Section 72A(3)

Section 72A(3) — the law in short

What the courts have decided on section 72A(3), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• 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.47A: the four withdrawals of exemption, the year each is charged and in whose hands, and the amalgamation and demerger clauses it does not touch CBDT Circulars & InstructionsCuts both ways
  Our amalgamation stopped satisfying a condition after the event. Can the department invoke section 47A to take back the section 47(vi) exemption, and if it can, in which year and on whom?
  Section 47A does not reach the amalgamation and demerger clauses at all. It withdraws the exemption in exactly four situations: sub-section (1), where a capital asset transferred under s.47(iv) or (v) — the holding company to wholly-owned subsidiary transfers — is converted into or treated as stock-in-trade, or the whole of the share capital ceases to be held, within eight years; sub-section (2), where shares allotted on a s.47(xi) conversion of a stock exchange membership are transferred within three years; sub-section (3), where a condition in the proviso to s.47(xiii) or (xiv) is broken; and sub-section (4), where a condition in the proviso to s.47(xiiib) is broken. Clauses (vi), (via), (vib), (vic), (vicc), (vid) and (vii) — the amalgamation and demerger exemptions — appear nowhere in section 47A.
• 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.