF PHILIPPINES AND HAD STARTED MANUFACTURING BEER UNDER THE BRANDING SAN MIGU EL AND HAD INCURRED HUGE EXPENSES IN ADVERTISEMENTS TO LAUNCH AND ESTABLISH THE BRAND SAN MIGUEL . THE AO HELD THAT THE EXPENSES WERE WELL WITHIN THE PROVISIONS OF SECTION 35D(1)(A)(III) OF THE ACT. ACCORDINGLY, THE AO ALLOWED 1/10 TH OF SUCH EXPENSES AS DEDUCTION FOR EACH OF THE 10 SUCCESSIVE PREVIOUS YEARS BEGINNING WITH THE PREVIOUS YEAR UNDER CONSIDERATION. THUS HE ALLOWED RS.41,47,506/ - AND DISALLOWED THE BALANCE OF RS.3,73,27,556/ - . 16. IN APPEAL, THE LD. CIT(A) HELD THAT THE AMOUNT OF EXPENDITURE O F RS.4,14,75,062/ - SHALL NOT BE ALLOWED AS A DEDUCTION. HOWEVER, THE ASSESSEE HAD CHARGED/DEBITED THE ADVERTISEMENT EXPENDITURE OF RS.82,95,012/ - ONLY TO THE P&L ACCOUNT. AS PER THE LD. CIT(A), THE SAME SHALL BE DISALLOWED AND ADDED BACK TO THE INCOME OF T HE ASSESSEE. A S PER HIM, THE AO HAS INADVERTENTLY ADDED ONLY AN AMOUNT OF RS.41,47,506/ - . THUS THE LD. CIT(A) ENHANCED THE DISALLOWANCE BY RS.41,47,506/ - . M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 8 17. THE LD. COUNSEL OF THE ASSESSEE SUBMITS THAT THE DETAILS OF EXPENDITURE WERE FILED BEFORE THE AO AND THERE WAS NO DISPUTE REGARDING THE NATURE OF EXPENDITURE I.E. IN REGARD TO SHOP FRONTAGE, WALL PAINTING OR HOARD ING , AGENCY PRODUCTION/FEES CHARGES, DISPLAY CONTENTS, EVENT SPONSORSHIP, EXCLUSIVES/NEW YEAR TIE - UPS, FREE ISSUE OF BEER, GIVE AWAYS, INSTI TUTIONAL PROMOTIONS, LOCAL EVENTS ETC. IT IS STATED BY HIM THAT THE AO HAS WRONGLY HELD THAT THE EXPENDITURE IS ALLOWABLE U/S 35D. THE SAID SECTION COULD APPLY IN CASE OF A NEW COMPANY AND IT HAS NO RELEVANCE IN THE CASE OF A 30 YEAR OLD BUS INESS LIKE THAT OF THE ASSESSEE. IT IS FURTHER STATED THAT THE ASSESSEE HAD NOT INCURRED PRELIMINARY EXPENSES. IT IS ALSO STATED THAT THE EXPENDITURE ON ADVERTISEMENT IS REQUIRED TO BE ALLOWED AS REVENUE EXPENDITURE INCURRED DURING THE YEAR, AS THE MEMOR Y OF THE PURCHASING MARKET IS VERY SHORT AND BECAUSE SUCH EXPENDITURE HAS TO BE INCURRED REGULARLY OUT OF NECESSITY . IN THIS REGARD, RELIANCE IS PLACED BY HIM ON THE DECISION IN CIT V. BERGER PAINTS INDIA LTD. 254 ITR 503 (CAL), CIT V. GEOFFREY MANNERS & C O. LTD . 315 ITR 135 (BOM), CIT V. SALORA INTERNATIONAL LIMITED 308 ITR 199 (DELHI), CIT V. CITI FINANCIAL CONSUMER FIN. LTD. 335 ITR 29 (DELHI) AND DCIT V. GODREJ TEA LTD . 4 ITR (TRIB) 649 (MUMBAI). 18. ON THE OTHER HAND, THE LD. DR SUPPORTS THE ORDER PASS ED BY THE LD. CIT(A). 19. HAVING GONE THROUGH THE DETAILS OF ADVERTISEMENT EXPENSES, WE FIND THAT THE AO HAS WRONGLY HELD THE EXPENDITURE AS ALLOWABLE U/S 35D OF THE ACT. THERE CAN BE NO DEBATE THAT THE ABOVE SECTION COULD APPLY IN THE CASE OF A NEW COMPANY AND IT HAS NO RELEVANCE IN THE CASE OF A 30 M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 9 YEAR OLD BUSINESS LIKE THAT OF THE ASSESSEE. THESE ARE NOT PRELIMINARY EXPENSES INCURRED BY THE ASSESSEE. IN THE CASE OF BERGER PAINTS (INDIA) LTD. (SUPRA), IT IS HELD THAT EXPENDITURE ON ADVERTISING IS REVENUE EXPENDITURE. ALSO IN GE OFFREY MANNERS & CO. LTD . (SUPRA), IT IS HELD THAT EXPENDITURE INCURRED IN PROMOTING ONGOING PRODUCTS OF THE ASSESSEE IS REVENUE EXPENDITURE . IN SALORA INTERNATIONAL LTD. (SUPRA), IT IS HELD THAT ADVERTISEMENT EXPENDITURE INCURRED FOR LAUNCHING OF PRODUCTS HAS DIRECT NEXUS BETWEEN ADVERTISING EXPENDITURE AND BUSINESS OF ASSESSEE AND THEREFORE, T HE SAME IS REVENUE EXPENDITURE. IN CITI FINANCIAL CONSUMER FIN. LTD. (SUPRA), I T IS HELD THAT EXPENDITURE ON ADVERTISEMENT AND P UBLICITY IS REVENUE EXPENDITURE. IN GODREJ TEA LTD . (SUPRA), EXPENSES ON ADVERTISEMENT TO CREATE BRAND IMAGE WERE PARTLY DEBITED IN THE PROFIT & LOSS ACCOUNT AND BALANCE DEFERRED OVER A PERIOD OF 3 YEARS. IT IS HELD THAT ENTRY OR ABSENCE OF AN ENTRY DOES NOT DETERMINE ALLOWABILITY AND THE EXPENDITURE IS TO BE ALLOWED BEING REVENUE IN NATURE. IN THE INSTANT CASE, THE ABOVE EXPENDITURE INCURRED BY THE ASSESSEE IS REVENUE IN NATURE. THE SAID EXPENSES DO NOT FAL L IN THE AMBIT OF 35D AS DONE BY THE AO. HAVING GONE THROUGH THE ACCOUNTS, WE FIND THAT THE LD. CIT(A) HAS HURRIEDLY ENHANCED/DISALLOWED RS.41,47,506/ - . THERE WAS NO MATERIAL BEFORE HIM TO DO SO. THEREFORE, WE DELETE THE ENHANCEMENT OF RS.41,47,506/ - MADE BY THE LD. CIT(A). THUS THE 4 TH , 5 TH , 6 TH , 7 TH AND 8 TH GROUNDS OF APPEALS ARE ALLOWED. M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 10 20. THE 9 TH , 10 TH & 11 TH GROUND OF APPEAL THE ASSESSING OFFICER ERRED IN HOLDING THAT THERE WAS A CHANGE IN THE SHARE HOLDING PATTERN OF THE COMPANY DURING THE YEAR UNDER CONSIDERATION. THE LD. CIT(A) ERRED IN NOT DIRECTING THE ASSESSING OFFICER TO CARRY FORWARD THE FOLLOWING LOSSES IN RESPECT OF A.Y 1997 - 98 TO A.Y 2000 - 01: A. BROUGHT FORWARD BUSINESS LOSSES RS.18,01,94,316 B. UNABSORBED DEPRECIATION RS.6,19,52,412 THE LD. CIT(A) ERRED IN INVOKING SECTION 72A OF THE INCOME TAX ACT WHEN DEALING WITH THE ABOVE GROUND. 21. THE AO DISALLOWED THE CARRY FORWARD LOSS OF EARLIER YEARS ON THE GROUND THAT THERE IS CHANGE IN THE SHAREHOLDING PATTERN OF THE COMPANY WHICH IS MORE THA N 50%. 22. IN APPEAL, THE ASSESSEE FILED BEFORE THE LD. CIT(A) A STATEMENT SHOWING UNABSORBED LOSS/UNABSORBED DEPRECIATION/UNABSORBED INVESTMENT ALLOWANCE/UNABSORBED LONG TERM CAPITAL LOSS BROUGHT FORWARD, WHICH IS AS UNDER: ASSESSMENT YEAR BUSINESS LOSS UNABSORBED DEPRECIATION TOTAL 1997 - 98 (9,986,965) (9,146,241) (19,133,206) 1998 - 99 (19,443,761) (14,358,586) (33,802,347) 1999 - 00 (54,321,816) (21,294,413) (75,616,229) 2000 - 01 (96,441,774) (17,153,172) (113,594,946) TOTAL (180,194,316) (61,952,412) (242,146,728) 2001 - 02 (1 6 , 966,636) ( 91 , 858,906) ( 108 , 825,542) 2002 - 03 (156 , 250,646) (13 , 415,901) (169 , 666,547) TOTAL (173 , 217,282) ( 105 , 274,807 4) (278 , 492,089) M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 11 THE LD. CIT(A) NOTED THAT THE CHANGE IN THE SHAREHOLDING HAD TAKEN PLACE FROM 19.01.2001 I.E. IN THE AY 2001 - 02. THEREFORE, THE LD. CIT(A) HELD AS UNDER: AS SUCH THE BUSINESS LOSS FOR THE PERIOD AY 97 - 98 TO AY 2000 - 01 AMOUNTING TO RS.180,194,316/ - SHALL NOT BE ALLOWED TO BE BROUGHT FORWARD/CARRIED FORWARD. HOWEVER, THE UNABSORBED DEPRECIATION FROM AY 97 - 98 TO AY 2000 - 01 AMOUNTING TO RS.61,952,412/ - CAN BE CARRIED FORWARD IF PROVISION OF SEC. 72A ARE COMPLIED WITH. THE AO SHALL VERIFY THE FACTS BEFORE ALLO WING THE SAME. BUSINESS LOSS OF AY 2001 - 02 AND AY 2002 - 03 AMOUNTING TO RS.173,217,282/ - UNABSORBED DEPRECIATION OF AY 2001 - 02 AND AY 2002 - 03 AMOUNTING TO RS.105,274,807/ - SHALL BE ALLOWED TO BE BROUGHT FORWARD/CARRY FORWARD AS PROVISIONS OF SEC. 79. SEC. 7 9 ONLY RESTRICTS THE ADJUSTMENT OF BROUGHT FORWARD LOSSES IN RESPECT OF THE YEAR PRIOR TO THE PREVIOUS YEAR IN WHICH SUBSTANTIAL CHANGE IN THE SHARE HOLDING HAS TAKEN PLACE. AS PER HONBLE SUPREME COURTS DECISION IN THE CASE OF CIT V. SUBHULAXMI MILLS LTD ., HELD FOR PROVISION U/S 79 ONLY THE BUSINESS LOSS SHOULD BE TAKEN INTO ACCOUNT AND NOT THE UNABSORBED DEPRECIATION OR UNABSORBED DEVELOPMENT REBATE. SEC. 79 SPEAKS OF LOSS, IT DOES NOT INCLUDE UNABSORBED DEPRECIATION OR UNABSORBED DEVELOPMENT REBATE. T HE LD. CIT(A) THUS PARTLY ALLOWED THE ABOVE GROUNDS OF APPEAL AS PER AFORESAID DIRECTIONS. 23. THE LD. COUNSEL OF THE ASSESSEE FILES A WRITTEN SUBMISSIONS AND STATES THAT THE LD. CIT(A) CONFIRMED THE FACT THAT THE CHANGE IN SHAREHOLDING TOOK PLACE ON 19.01 .2001 (THIS FACT IS UNCHALLENGED) AND FURTHER HELD THAT IN RESPEC T OF THE PERIOD FROM AY 1997 - 98 TO AY 2000 - 01, THE BROUGHT FORWARD BUSINESS LOSS WAS NOT ALLOWED TO BE CARRIED M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 12 FORWARD. HOWEVER, THE UNABSORBED DEPRECIATION AMOUNTING TO RS.6,19,54,412/ - COUL D BE CARRIED FORWARD, IF THE PROVISIONS OF SECTION 72A WERE COMPLIED WITH. HE DIRECTED THE AO TO VERIFY THE FACTS, BEFORE ALLOWING THE SAME. AS REGARDS THE BUSINESS LOSSES OF AY 2001 - 02 AND 2002 - 03, AS ALSO THE UNABSORBED DEPRECIATION OF AY 2001 - 02 AND 200 2 - 03, THE LD. CIT(A) HELD THAT SECTION 79 ONLY RESTRICTS CARRY FORWARD OF LOSSES IN RESPECT OF YEARS PRIOR TO THE PREVIOUS YEAR, IN WHICH SUBSTANTIAL CHANGE IN SHAREHOLDING TAKES PLACE. THE LD. COUNSEL THUS SUBMITS THAT THE CIT(A) DOES NOT SEEM TO HAVE GIV EN ANY CLEAR - CUT DIRECTION REGARDING CARRY FORWARD OF THE SAID LOSSES. IT IS SUBMITTED BY THE LD. COUNSEL THAT THE APPELLANT HAD POINTED OUT TO THE LD. CIT(A), THAT HAVING REGARD TO THE CORRECT POSITION OF LAW U/S 79, IT WAS NECESSARY TO BREAK THE CONSID ERATION OF LOSSES, IN LAW, INTO TWO PARTS THE 1 ST PART FROM AY 1997 - 98 TO AY 2000 - 01 AND THE 2 ND PART FOR AYS 2001 - 02 & 2002 - 03. THE LD. COUNSEL RELIES ON SECTION 79 OF THE ACT AND SUBMITS THAT AS FAR AS UNABSORBED DEPRECIATION IS CONCERNED, IT IS THE CONTENTION OF THE APPELLANT THAT THE ISSUE IS SETTLED BY THE HONBLE SUPREME COURT IN THE CASE OF SHRI SUBHULAXMI MILLS LTD . (SUPRA). IT IS FURTHER SUBMITTED BY HIM THAT THE DIRECTION OF THE CIT(A) ON THE 4 TH LINE OF PAGE 10 THAT UNABSORBED DEPRECIATION CA N BE CARRIED FORWARD, IF THE PROVISIONS OF SECTION 72A ARE COMPLIED WITH IS AN ERRONEOUS DIRECTION. THE HEAD NOTES OF SECTION 72A THEMSELVES PROVIDE THAT THE SAID SECTION APPLIES IN THE EVENT OF CARRY FORWARD AND SET OFF OF BROUGHT FORWARD BUSINESS LOSSES AND UNABSORBED DEPRECIATION IN AN AMALGAMATION OF DEMERGER . IN THE M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 13 INSTANT CASE, THERE IS NO AMALGAMATION OR DEMERGER, AND, THEREFORE, SECTION 72A HAS NOT APPLICABILITY WHATSOEVER. THUS IT IS STATED THAT UNABSORBED DEPRECIATION RELATING TO AYS 1997 - 98 TO 2 000 - 01 IS REQUIRED TO BE CARRIED FORWARD UN CONDITIONALLY. IT IS FURTHER STATED THAT AS FAR AS BUSINESS LOSS RELATING TO THESE YEARS ARE CONCERNED, THERE IS NO BAR TO CARRY FORWARD, AND, THEREFORE, THE SAID BUSINESS LOSSES SHOULD BE CARRIED FORWARD - THE SE CTION ONLY BARS SET OFF, WHICH IS NOT MISUSE ARISING IN THE CURRENT ASSESSMENT YEAR. REFERRING TO SECTION 79, THE LD. COUNSEL SUBMITS THAT THE WORD AND IN THE LAST LINE IS USED AS A CONJUNCTIVE PREPOSITION, AND NOT AS A DISJUNCTIVE PREPOSITION. THE BAR IS TO CARRY FORWARD AND SET OFF. IN SUBSTANCE, THE PURPOSE OF THIS SECTION IS TO PREVENT SET OFF. UNTIL SET OFF, THE SECTION DOES NOT GET TRIGGERED. THE LD. COUNSEL SUBMITS THAT IT IS ALWAYS POSSIBLE FOR A COMPANY TO CHANGE BACK ITS SHAREHOLDING IN THE YE AR OF SET OFF, IN A MANNER THAT THE PROVISIONS OF SECTION 79 DO NOT APPLY. 24. ON THE OTHER HAND, THE LD. DR SUBMITS THAT THE LD. CIT(A) HAS RIGHTLY PARTLY ALLOWED THE APPEALS OF THE ASSESSEE WITH DIRECTIONS. 25. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. SECTION 79 OF THE ACT RELATES TO CARRY FORWARD AND SET OFF OF LOSSES IN CASE OF CERTAIN COMPANIES. THIS SECTION APPLIES NOTWITHSTANDING ANYTHING CONTAINED IN CHAPTER VI OF TH E ACT. IT SAYS THAT IN THE CASE OF A COMPANY, NOT BEING A COMPANY IN WHICH PUBLIC ARE SUBSTANTIALLY INTERESTED, WHERE A CHANGE IN SHAREHOLDING AS TAKEN PLACE M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 14 IN THE PREVIOUS YEAR, THEN NO LOSS INCURRED IN ANY YEAR PRIOR TO THE PREVIOUS YEAR SHALL BE CARRIE D FORWARD AND SET OFF AGAINST THE INCOME OF THE PREVIOUS YEAR UNLESS ON THE LAST DAY OF THAT PREVIOUS YEAR AND ON THE LAST DAY OF THE PREVIOUS YEAR IN WHICH THE LOSS WAS INCURRED, THE SHARES OF THE COMPANY CARRYING NOT LESS THAN 51% OF THE VOTING POWER WER E BENEFICIARY HELD BY THE SAME PERSONS. THIS PROVISION SHALL NOT APPLY TO A CHANGE IN THE VOTING POWER CONSEQUENT UPON: (A) THE DEATH OF A SHAREHOLDER, OR (B) ON ACCOUNT OF TRANSFER OF SHARES BY WAY OF GIFTS TO ANY RELATIVE OF THE SHAREHOLDER MAKING SUCH GIFT, (C) ANY CHANGE IN THE SHAREHOLDING OF AN INDIAN COMPANY WHICH IS SUBSIDIARY OF A FOREIGN COMPANY ARISING AS A RESULT OF AMALGAMATION OR DEMERGER OF A FOREIGN COMPANY SUBJECT TO THE CONDITIONS THAT 51% OF THE SHAREHOLDERS OF THE AMALGAMATING OR DEMERGED FOREIGN COMPANY CONTINUE TO REMAIN THE SHAREHOLDERS OF THE AMALGAMATED OR THE RESULTING FOREIGN COMPANY. LET US GIVE AN ILLUSTRATION. X & Y TWO SHAREH OLDERS OF Z LTD., A CLOSELY HELD COMPANY. X HOLDS 55% SHARE CAPITAL. ON JANUARY 30, 2016, X TRANSFERS HIS SHARES TO A. Z LTD. WANTS TO SET OFF BROUGHT FORWARD LOSS OF RS. 8 ,00,000/ - (BUSINESS LOSS: RS. 2 ,00,000/ - ; UNADJUSTED DEPRECIATION: RS. 6 ,00,000/ - ) OF T HE PREVIOUS YEAR 2014 - 15 AGAINST THE INCOME OF THE PREVIOUS YEAR 2015 - 16) (I.E. RS. 18 ,00,000/ - ). CAN IT DO IT? M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 15 THE ANSWER : Z LTD. IS A CLOSELY - HELD COMPANY IN WHICH SHAREHOLDERS HAVING 51% VOTING RIGHT ON MARCH 31, 2015 AND MARCH 31, 2016 ARE NOT THE SAM E. CONSEQUENTLY, SECTION 79 IS APPLICABLE. UNADJUSTED DEPRECIATION CAN BE SET OFF BUT NOT BROUGHT FORWARD LOSS. INCOME OF THE PREVIOUS YEAR 2015 - 16 WILL BE RS. 12 ,00,000/ - (I.E. RS. 18 ,00,000/ - MINUS RS. 6 ,00,000/ - ). IN THE INSTANT CASE, THE ASSESSEE HAS RAISED IN THE 9 TH GROUND OF APPEAL THAT THE AO ERRED IN HOLDING THAT THERE WAS A CHANGE IN THE SHAREHOLDING PATTERN OF THE COMPANY DURING THE YEAR UNDER CONSIDERATION. IN THE ORDER DATED 31.10.2012, THE LD. CIT(A) HAS MENTIONED AT PAGE 9 THAT THE CHANGE IN THE SHAREHOLDING TOOK PLACE FROM 19.01.2001 I.E. W.E.F. AY 2001 - 02. HOWEVER, THE BASIC FACTS PERTAINING TO APPLICABILITY OF SECTION 79 OR OTHERWISE ARE NOT AVAILABLE IN THE ORDER PASSED BY THE AO AS WELL AS THE LD. CIT(A). THEREFORE, WE SET ASIDE THE OR DER OF THE LD. CIT(A) AND RESTORE THE ABOVE MATTER TO THE FILE OF THE AO TO MAKE AN ORDER AFRESH IN THE LIGHT OF THE DISCUSSION HEREINABOVE , AFTER GIVING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE DIRECT THE ASSESSEE TO FILE THE RELEVANT DOC UMENTS/EVIDENCE BEFORE THE AO. THUS THE APPEAL CONCERNING BUSINESS LOSS OF RS.180,194,316/ - PERTAINING TO AYS 1997 - 98 TO 2000 - 01 IS ALLOWED FOR STATISTICAL PURPOSES. 25.1 HOWEVER, UNABSORBED DEPRECIATION FROM AY 1997 - 98 TO AY 2000 - 01 AMOUNTING TO RS.61,952,412/ - IS NOT GOVERNED BY SECTION 72A AS WRONGLY HELD BY THE LD. CIT(A). IN THE CASE OF SHRI SUBHULAXMI MILLS LTD. M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 16 (SUPRA), IT IS HELD THAT SECTION 79 OF THE ACT, WHICH PR OVIDES THAT LOSS WILL NOT BE ALLOWED TO BE CARRIED FORWARD AND SET OFF IN CASE OF COMPANIES IN WHICH THE PUBLIC IS NOT SUBSTANTIALLY INTERESTED, IF CHANGE IN 51% OF THE VOTING POWER HAS TAKEN PLACE, DOES NOT APPLY TO UNABSORBED DEPRECIATION AND UNABSORBED DEVELOPMENT REBATE. IT IS TO BE NOTED THAT CARRY FORWARD AND SET OFF OF UNABSORBED DEPRECIATION IS GOVERNED BY SECTION 32 AND NOT SECTION 79. SECTION 32 DOES NOT CONTAIN ANY RESTRICTION REGARDING SHAREHOLDING. THE AO IS DIRECTED TO CARRY FORWARD THE UNABSO RBED DEPRECIATION FROM AY 1997 - 98 TO AY 2000 - 01 AMOUNTING TO RS.61,952,412/ - . 26. THE 12 TH GROUND OF APPEAL THE LD. CIT(A) ERRED IN NOT DIRECTING THE ASSESSING OFFICER TO CARRY FORWARD THE FOLLOWING LOSSES: ASSESSMENT YEAR BUSINESS LOSS UNABSORBED DEPRECIATION TOTAL 2001 - 02 (1,69,66,636) (19,18,58,906) ( 10,88,25,542) 2002 - 03 (15,62,50,646) (1,34,15,901) (16,96,66,547) TOTAL (17,32,17,282) ( 10,52,74,807 ) (27,84,92,089) 27. THE LD. COUNSEL SUBMITS THAT AS FAR AS THE ABOVE GROUND IS CONCERNED, THERE IS NO BAR IN THE ACT TO CARRY FORWARD AND SET OFF OF THE RELEVANT LOSSES BOTH AS REGARDS BUSINESS LOSSES, AS WELL AS UNABSORBED DEPRECIATION, BECAUSE THE LOSSES ARI SE AFTER CHANGE IN SHAREHOLDING. IT IS STATED BY HIM THAT THE CIT(A) APPEAR S TO HAVE GIVEN AN INITIAL FINDING IN FAVOUR OF THE ASSESSEE FROM THE 5 TH LINE OF PARA 8.2 TILL THE 10 TH LINE. HOWEVER, HE CONTINUES LATER WE DISCUSS THE DECISION IN SUBHULAXMI MILLS M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 17 LTD. (SUPRA), WHICH HAS RELEVANCE ONLY FOR GROUNDS NO. 9 TO 11 AND HAS NO RELEVANCE FOR GROUND NO. 12. FINALLY, THE LD. COUNSEL SUBMITS THAT THERE SHOULD BE AN UNAMBIGUOUS DIRECTION TO THE AO TO CARRY FORWARD BUSINESS LOSS AND UNABSORBED DEPRECIATION RELATING TO AYS 2001 - 02 AND 2002 - 03, AS FINALLY DETERMINED, AFTER GIVING EFFE CT TO APPELLATE ORDERS. 28. ON THE OTHER HAND, THE LD. DR SUBMITS THAT THE LD. CIT(A) HAS RIGHTLY PARTLY ALLOWED THE APPEAL OF THE ASSESSEE WITH AFORESAID DIRECTIONS. 29. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. A S MENTIONED EARLIER, CARRY FORWARD AND SET OFF OF UNABSORBED DEPRECIATION IS GOVERNED BY SECTION 32 AND NOT SECTION 79. SECTION 32 DOES NOT CONTAIN ANY RESTRICTION REGARDING SHAREHOLDING. WE DIRECT THE AO TO CARRY FORWARD THE BUSINESS LOSS OF AY 2001 - 02 AN D AY 2002 - 03 AMOUN TING TO RS.173,217,282/ - ; UNABSORBED DEPRECIATION OF AY 2001 - 02 AND AY 2002 - 03 AMOUNTING TO RS.105,274,807/ - AS PER PROVISIONS OF SECTION 79 OF THE ACT. 30. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COUR T ON 13/02/2019. SD/ - SD/ - (PAWAN SINGH) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED: 13/02/2019 RAHUL SHARMA, SR. P.S. COPY OF THE ORDER FORWARDED TO : M/S ASSOCIATED BREWERIES ITA NO. 625/MUM/2013 18 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// ( SR. PRIVATE SECRETARY ) ITAT, MUMBAI