M/S. MCDOWELL & COMPANY LTD.versusCOMMISSIONER OF INCOME-TAX, KARNATAKA CENTRAL, BANGALORE

                             [20 I 7] 2 S.C.R. 856



A                 MIS. MCDOWELL & COMPANY LTD.
                                      v.
    COMMISSIONER OF INCOME-TAX, KARNATAKA CENTRAL,
                      BANGALORE

B                      (Civil Appeal No. 3893 of2006)
                              MARCH 09, 2017
             [ A. K. SIKRI AND ASHOK BHUSHAN, JJ.J
           Income Tax Act, 1961 - s. 72A - Provisions relating to carry
    forward and set off of accumulated loss_. and unabsorbed
c   depreciation allowance in certain cases of amalgamation - Benefit
    of provisions of s. 72A - Grant of - Waiver of interest by financial
    institutions, if to be ·treated as income of assessee company, which
    took·over sick company through scheme of amalgamation - Tribunal
    granted benefit of provisions of s. 72A and also held that waiver of
D   interest by financial institutions would not be treated as income of
    assessee uls. 41(/) - Said order set aside by the High Cozirt - On
    appeal, held: Assessee took over the sick company-HPL and"HPL
    ceased to have any identity - Since the benefit of interest accrued
    after the company had ceased to exist and was in fact, availed of
    by assessee, the assessee company was allowed to· set off the
E
    amalgamated losses of the company amalgamated with it :.... When
    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 co111pany - It cannot be said that the
F   assessee would be entitled to take advalllage of the accumulated
    loses but while calculating these accumulated loses at the hands of
    amalgamated company, the inco111e accrued uls. 41 (/) at the hands
    of HPL would not be accounted for - Order passed by the High
    Court upheld.
G         Dismissing the appeal, the Court
          HELD: 1.1 Tl!e High Court took note of the fact that the
    assessee had taken over the sick company-HPL through the
    scheme of amalgamation and that the HPL ceased to have any
    identity as it did not remain a 'person' either in fact or in law after
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                                   856
   MIS. MCDOWELL & COMPANY LTD. v. COMMISSIONER OF                        857
                     INCOME-TAX

amalgamation. However, rights are determined in terms of the              A
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. The assessee company was
allowed to set off the amalgamated losses of the company
amalgamated with HPL. This was the benefit which accrued to
                                                                           B
the assessee under section 72A of the Income Tax 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 a:nd 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             c
there is no dispute about the same. [Para 10] [862-E-H]
      1.2 The assessee was given the benefit of accumulated loses
of the amalgamated company. The effect thereof is that though
these loses were suffered by the amalgamated company they were
deemed to be treated as lose~ of the assessee company by virtue            D
of Section 72A. 1t·caunot 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) at
the hands·of HPL would not be accounted for. That had to be
                                                                           E
necessarily adjusted in order to see what are the actual
accnmnlated loses, the benefit whereof is to be extended to the
assessee. Thus, the High Court's analysis of Section 41(1) along
with Section 72A, is concurred with. [Para 10] [863-B-D]
      Sara~wati Industrial Syndicate v. CIT (1990) Supp. SCC
      §75 : (1990] Suppl. SCR 332 - distinguished.                         F

                        Case Law Reference·
[1990] Suppl. SCR 332                distin~uished           Para 10
      CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3893
~~.                                                                        G
     From the Judgment and Order dated 05 .04.2005 of the High Court
ofKarnataka at Bangalore in l.T.R.C. No. 12 of2002.
      Jaideep Gupta, Sr. Adv., Kuna! Chatterji, Ms. Maitrayee Banerjee,
Advs. for the Appellant.
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858             SUPREME COURT REPORTS                         (2017) 2 S.C.R.


A           Y. P. Adhyaru, Sr. Adv., Rupesh Kumar, S. A. Haseeb, Mrs. Anil
      Katiyar, Advs. for the Respondent.
            The Judgment of the Court was delivered by
             A. K. SIKRI, J. I. This appeal is preferred against judgment
      dated 05.04.2005 of the High Court of Karnataka whereby the appeal
B     of Commissioner oflncome 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 ofinterest by financial institutions would not
c     be treated as income of the appellant-assessee under Section 41 (I) of
      the Act.
           2. Brief summary of the facts which have led to the present appeal
      may be taken note of at this stage.
             3. There was a company known as M/s. Hindustan Polymers
D     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 stage, petitions under Section 39 I and
      392 of the Companies Act, 1956, were filed in the High Court ofBombay
E     and Madras for amalgamation ofHPL 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/appellartt-
      company.
             4. As mentioned above, HPL, which was an industrial undertaking,
F
      had become a sick company and it owed a lot of money to banks and
      financial institutions, ln 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
G     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 72Aofthe 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
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  MIS. MCDOWELL & COMPANY LTD. v. COMMISSIONER OF                              859
             INCOME-TAX [A. K. SIKRI, J.]

  etc. Under certain circumstances and on fulfillment of conditions laid       A
. 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 tothis effect under Section
  72A of the Act granting the benefit of the said provision to the assessee.
        5.' Under the scheme of amalgamation tha.t was approved by the B
 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
                                                                           c
 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.whi_ch it had taken over from HPL by virtue of the
 provisions contained i11 section 72A of the Act. This was allowed.
 However, later ori, it came to the notice of the Assessing Officer that .D
 while allowing the aforesaid benefit to the assessee, the income which
 had accrued mid er 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 E
 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, 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 F
 was challenged by the assessee by filing appeal before the Commissioner
 of Income Tax (Appeals), which was dismissed. However, in further
 appeal before the !TAT, the assessee succeeded inasmuch as the ITAT
 held that the aforesaid income under Section 41 (I) 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 G
 assessee herein was not liable to pay any taxes on the said income.
 Feeling aggrieved thereby, the Revenue sought reference unde( Section
  256 of the Act and ultimately, the reference was made on the following
  questions oflaw:
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860            SUPREME COURT REPORTS                            [2017] 2 S.C.R.


A           "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?"
            6. This question oflaw has been decided in favour of Revenue by
B     the impugned judgment.                                  ·
              7. 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 (I)
      in their proper perspective and has also committed error in not properly
c     understanding the 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
D     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 ofHPL 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
E     Government under the aforesaid provisions.
             8. On the other hand, submitted the learned counsel, that insofar
      as Section 41 (I) 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 il1stant case. This HPL was a distinct
F     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 (I) has been enacted for charging tax on profits made
G
             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
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  MIS. MCDOWELL & COMPANY LTD. v. COMMISSIONER OF                              861
             INCOME-TAX [A. K. SIKRI, J.]

       assessees the income received in the year subsequent to the              A
       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
                                                                                B
       there would be no tax liability under the provisions of Section 41.
       In CIT 1i Hukumchand Mohan/al 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 (I)
       in respect of the amount remitted on receipt by the successor or         c
       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
                                                                                D
       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               E
       Section 41 (I) 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.
         9. He also drew attention of this Court to the discussion contained
· in paragraph 6 of the said judgment in support of his submission that         F
  since HPL was a different assessee, this income could not be held to be
  the income of the amalgamated company, Le., the assessee herein, for
  the purposes of 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       G
        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 (I) of the Act.
        The High Court was in error in holding that even after amalgamation
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862            SUPREME COURT REPORTS                            (2017] 2 S.C.R.


A           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
B
            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,
c           their respective rights or liabilities are determined under the scheme
            ofamalgamation but the corporate entity of the transferor company
            ceases to exist with effect from the date the amalgamation is
            made effective."
              I 0. The aforesaid arguments appear to be attractive in the first
D     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 l 982 w.e.f. 0 l .04.1977
E     and that the HPL ceased to have any identity as it did not remain a
      'person' either in fact or in law after amalgamation. However, rights
      are determined in tenns 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
F     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
G     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(!) of the Act per se. Section 72A of the Act was not the
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MIS. MCDOWELL & COMPANY LTD. v. COMMISSIONER OF                               863
           INCOME-TAX (A. K. SIKRI, J.]

subject matter of the said decision. Therefore, the principle laid· down in    A
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 (I) 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,
                                                                               B
in the instant case, the assessee was given the benefit of accumulated
loses of the amalgamated company. The effect thereof is·that though
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          c
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 fof: 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,
                                                                               D
 agree with. the High Court in its analysis of Section 41 (I} along with
 Section 72AoftheAct, which is to the following effect:
       "! 0. Though the ITO proposed to treat the waiver of interest
       portion as revenue receipt in the hands of assessee's company
       under Section 41 (I) of the Act, the same is to be read with Section
       72A of the Act. The Finance Minister in his Budget speech while         E
       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 tenns of production loss and
       unemployment as also waste of valuable capital assets,· and             F
       experience had shown that taking over of such sick units by
       Governments was not always a satisfactory or ec01\omical 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           G
       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 merger of sick industrial units with sound
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864                SUPREME COURT REPORTS                        [2017] 2 S.C.R.


A            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 72AoftheAct, to the facts of the case.
B
             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."
            11. We, thus, find that this appeal is withoutany merit and is,
c     accordingly, dismissed.


      Nidhi Jain                                                    Appeal dis111issed.