The Tax Publishers2020 TaxPub(DT) 1029 (Del-Trib) : (2020) 079 ITR (Trib) 0060

INCOME TAX ACT, 1961

Section 35DD

Under section 35DD it is the parent entity, who initiates demerger of the undertaking(s) and incur legal and professional expenses in relation to demerger and not the assessee to whom units of NIIT Ltd. merged and rest with assessee.

Business deduction under section 35DD - Demerger expenses - Expenses of undertaking vested with assessee and not demerger from assessee -

M/s. NIIT Ltd. was demerged pursuant to a scheme of demerger approved by the High Court of Delhi with effect from 1-4-2003. As a result of that demerger, the units of 'NIIT Ltd.' not eligible for deduction under section 10B were vested with the assessee. Assessee had incurred expenditure on legal and professional expense in assessment year 2004-05 for pursuing the aforesaid scheme of demerger of 'NIIT Ltd.' and claimed deduction of 1/5th of the aforesaid expenditure, amounting to for first-time in assessment year 2004-05 and subsequently 1/5th each in assessment years 2005-06; 2006-07; 2007-08 and 2008-09. According to the AO, in view of the provisions of section 35DD, the deduction of Rs. 44,00,739 for demerger expenses was to be allowed in the hands of the original company and not in the company resulted out of demerger. Accordingly, he disallowed the claim of assesse of deduction under section 35DD. The CIT(A) also sustained the disallowance. He held that in view of the clear provisions of section 35DD, the expenses claimed by the assessee are not allowable as the undertaking are not demerged from the assessee company but only vested with it.Held: Since demerger of the undertaking(s) in the instant case had taken place from the parent company M/s NIIT Ltd, the word “assessee” here refers to M/s NIIT Ltd. and not the target company M/s NIIT Technologies Ltd., i.e., the assessee, with whom the undertakings of M/s NIIT Ltd. got merged. Language of the section is clear and there is no ambiguity, as who is entitled to claim the said deduction. In case of demerger, where the undertaking(s) which get demerged, may result in new entity and in said circumstances, the resultant company cannot incur expenditure before its birth. It is the parent entity, who initiates demerger of the undertaking(s) and incur expenditure for legal and professional expenses in relation to such demerger. The resultant company, come into existence as a result of demerger only, the word “assessee” in section 35DD cannot mean to include the resultant company.

Relied:Distributors (Baroda) (P) ltd. v. UOI & Ors. 155 ITR 120 (SC). Distinguished:CIT v. Bombay Dyeing & Manufacturing Co. Ltd. 219 ITR 521 (SC).

REFERRED : CIT v. Rajasthan Be4eweries Ltd. [ITA No. 889/2009].

FAVOUR : Against the assessee.

A.Y. : 2007-08 & 2008-09


INCOME TAX ACT, 1961

Section 14A Rule 8D

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