Section 72A(2)

Section 72A(2) — the law in short

What the courts have decided on section 72A(2), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• DCIT, Circle 7(1), Mumbai v. M/s. Piramal Enterprises Ltd. (ITAT Mumbai) — a scheme the High Court sanctioned cannot be attacked as a colourable device, but section 72A and Rule 9C still have to be satisfied ITATHelps taxpayerValidity unconfirmed
  The Assessing Officer says our merger was a device to buy the target's losses, even though the High Court sanctioned the scheme. How far does the sanction protect us, and what must we still prove?
  The Tribunal held that once the scheme of merger has been duly approved by the High Court, having in mind the larger public interest, it cannot be disturbed by the Revenue merely by alleging that the merger was done only to buy losses and was a colourable device — the more so where the Income Tax department, being part of the Union of India which is a party to the scheme petition, filed no objection before the High Court and preferred no appeal under section 391(7) of the Companies Act, 1956. But the Tribunal did not stop there. It went on expressly to address "the next crucial aspect" — whether the assessee had complied with section 72A read with Rule 9C, "which alone would enable it to get the benefit of set off of accumulated losses of amalgamating company in addition to the scheme of merger approved by the Hon'ble Bombay High Court" — and found on the facts that the conditions and the Rule 9C production and Form No. 62 requirements were satisfied.
• Embio Ltd v. ACIT 15(1)(2), Mumbai (ITAT Mumbai) — where production falls below fifty per cent of installed capacity, the Rule 9C relaxation is applied for and the withdrawal is confined to the correct year ITATHelps taxpayerValidity unconfirmed
  We got the section 72A set-off in year one, then production collapsed and we fell below fifty per cent of installed capacity. Can the Assessing Officer withdraw the set-off, and if so for which year?
  The Tribunal restored the issue to the Assessing Officer to be decided afresh following the coordinate bench decision in Bayer Material Science, and directed him in terms to consider the assessee's submission that withdrawal of the loss or depreciation, if any, can be only in the year under consideration. The order is therefore a remand on the merits, not a decision that the assessee wins; its value is that it fixes the framework — Rule 9C is to be applied on the Bayer construction, and the year in which the set-off is taken back is a question to be decided, not assumed. The order also records the machinery a taxpayer in this position should use: the assessee had applied to the Central Government under Rule 9C for an extension of the time for achieving the minimum fifty per cent production beyond the stipulated four years, on the ground of labour unrest.
• Bayer Material Science Pvt. Ltd. v. ACIT, Circle 10(3), Mumbai (ITAT Mumbai) — the three-fourths test is applied to each amalgamating company separately, and Rule 9C bites only at the end of four years ITATHelps taxpayerValidity unconfirmed
  The Assessing Officer has denied our section 72A set-off in the very first year after the merger because we have not yet reached fifty per cent of installed capacity and have not filed Form No. 62. Can he do that before the four years are up?
  No. The Tribunal held that Rule 9C(a) requires the fifty per cent production level to be achieved before the END of four years from the date of amalgamation, so it may be achieved in the first, second, third or fourth year, and the Assessing Officer of an earlier year is not required — and by implication not entitled — to examine that condition at that stage. The Form No. 62 certificate under Rule 9C(b) is due for the first time only for the assessment year relevant to the previous year in which the prescribed production level is achieved, so a demand for it before that is premature. Separately, the Tribunal held that the three-fourths of book value test in section 72A(2)(b)(i) is applied qua the particular amalgamating company whose loss is being claimed, and that where two companies amalgamate in the same year the disposals of the second company's assets cannot be aggregated with the first's.
• Statutory position — s.72A(1) and s.72A(7)(aa): which amalgamations carry accumulated loss and unabsorbed depreciation across, and the closed definition of "industrial undertaking" CBDT Circulars & InstructionsCuts both ways
  We amalgamated a loss-making service company into ours. The Assessing Officer says section 72A does not apply at all because there is no industrial undertaking. Is that right, and what does the section actually cover?
  Section 72A(1) does not apply to every amalgamation. It applies to an amalgamation of (a) a company owning an industrial undertaking or a ship or a hotel with another company, (b) a banking company within s.5(c) of the Banking Regulation Act, 1949 with a specified bank, (c) one or more public sector companies with one or more public sector companies, or (d) an erstwhile public sector company with one or more companies where the share purchase agreement entered into under strategic disinvestment restricted immediate amalgamation and the amalgamation is carried out within five years from the end of the previous year in which that restriction ends. "Industrial undertaking" is exhaustively defined in s.72A(7)(aa) as an undertaking engaged in the manufacture or processing of goods, the manufacture of computer software, the business of generation or distribution of electricity or any other form of power, the business of providing telecommunication services (basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services), mining, or the construction of ships, aircrafts or rail systems.
• Statutory position — s.72A(2), s.72A(3) and Rule 9C: the five conditions, the fifty per cent production test, the Form No. 62 certificate and the year the set-off is taken back CBDT Circulars & InstructionsCuts both ways
  We took over an amalgamating company's brought-forward losses. What exactly must we satisfy under section 72A(2) and Rule 9C, and if we fail, in which year does the department take the set-off back?
  Section 72A(2) imposes five conditions in two groups. The amalgamating company must (a)(i) have been engaged in the business in which the accumulated loss occurred or depreciation remains unabsorbed for three or more years, and (a)(ii) have held continuously, as on the date of the amalgamation, at least three-fourths of the book value of fixed assets held by it two years prior to that date. The amalgamated company must (b)(i) hold continuously for a minimum of five years from the date of amalgamation at least three-fourths of the book value of the fixed assets of the amalgamating company acquired in the scheme, (b)(ii) continue the business of the amalgamating company for a minimum of five years from that date, and (b)(iii) fulfil the conditions prescribed by Rule 9C — achieving at least fifty per cent of the installed capacity of the amalgamating company's industrial undertaking before the end of four years from the date of amalgamation and maintaining it to the end of five years, and furnishing to the Assessing Officer a certificate in Form No. 62 verified by an accountant. If any condition in sub-section (2) is not complied with, s.72A(3) deems the set-off or depreciation allowance already made in any previous year to be the income of the amalgamated company chargeable to tax for the year in which the condition is not complied with.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.