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'REPORTABLE' IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 3893 OF 2006

M/s. MCDOWELL & COMPANY LTD.                 ... Appellant VERSUS

COMMISSIONER OF INCOME-TAX,  KARNATAKA CENTRAL, BANGALORE      ... Respondent

J U D G M E N T A. K. SIKRI, J.

This  appeal  is  preferred  against  judgment  dated 05.04.2005 of the High Court of Karnataka whereby the appeal of Commissioner of Income Tax (Revenue) was allowed setting aside the order to the Income Tax Appellate Tribunal(ITAT) which had granted the benefit of provisions of Section 72A of the Income Tax Act, 1961 (hereinafter referred to as 'Act') to the appellant-assessee and, at the same time, held that waiver of interest by financial institutions would not be treated as income of the appellant-assessee under Section 41(1) of the Act.   

Brief  summary  of  the  facts  which  have  led  to  the present appeal may be taken note of at this stage.   

There was a company known as M/s. Hindustan Polymers Limited (HPL) which had become a sick industrial company. Proceedings  in  respect  of  the  said  company  were  pending before the Board for Industrial and Financial Reconstruction (BIFR) under Sick Industrial Companies Act (SICA).  At that

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stage, petitions under Section 391 and 392 of the Companies Act, 1956, were filed in the High Court of Bombay and Madras for amalgamation of  HPL with the assessee-appellant herein i.e.,  M/s.  McDowell  and  Company  Limited.   Both  the  High Courts approved the scheme of amalgamation as a result of which,  w.e.f.  01.04.1977,  HPL  stood  amalgamated  with  the assessee/appellant-company.   

As  mentioned  above,  HPL,  which  was  an  industrial undertaking, had become a sick company and it owed a lot of money to banks and financial institutions.  In its books of accounts, the interest which had accrued on the loans given by such financial companies were shown as the money payable on account of interest to the said banking companies and was reflected as expenditure on that count.  As  the interest payable was treated as expenditure, benefit thereof was taken in the assessment orders made.  The assessee had approached the Central Government, before moving the High Court, with the scheme of amalgamation for getting benefits of Section 72A of the Act.  This section makes provisions relating to carry forward and set off accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation  or demerger etc.  Under certain circumstances and on fulfillment of conditions laid down therein, the company which takes over the  sick  company  is  allowed  to  set  off  losses  of  the amalgamated company as its own loses.  The Central Government had made a declaration to this effect under Section 72A of

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the Act granting the benefit of the said provision to the assessee.  

Under the scheme of amalgamation that was approved by the High Court, after following the procedure in terms of Sections 391 and 392 of the Companies Act, which includes the consent of the secured creditors as well, the banks which had advanced loans to HPL agreed to waive off the interest which had accrued prior to 01.04.1977.  As already stated above, this  interest  was  claimed  as  expenditure  by  HPL  in  its returns.  On the waiver of this interest, it became income in terms of Section 41(1) of the Act.  In the return filed by the assessee for the Assessment Year 1983-1984, the assessee claimed set off of the accumulated loses which it had taken over  from  HPL  by  virtue  of  the  provisions  contained  in section 72A of the Act.  This was allowed.  However, later on, it came to the notice of the Assessing Officer that while allowing the aforesaid benefit to the assessee, the income which had accrued under section 41(1) of the Act had not been set off against the accumulated loses.  It so happened that on  certain  grounds,  the  assessment  was  reopened  by  the Assessing  Officer  and  while  undertaking  the  exercise  of reassessment, the Assessing Officer also noticed that the aforesaid fact, viz., the income which had accrued within section 41(1) of the Act as mentioned above, was not set off while  giving  benefit  of  accumulated  losses  under  Section 72(A) of the Act to the assessee.  The Assessing Officer,

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therefore, treated the aforesaid income at the hands of the assessee herein and adjusted the same from the accumulated loses.  The assessment order was drawn accordingly.  This reassessment was challenged by the assessee by filing appeal before the Commissioner of Income Tax (Appeals), which was dismissed.  However, in further appeal before the ITAT, the assessee  succeeded  inasmuch  as  the  ITAT  held  that  the aforesaid income under Section 41(1) of the Act was not at the hands of the assessee herein but it may be treated as income of the HPL and since HPL was a different assessee and a different entity, the assessee herein was not liable to pay any taxes on the said income.  Feeling aggrieved thereby, the Revenue sought reference under Section 256 of the Act and ultimately, the reference was made on the following questions of law:  

“Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding that the over due interest waived by the financial institutions  amounting  to  Rs.25.02  lakhs  is  not assessable in the hands of the assessee?”

This question of law has been decided in favour of Revenue by the impugned judgment.

It  is  argued  by  Mr.  Jaideep  Gupta,  learned  senior counsel appearing for the assessee-appellant, that the High Court has not appreciated the provisions of the Act, viz., Section 72A or Section 41(1) in their proper perspective and has also committed error in not properly understanding the

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ratio of the judgment of this Court in 'Saraswati Industrial Syndicate v. CIT' [ (1990) Supp. SCC 675 ] thereby committing serious error in answering the said question.  It was argued that the benefit of section 72A of the Act was given as the assessee fulfilled all the conditions stipulated therein and the Central Government while giving declaration was satisfied that the eligibility conditions for taking advantage of carry forward and set off of accumulated loses of the HPL were fulfilled.  He, thus, submitted that insofar as the benefit of carry forward of accumulated loses of HPL and seeking set off thereof is concerned, it was the statutory right of the appellant-assessee which became available to it by virtue of the declaration given by the Central Government under the aforesaid provisions.   

On the other hand, submitted the learned counsel, that insofar as Section 41(1) is concerned, language thereof makes it abundantly clear that the income has to be treated at the hands of “first mentioned person” which is HPL in the instant case.   This HPL was a distinct entity in law and was also a different assessee.  Therefore, any such income earned by the HPL could not have been treated as income of the assessee herein.  Mr. Gupta submitted that this is, in fact, the ratio of  the  judgment  of  this  Court  in  'Saraswati  Industrial Syndicate'  (supra)  wherein  section  41(1)  of  the  Act  is interpreted in the following manner:  

“Section 41(1) has been enacted for charging tax on

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profits made by an assessee, but it applies to the assessee to whom the trading liability may have been allowed in the previous year.  If the assessee to whom the  trading  liability  may  have  been  allowed  as  a business expenditure in the previous year ceases to be in existence or if the assessee is changed on account of  the  death  of  the  earlier  assessees  the  income received in the year subsequent to the previous year or the accounting year cannot be treated as income received by the assessee.  In order to attract the provisions  of  Section  41(1)  for  enforcing  the  tax liability,  the  identity  of  the  assessee  in  the previous  year  and  the  subsequent  year  must  be  the same.  If there is any change in the identity of the assessee there would be no tax liability under the provisions  of  Section  41.   In  CIT  v.  Hukumchand Mohanlal this Court held that the Act did not contain any provision making a successor in a business or the legal  representatives  of  an  assessee  to  whom  the allowance may have been already granted liable to tax under Section 41(1) in respect of the amount remitted on  receipt  by  the  successor  or  by  the  legal representative.  In that case the wife of the assessee on the death of her husband succeeded to the business carried on by him.  Another firm which had recovered certain  amounts  towards  the  sales  tax  from  the assessee's husband succeeded in an appeal against its sales tax assessment and thereupon the firm refunded that amount to the assessee which was received during the relevant acounting period.  The question arose whether the amount so received by the assessee could be assessed in her hands as a deemed profit under Section  41(1)  of  the  Act.   This  Court  held  that Section 41 did not apply because the assessee sought to be taxed was not the assessee as contemplated by Section 41(1) as the husband of the assessee had died, therefore the revenue could not take advantage of the provisions of Section 41(1) of the Act.  

He also drew attention of this Court to the discussion contained in paragraph 6 of the said judgment in support of his submission that since HPL was a different assessee, this income could not be held to be the income of the amalgamated company,  i.e.,  the  assessee  herein,  for  the  purposes  of

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Section 41(1) of the Act which aspect is explained by this Court in the following manner:  

“In the instant case the Tribunal rightly held that the appellant company was a separate entity and a different assessee, therefore, the allowance made to Indian Sugar Company, which was a different assessee, could not be held to be the income of the amalgamated company for purposes of Section 41(1) of the Act. The  High  Court  was  in  error  in  holding  that  even after amalgamation of two companies, the transferor company  did  not  become  non-existent  instead  it continued  its  entity  in  a  blended  form  with  the appellant company.  The High Court's view that on amalgamation  there  is  no  complete  destruction  of corporate  personality  of  the  transferor  company instead  there  is  a  blending  of  the  corporate personality of one with another corporate body and it continues as such with the other is not sustainable in  law.   The  true  effect  and  character  of  the amalgamation  largely  depends  on  the  terms  of  the scheme of merger.  But there cannot be any doubt that when two companies amalgamate and merge into one the transferor company loses its entity as it ceases to have its business.  However, their respective rights or  liabilities  are  determined  under  the  scheme  of amalgamation  but  the  corporate  entity  of  the transferor company ceases to exist with effect from the date the amalgamation is made effective.”

The aforesaid arguments appear to be attractive in the first blush, but a little deeper scrutiny thereof in the light of the situation prevailing in the instant case would reflect that these arguments need to be rejected.  In fact, same arguments were advanced before the High Court as well which did not find merit therein.  The High Court took note of  the  fact  that  the  assessee  had  taken  over  the  sick company-HPL through the scheme of amalgamation sanctioned in 1982 w.e.f. 01.04.1977 and that the HPL ceased to have any identity as it did not remain a ‘person’ either in fact or in

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law after amalgamation.  However, rights are determined in terms of the scheme of amalgamation and since the benefit of interest had accrued after the company had ceased to exist, it was, in fact, availed of by the assessee company.  What is more important is that the assessee company was allowed to set off the amalgamated losses of the company amalgamated with it, i.e., HPL.  This was the benefit which accrued to the assessee under the provisions of section 72A of the Act. When the assessee is allowed the benefit of the accumulated loses, while computing those loses, the income which accrued to it had to be adjusted and only thereafter net losses could have been allowed to be set off by the assessee company. Calculations  to  this  effect  are  given  by  the  Assessing Officer in his assessment order and there is no dispute about the same.  Judgment of this Court in  Saraswathi Industrial Syndicate Ltd. (supra) deals with the provisions of Section 41(1) of the Act per se.  Section 72A of the Act was not the subject  matter  of  the  said  decision.   Therefore,  the principle laid down in the said case may not be applicable in the instant case inasmuch as the position would be totally different in those cases where the income has accrued to an amalgamated  company  under  Section  41(1)  of  the  Act  and, obviously, that cannot be treated as income at the hands of the company which has taken over the amalgamated company. However, in the instant case, the assessee was given the benefit of accumulated loses of the amalgamated company.  The

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effect thereof is that thought these loses were suffered by the amalgamated company they were deemed to be treated as loses of the assessee company by virtue of Section 72A of the Act.   In  a  case  like  this,  it  cannot  be  said  that  the assessee  would  be  entitled  to  take  advantage  of  the accumulated  loses  but  while  calculating  these  accumulated loses at the hands of amalgamated company, i.e., HPL, the income accrued under section 41(1) of the Act at the hands of HPL would not be accounted for.  That had to be necessarily adjusted in order to see what are the  actual accumulated loses, the benefit whereof is to be extended to the assessee. We,  thus,  agree  with  the  High  Court  in  its  analysis  of Section 41(1) along with Section 72A of the Act, which is to the following effect:

“10. Though the ITO proposed to treat the waiver of interest portion as revenue receipt in the hands of assessee's company under Section 41(1) of the Act, the same is to be read with Section 72A of the Act. The  Finance  Minister  in  his  Budget  speech  while introducing Section 72A of the Act stated that the sickness among industrial undertaking was regarded as a matter of grave national concern inasmuch as closure of any sizable manufacturing unit industry entailed social costs in terms of production loss and unemployment as also waste of valuable capital assets, and experience had shown that taking over of such  sick  units  by  Governments  was  not  always  a satisfactory  or  economical  solution;  it  was  felt that a more effective method would be to facilitate amalgamation  of  sick  industrial  units  with  sound ones  by  providing  incentives  and  removing impediments in the way of such amalgamation which would  not  merely  relieve  the  Government  of un-economical burden of taking over and running sick units but save the Government from social costs in terms of loss of production and unemployment.  With such objection in view, in order to facilitate the

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merger of sick industrial units with sound ones and as  and  by  way  of  offering  an  incentive  in  that behalf section 72A was introduced, whereunder, by a deeming fiction, the accumulated loss or unabsorbed depreciation of the amalgamating company is treated to be a loss or, as the case may be.  The Revenue before the first appellate authority emphasized the application of section 72A of the Act, to the facts of the case.  The first appellate authority and also the Tribunal failed to consider the scope and object of  section  72A  of  the  Act.   Thus,  the  Tribunal committed  an  error  in  treating  the  waiver  of interest as not income of the assessee.”

We, thus, find that this appeal is without any merit and is, accordingly, dismissed.   

........................, J. [ A.K. SIKRI ]

........................, J. [ ASHOK BHUSHAN ]

New Delhi; March 09, 2017.

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