SARASWATI INDUSTRIAL SYNDICATE LTD.versusC.I.T., HARYANA, HIMACHAL PRADESH, DELHI

A           SARASWATI INDUSTRIAL SYNDICATE LTD.
                             v.
         C.I.T., HARYANA, HIMACHAL PRADESH, DELHI

                            SEPTEMBER 4, 1990
B
     [K.N ...SINGH, T.K. THOM\l!EN AND KULDIP SINGH, JJ.]

          Income Tax Act, 1961-Section 41( /)-Object and scope of.
         Income-Tax Act, 1961: Section 41-Application of-Condition
    -Identity of assessee in previous year and subsequent year to be
    same-Change in the assessee's identity-No tax liability.
c
         Income Tax Act, 1961-Section 41( 1) read with Sections 391 and
    394, Companies Act, 1956--Amalgamation of two Companies-Effect-
    of-Exemption from tax liability granted to the transferor company
    whether can be claimed by the transferee company.
D
          Under the scheme of amalgamation and order of the High Court
    under Sections 391 and 394 of the Companies Act, 1956 on 28.9.1962
    one Indian Sugar Company was amalgamated with the appellant-
    assessee company. The transferor company had been allowed expendi-
    ture to the extent of Rs.58, 734. The appellant transferee company
E   claimed exemption on the amount of Rs .58, 735 from income-tax for the
    assessment year of 1965-66 on the ground that the amalgamated trans-
    feree coml'any was not liable to pay tax under Section 41(1) of the
    Income-tax Act, as the expenditure had been allowed to the erstwhile
    transferor-company. The claim was disallowed by the Income Tax
    Officer. The transferee-appellant company's appeal was also rejected
F   by the Appellate Assistant Commissioner. The appellankompany pre-
    ferred appeal before the Income Tax Tribunal which was allowed on the
    ground that after amalgamation, the transferor company's identity was
    lost and it was no longer in existence and the transferee-company was a
    different entity.

G         When the question was referred to the High Court, it answered
    the reference in favour of the Revenue, holding that on amalgamation
    of the two companies, neither of them ceased to exist, instead both the
    companies continued their entities in a blended form and the amal-
    gamated company was a successor-in-interest of the amalgamating
    company.
H

                                      332
                         SARASWATI INDUSTRIAL v. C.!.T.                       333

         The Appellant Company's application under Section 291 of the
                                                                                     A
    Income-Tax Act read with Section 109, Code of Civil Proce<\ure was
    dismissed by the High Court.

          Hence the present appeal.

         Allowing the appeal of the assessee-Appellant company, this                 B
    Court,

          HELD: 1. Section 41(1) has been enacted for charging tax on
    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 busi-
    ness expenditure in the previous year ceases to be in existence or if the        c
    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 assessre. [146C-E)

          2. In order to attract the provisions of Section 41(1) for enforcing       D
    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. [146E)

          3. Two companies may join to form a new company, but there                 E
    may be absorption or blending of one by the other, both amount to
    amalgamation. When two companies are merged and are so joined, as
    to form a third company or one is absorbed into the other or blended
    with another, the amalgamating company loses its entity. [147G]

         4. After the amalgamation of two companies the transferor com-              F
    pany ceased to have any entity and the amalgamated company acquired
    a new status and it was not possible to treat the two companies as
    partners or jointly liable in respect of their liabilities and assets. [148E]

         5. The true effect and character of the amalgamation largely
    depends on the terms of the scheme of merger. But there can be no                G
    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 undet the
-   scheme of amalgamation but the corporate entity of the transferor com-
    pany ceases to exist with effect from the date the amalgamation is made
    effective. [148H; 149A-B]                                                        H
     334           SUPREME COURT REPORTS              [ 1990] Supp. 1 S.C.R.

          Commissioner of Income Tax, Madhya Pradesh v. Hukuinchand
A
    Molwnla/, 82 I.T.R. 624 (S.C.) and M/s. General Radio and Appliances
    Co. Ltd. & Ors. v. M.A. Khader (dead) by L.rs., [1986) 2 S.C.C. 656;
    followed.

          Halsbury's Laws of England, 4th Edition Vol. 7 Para 1539; refer-
B   red to.

             CIVIL APPELLATE JURISDICTION: Civil Appeal No. 91 of
     1976.

          From the Judgment and Order datedl5.4. 1975 of the Punjab and
     Haryana High Court in l.T. Reference No. 14of 1972.
c
             Bishamber Lal and Ms. Geetanjali Madan for the Appellant.

         Gauri Shanker, Manoj Arora, S. Rajappa arid Ms. A.
    Subhashini for the Respondent.
D
             The Judgment of the Court was deli-vered by

          SINGH, J. This appeal is directed against the judgment and order of
    the Punjab and Haryana High Court dated 15.4.1975 answering the Income
    Tax Reference made to it by the Income Tax Appellate Tribunal.
E

          Briefly, the facts giving rise to this appeal are that the appellant-
    Saraswati Industrial Syndicate is a limited company carrying on
    business of manufacturing and sale of sugar and machinery for sugar
    mills and other industries. Another company, namely, the Indian
F · Sugar and General Engineering Corporation (hereinafter referred to
    as 'the Indian Sugar Company') was also manufacturing machinery
    parts for sugar mills. On 28th September 1962 under the orders of the
    High Court the Indian Sugar Company was amalgamated with the
    appellant company. After the amalgamation, the Indian Sugar
    Company lost its identity, as it did not carry on any business. Prior
G to the amalgamation, the Indian Sugar Company had been allowed
    expenditure to the extent of Rs.58, 735 on accrual basis in its earlier
    assessment. The company hall shown the aforesaid amount as a trad-
    ing liability and the said trading liability was taken over by the
    appellant company. After amalgamation, the appellant company
    claimed exemption on the amount of Rs.58,735 from income tax for
H the assessment year 1965-66 on the ground that the amalgamated
                   SARASWATI INDUSTRIAL v. C.l.T. [SINGH, J.]             335

      company was not liable to pay tax under Section 41 ( 1) of the Income A
      Tax Act 1961 (hereinafter referred to as 'the Act') as the expenditure
      had been allowed to the erstwhile Indian Sugar Company which ras
      a different entity from the amalgamated company. The Income Tax
      Officer disallowed the appellant's claim for exemption. The assessee
      filed appeal before the Appellate Assistant Commissioner who con-
      firmed the order of the Income Tax Officer. The assessee, thereafter, B
      preferred appeal before the Income Tax Appellate Tribunal. The Tri-
      bunal allowed the appeal on the construction of Section 41(1) of the
      Act. The Tribunal held that after the amalgamation of the Indian
      Sugar Company with the assessee company the identity of the
      amalgamating company was lost and it was no longer in existence,
      therefore, the assessee company was a different entity not liable to tax
      on the aforesaid amount of Rs.58,735. On the Department's applica-         c
      tion the Tribunal referred the following question to the High Court:

                  "Whether on the facts and circumstances of the case the
                  Tribunal was justified in law in holding that the amount of
                  Rs.58,735 was not chargeable to tax under sub-section (1)      D
                  of Section 41 of the 'Income Tax Act 1961 for the assess-
                  ment year 1965-66?"

       The High Court answered the question in favour of the Revenue hold-
       ing that the exemption from tax liability claimed by the appellant-
       assessee was chargeable to tax under Section 41(1) of the Act. The        E
       High Court held that on the amalgamation of the two companies,
       neither of them ceased to exist instead both the amalgamating com-
       panies continued their entities in a blended form. It further held that
       the amalgamated company was a successor in interest of amalgamating
       company and since the assets of both the companies were merged and
       blended to constitute a new company the liabilities attaching thereto     F
       must, therefore be, on the amalgamated company. On these findings
       the High Court held that the amalgamated company, namely, the
       a~sessee was liable to pay tax on Rs.58, 735 which came into its hands
       from .the assets of the Indian Sugar Company. The assessee made
       application before the High Court under Section 261 of the Act read
       with Section 109 of the Code of Civil Procedure for certificate to        G
       appeal to this Court but the High Court dismissed the same. The
       appellant, thereupon, approached this Court by means of special leave
      ·petition under Article 136 of the Constitution. This Court granted
--£    leave. Hence this appeal.

            Section 41(1) of the Act reads as under:                             H
    336         SUPREME COURT REPORTS                I 1990] Supp. 1 S.C.R.

                "41 ( 1). Whether. an allowance or deduction has been made
A               in the assessment for any year in respect of loss, expendi-
                ture or trading liability incurred by the assessee, and subse-
                quently during any previous year the assessee has obtained.
                whether in cash or in any other manner whatsoever, any
                amount in respect of such loss or expenditure or some
B               benefit in respect of such trading liability by way of remis-
                sion or cessation thereof, the amount obtained by him or
                the value of benefit accruing to him, shall be deemed to be
                profits and gains of business or profession and accordingly
                chargeable to income tax as the income of that previous
                year, whether the business or profession in respect of which
                the allowance or deduction has been made is in existence in
c               that year or not."

    Section 41( I) has been enacted for charging tax on 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
D   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
E   of the assessce 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 Com-
    missioner of Income Tax, Madhya Pradesh v. Hukumchand Mohan/al,
    82 !TR 624 this Court held that the Act did not contain any provision
    making a successor in a business or the legal representative of an
F   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
G   appeal against its sales tax assessment and thereupon the firm
    refunded that amount to the assessee which was received during the
    relevant accounting 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 (I) of the Act. This Court held that Section
    4 1 did not apply because the assessee sought to be taxed was not the
H   assessee as contemplated by Section 41(1} as the husband of the asses-
                     SARASWATI INDUSTRIAL v. C.I.T. !SINGH, J.J              337

        see had died, therefore the Revenue could not take advantage of the
        provisions of Section 41 (1) of the Act.                                   A



              The question is whether on the amalgamation of the Indian
        Sugar Company with the appellant company, the Indian Sugar Com-
        pany continued to have its entity and w<.s alive for the purposes of B
        Section 41 (I) of the Act. The amalgamation of the two companies was
        effected under the order of the High Court in proceedings under Sec-
        tion 391 read with Section 394 of the ·Companies Act. The Saraswati
        Industrial Syndicate, the transferee company was a subsidiary of the
        Indian Sugar Company, namely, the transferor company. Under the
        scheme of amalgamation the Indian Sugar Company stood dissolved
        on 29th October, 1962 and it ceased to be in existence thereafter. C
        Though the scheme provided that the transferee company the
        Saraswati Industrial Syndicate Ltd. undertook to meet any liability of
        the Indian Sugar Company which that company incurred or it could
        incur, any liability, before the dissolution or not thereafter.
                                                                                 D
               Generally, where only one company is involved in change and
         the rights of the share holders and creditors are varied, it amounts to
         reconstruction or reorganisation or scheme of arrangement. In
   '.    1malgamation two or more companies are fused into one by merger or
         by taking over by another. Reconstruction or 'amalgamation' has no
        ·precise legal meaning. The amalgamation is a blending of two or more E
---,     existing undertakings into one undertaking, the share holders of each
         blending company become substantially the share holders in the com-
         pany which is to carry on the blended undertakings. There may be
         amalgamation either by the transfer of two or more undertakings to a
         new company, or by the transfer of one or more undertakings to an
         existing company. Strictly 'amalgamation' does not cover the mere F
         acquisition by a company of the share capital of other company which
         remains in existence and continues its undertaking but the context in
         which the term is used may show that it is intended to include such an
         acquisition. See: Halsbury's Laws of England, 4th Edition Vol. 7 Para
         1539. Two companies may join to form a new company, but there may
         be absorption or blending of one by the other, both amount to amalga- G
         mation. When two companies are merged and are so joined, as to form
         a third company or one is absorbed into one or blended with another,
         the amalgamating company loses its entity.

             In M/s. General Radio and Appliances Co. Ltd. & Ors. v. M.A.
         Khader (dead) by Lrs., l.1986] 2 S,C.C. 656, the effect of amalgamation of H
          338         SUPREME COURT REPORTS                 [ 1990] Supp. I S.C.R.

          two companies was considered. M/s. Generai Radio and Appliances Co.
      A
          Ltd. was tenant of a premises under an agreement providing that the tenant
          shall not sub-let the premises or any portion thereof to anyone without the
          consent of the landlord. M/s. General Radio and Appliances Co. Ltd.
          was amalgamated with M/s. National Ekco Radio and Engineering Co.
!~
          Ltd. under a scheme of amalgamation and order of the High Court under
      B   Sections 391 and 394 of Companies Act, 1956. Under the amalga-
          mation scheme, the transferee company, namely, M/s. National Ekco
;~        Radio and Engineering Company had acquired all the interest, rights
          including leasehold and tenancy rights of the transferor company and
          the same vested in the transferee company. Pursuant to the amalgama-
"
          tion scheme the transferee company continued to occupy the premises
4         which had been let out to the transferor company. The landlord
      c   initiated proceedings for the eviction on the ground of unauthorised
          sub-letting of the premises by the transferor company. The transferee
          company set up a defence that by amalgamation of the two companies
          under the order of the Bombay High Court all interest, rights includ-
          ing leasehold and tenancy rights held by the transferor company
      D   blended with the transferee company, therefore the transferee com-
          pany was legal tenant and there was no question of any sub-letting.
          The Rent Controller and the High Court both decreed the landlord's
          suit. This Court in appeal held that under the order of amalgamation
          made on the basis of the High Court's order, the transferor company
          ceased to be in existence in the eye of law and it effaced itself for all
      E   practical purposes. This decision lays down that after the amalgama-
          tion of the two companies the transferor company ceased to have any
          entity and the amalgamated company acquired a new status and it was
          not possible to treat the two companies as partners or joiutly liable in
          respect of their liabilities and assets. In the instant case the Tribunal
          rightly held that the appellant company was a separate entity and a
      F   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
ii        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
      G   with the appellant company. The High Court's view that on amalgama-
          tion ·there is no complete destruction of corporate personality of the
i[
          transferor company instead there is a blending of the corporafe per-
          sonality of one with another corporate body and it continues as such
.K
          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
      H   merger. But there cannot be any doubt that when two companies
                   Sl\RASWATI INDUSTRL\L y. C.I.T. (SINGH, l.]            339

      amalgamate and merge intp pne tfle transferor company loses its entity     A
      as it ceases to have its b11siness. However, their respective rights cif
      liabilities are determined under ·scheme of amalgamation but the
      corporate entity of the transforor company ceases to exist with effect
      from the date the <1malgamation is made effective.
                                                                                 B
            In view of the above disrnssion, we agree with the Tribunal's
      view that the amalgam11ting company ceased to exist in the eye of law,
      therefore the appellant was not liable to pay tax on the amount of
      Rs.58,735. The appeal is accordingly allowed an\1 we set aside the
      order of the High Co1,!f\ and answer tfle question in favoµr of the
      assessee against the ReveiJ\le. There will be !1CJ order as to costs.
                                                                                 c
      V.P.R                                                  Appeal allowed.




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