HC: Partial Asset Transfer Not a Demerger, Carry Forward of Losses Allowed

HC: Partial Asset Transfer Not a Demerger, Carry Forward of Losses Allowed

The Revenue challenged an ITAT order allowing the assessee company to carry forward business losses and unabsorbed depreciation despite a restructuring scheme sanctioned by the Company Court. The AO had reopened the assessment

under Section 147, holding that the scheme amounted to a demerger as defined in Section 2(19AA) of the IT Act, triggering Section 72A(4), thereby disentitling NOCIL from set-off of losses.

Tribunal’s Decision: Both the CIT(A) and ITAT rejected the AO’s view, holding that the transfer was not a “demerger” under the Income Tax Act as it involved partial transfer of assets and liabilities, and consideration was paid in cash, not by issuance of shares to shareholders of the demerged company.

Issue Raised: Whether NOCIL could carry forward the business loss and unabsorbed depreciation even though a partial asset transfer under a restructuring plan did not meet the requirements of a “demerger” under Section 2(19AA), thereby avoiding the application of Section 72A(4).

Decision of HC: The High Court upheld these findings, observing that under Section 2(19AA), a valid demerger requires full transfer of all assets and liabilities of an undertaking and share-based consideration by the resulting company. As both conditions were not met in the case of transfer to Relene Petrochemicals Pvt. Ltd. and NOCIL Petrochemicals Ltd., Section 72A(4) was held inapplicable.

The Court dismissed the Revenue’s appeal, confirming that the transfer did not qualify as a “demerger” under the IT Act and that NOCIL was entitled to carry forward the business losses and unabsorbed depreciation.

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