HC Quashes Section 263 Revision on Demerger Misread as Amalgamation

Case Details: Commissioner of Income-tax vs. Eastman Exports Global Clothing Pvt Ltd. - [2025] 181 taxmann.com 772 (Madras)

Judiciary and Counsel Details

• Dr Anita Sumanth & Mummineni Sudheer Kumar, JJ.
• P.E.R. Mangala Suvigaran for the Appellant.
• T. Banusekar & R. Sivaraman for the Respondent.

Facts of the Case

The assessee received manufacturing undertakings of three companies pursuant to court-approved schemes of demerger and filed its return accordingly, which culminated in an assessment order allowing carry forward of accumulated business losses and unabsorbed depreciation.

The Commissioner invoked revisionary jurisdiction under section 263, taking the view that the arrangement was akin to an amalgamation and that the conditions prescribed under section 72A(2), particularly the requirement that the amalgamating companies had been in existence for at least 3 years, were not fulfilled.

On appeal, the Tribunal set aside the revisionary order. The matter reached before the Madras High Court.

High Court Held

The High Court held that the jurisdiction under section 263 can be exercised only when the assessment order is both erroneous and prejudicial to the interests of the revenue. In the present case, the foundational error committed by the Commissioner was mischaracterising a demerger as an amalgamation, despite the assessee having placed on record the Company Court’s orders clearly evidencing the nature of the transaction.

The Court observed that, while section 72A governs the carry-forward and set-off of accumulated losses and unabsorbed depreciation in cases of amalgamation and demerger, the three-year condition applies only under section 72A(2), which deals with amalgamation. In contrast, section 72A(4), applicable to demergers, does not impose any such condition. The assessee had specifically pointed out this distinction in its reply to the show-cause notice, and the same was even reflected in the Commissioner’s order, indicating due consideration of the explanation.

In the absence of any demonstrable error in the assessment order, the direction issued under section 263 amounted to nothing more than a roving and fishing enquiry, which is impermissible in law. Accordingly, the High Court held that the pre-conditions for invoking section 263 were not satisfied and answered the questions of law in favour of the assessee and against the revenue.

List of Cases Reviewed

• ITAT, Madras in IT Appeal No.1108/Mds/2012, dated 22-11-2012 (para 17) affirmed

List of Cases Referred to

• Malabar Industrial Co. Ltd. v. CIT [2000] 109 Taxman 66 (SC)/[2000] 243 ITR 83 (SC) (para 9).