'REPORTABLE' IN 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 JUDGMENT A. K. SIKRI, J. This appeal is preferred against judgment dated 05.04.2005 of High Court of Karnataka whereby appeal of Commissioner of Income Tax (Revenue) was allowed setting aside order to Income Tax Appellate Tribunal(ITAT) which had granted benefit of provisions of Section 72A of Income Tax Act, 1961 (hereinafter referred to as 'Act') to appellant-assessee and, at same time, held that waiver of interest by financial institutions would not be treated as income of appellant-assessee under Section 41(1) of Act. Brief summary of facts which have led to present appeal may be taken note of at this stage. There was company known as M/s. Hindustan Polymers Limited (HPL) which had become sick industrial company. Proceedings in respect of said company were pending before Board for Industrial and Financial Reconstruction (BIFR) under Sick Industrial Companies Act (SICA). At that 1 Page 1 C.A. No. 3893/ 2006 stage, petitions under Section 391 and 392 of Companies Act, 1956, were filed in High Court of Bombay and Madras for amalgamation of HPL with assessee-appellant herein i.e., M/s. McDowell and Company Limited. Both High Courts approved scheme of amalgamation as result of which, w.e.f. 01.04.1977, HPL stood amalgamated with assessee/appellant-company. As mentioned above, HPL, which was industrial undertaking, had become sick company and it owed lot of money to banks and financial institutions. In its books of accounts, interest which had accrued on loans given by such financial companies were shown as money payable on account of interest to said banking companies and was reflected as expenditure on that count. As interest payable was treated as expenditure, benefit thereof was taken in assessment orders made. assessee had approached Central Government, before moving High Court, with scheme of amalgamation for getting benefits of Section 72A of 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, company which takes over sick company is allowed to set off losses of amalgamated company as its own loses. Central Government had made declaration to this effect under Section 72A of 2 Page 2 C.A. No. 3893/ 2006 Act granting benefit of said provision to assessee. Under scheme of amalgamation that was approved by High Court, after following procedure in terms of Sections 391 and 392 of Companies Act, which includes consent of secured creditors as well, banks which had advanced loans to HPL agreed to waive off 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 waiver of this interest, it became income in terms of Section 41(1) of Act. In return filed by assessee for Assessment Year 1983-1984, assessee claimed set off of accumulated loses which it had taken over from HPL by virtue of provisions contained in section 72A of Act. This was allowed. However, later on, it came to notice of Assessing Officer that while allowing aforesaid benefit to assessee, income which had accrued under section 41(1) of Act had not been set off against accumulated loses. It so happened that on certain grounds, assessment was reopened by Assessing Officer and while undertaking exercise of reassessment, Assessing Officer also noticed that aforesaid fact, viz., income which had accrued within section 41(1) of Act as mentioned above, was not set off while giving benefit of accumulated losses under Section 72(A) of Act to assessee. Assessing Officer, 3 Page 3 C.A. No. 3893/ 2006 therefore, treated aforesaid income at hands of assessee herein and adjusted same from accumulated loses. assessment order was drawn accordingly. This reassessment was challenged by assessee by filing appeal before Commissioner of Income Tax (Appeals), which was dismissed. However, in further appeal before ITAT, assessee succeeded inasmuch as ITAT held that aforesaid income under Section 41(1) of Act was not at hands of assessee herein but it may be treated as income of HPL and since HPL was different assessee and different entity, assessee herein was not liable to pay any taxes on said income. Feeling aggrieved thereby, Revenue sought reference under Section 256 of Act and ultimately, reference was made on following questions of law: Whether on facts and in circumstances of case, Tribunal was justified in law in upholding that over due interest waived by financial institutions amounting to Rs.25.02 lakhs is not assessable in hands of assessee? This question of law has been decided in favour of Revenue by impugned judgment. It is argued by Mr. Jaideep Gupta, learned senior counsel appearing for assessee-appellant, that High Court has not appreciated provisions of Act, viz., Section 72A or Section 41(1) in their proper perspective and has also committed error in not properly understanding 4 Page 4 C.A. No. 3893/ 2006 ratio of judgment of this Court in 'Saraswati Industrial Syndicate v. CIT' [ (1990) Supp. SCC 675 ] thereby committing serious error in answering said question. It was argued that benefit of section 72A of Act was given as assessee fulfilled all conditions stipulated therein and Central Government while giving declaration was satisfied that eligibility conditions for taking advantage of carry forward and set off of accumulated loses of HPL were fulfilled. He, thus, submitted that insofar as benefit of carry forward of accumulated loses of HPL and seeking set off thereof is concerned, it was statutory right of appellant-assessee which became available to it by virtue of declaration given by Central Government under aforesaid provisions. On other hand, submitted learned counsel, that insofar as Section 41(1) is concerned, language thereof makes it abundantly clear that income has to be treated at hands of first mentioned person which is HPL in instant case. This HPL was distinct entity in law and was also different assessee. Therefore, any such income earned by HPL could not have been treated as income of assessee herein. Mr. Gupta submitted that this is, in fact, ratio of judgment of this Court in 'Saraswati Industrial Syndicate' (supra) wherein section 41(1) of Act is interpreted in following manner: Section 41(1) has been enacted for charging tax on 5 Page 5 C.A. No. 3893/ 2006 profits made by assessee, but it applies to assessee to whom trading liability may have been allowed in previous year. If assessee to whom trading liability may have been allowed as business expenditure in previous year ceases to be in existence or if assessee is changed on account of death of earlier assessees income received in year subsequent to previous year or accounting year cannot be treated as income received by assessee. In order to attract provisions of Section 41(1) for enforcing tax liability, identity of assessee in previous year and subsequent year must be same. If there is any change in identity of assessee there would be no tax liability under provisions of Section 41. In CIT v. Hukumchand Mohanlal this Court held that Act did not contain any provision making successor in business or legal representatives of assessee to whom allowance may have been already granted liable to tax under Section 41(1) in respect of amount remitted on receipt by successor or by legal representative. In that case wife of assessee on death of her husband succeeded to business carried on by him. Another firm which had recovered certain amounts towards sales tax from assessee's husband succeeded in appeal against its sales tax assessment and thereupon firm refunded that amount to assessee which was received during relevant acounting period. question arose whether amount so received by assessee could be assessed in her hands as deemed profit under Section 41(1) of Act. This Court held that Section 41 did not apply because assessee sought to be taxed was not assessee as contemplated by Section 41(1) as husband of assessee had died, therefore revenue could not take advantage of provisions of Section 41(1) of Act. He also drew attention of this Court to discussion contained in paragraph 6 of said judgment in support of his submission that since HPL was different assessee, this income could not be held to be income of amalgamated company, i.e., assessee herein, for purposes of 6 Page 6 C.A. No. 3893/ 2006 Section 41(1) of Act which aspect is explained by this Court in following manner: In instant case Tribunal rightly held that appellant company was separate entity and different assessee, therefore, allowance made to Indian Sugar Company, which was different assessee, could not be held to be income of amalgamated company for purposes of Section 41(1) of Act. High Court was in error in holding that even after amalgamation of two companies, transferor company did not become non-existent instead it continued its entity in blended form with appellant company. High Court's view that on amalgamation there is no complete destruction of corporate personality of transferor company instead there is blending of corporate personality of one with another corporate body and it continues as such with other is not sustainable in law. true effect and character of amalgamation largely depends on terms of scheme of merger. But there cannot be any doubt that when two companies amalgamate and merge into one transferor company loses its entity as it ceases to have its business. However, their respective rights or liabilities are determined under scheme of amalgamation but corporate entity of transferor company ceases to exist with effect from date amalgamation is made effective. aforesaid arguments appear to be attractive in first blush, but little deeper scrutiny thereof in light of situation prevailing in instant case would reflect that these arguments need to be rejected. In fact, same arguments were advanced before High Court as well which did not find merit therein. High Court took note of fact that assessee had taken over sick company-HPL through scheme of amalgamation sanctioned in 1982 w.e.f. 01.04.1977 and that HPL ceased to have any identity as it did not remain person either in fact or in 7 Page 7 C.A. No. 3893/ 2006 law after amalgamation. However, rights are determined in terms of scheme of amalgamation and since benefit of interest had accrued after company had ceased to exist, it was, in fact, availed of by assessee company. What is more important is that assessee company was allowed to set off amalgamated losses of company amalgamated with it, i.e., HPL. This was benefit which accrued to assessee under provisions of section 72A of Act. When assessee is allowed benefit of accumulated loses, while computing those loses, income which accrued to it had to be adjusted and only thereafter net losses could have been allowed to be set off by assessee company. Calculations to this effect are given by Assessing Officer in his assessment order and there is no dispute about same. Judgment of this Court in Saraswathi Industrial Syndicate Ltd. (supra) deals with provisions of Section 41(1) of Act per se. Section 72A of Act was not subject matter of said decision. Therefore, principle laid down in said case may not be applicable in instant case inasmuch as position would be totally different in those cases where income has accrued to amalgamated company under Section 41(1) of Act and, obviously, that cannot be treated as income at hands of company which has taken over amalgamated company. However, in instant case, assessee was given benefit of accumulated loses of amalgamated company. 8 Page 8 C.A. No. 3893/ 2006 effect thereof is that thought these loses were suffered by amalgamated company they were deemed to be treated as loses of assessee company by virtue of Section 72A of Act. In case like this, it cannot be said that assessee would be entitled to take advantage of accumulated loses but while calculating these accumulated loses at hands of amalgamated company, i.e., HPL, income accrued under section 41(1) of Act at hands of HPL would not be accounted for. That had to be necessarily adjusted in order to see what are actual accumulated loses, benefit whereof is to be extended to assessee. We, thus, agree with High Court in its analysis of Section 41(1) along with Section 72A of Act, which is to following effect: 10. Though ITO proposed to treat waiver of interest portion as revenue receipt in hands of assessee's company under Section 41(1) of Act, same is to be read with Section 72A of Act. Finance Minister in his Budget speech while introducing Section 72A of Act stated that sickness among industrial undertaking was regarded as 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 satisfactory or economical solution; it was felt that more effective method would be to facilitate amalgamation of sick industrial units with sound ones by providing incentives and removing impediments in way of such amalgamation which would not merely relieve Government of un-economical burden of taking over and running sick units but save Government from social costs in terms of loss of production and unemployment. With such objection in view, in order to facilitate 9 Page 9 C.A. No. 3893/ 2006 merger of sick industrial units with sound ones and as and by way of offering incentive in that behalf section 72A was introduced, whereunder, by deeming fiction, accumulated loss or unabsorbed depreciation of amalgamating company is treated to be loss or, as case may be. Revenue before first appellate authority emphasized application of section 72A of Act, to facts of case. first appellate authority and also Tribunal failed to consider scope and object of section 72A of Act. Thus, Tribunal committed error in treating waiver of interest as not income of 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. 10 Page 10 M/s. McDowell & Company Ltd. v. Commissioner of Income-tax, Karnataka Central, Bangalore