'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

ratio of the judgment of this Court in ' Saraswati Industrial

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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

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

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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

Section 41(1) of the Act which aspect is explained by this

Court in the following manner:

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“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

law after amalgamation. However, rights are determined in

terms of the scheme of amalgamation and since the benefit of

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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

effect thereof is that though these loses were suffered by

the amalgamated company they were deemed to be treated as

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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

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

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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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ITEM NO.102 COURT NO.8 SECTION IIIA

S U P R E M E C O U R T O F I N D I A

RECORD OF PROCEEDINGS

Civil Appeal No. 3893/2006

M/s. MCDOWELL & COMPANY LTD. Appellant(s)

VERSUS

COMMISSIONER OF INCOME-TAX,

KARNATAKA CENTRAL, BANGALORE Respondent(s)

Date : 09/03/2017 This appeal was called on for hearing today.

CORAM :

HON'BLE MR. JUSTICE A.K. SIKRI

HON'BLE MR. JUSTICE ASHOK BHUSHAN

For Appellant(s)

Mr. Jaideep Gupta, Sr. Adv.

Mr. Kunal Chatterji, Adv.

Ms. Maitrayee Banerjee, Adv.

For Respondent(s)

Mr. Y. P. Adhyaru, Sr. Adv.

Mr. Rupesh Kumar, Adv.

Mr. S. A. Haseeb, Adv.

Mrs. Anil Katiyar, Adv.

UPON hearing the counsel the Court made the following

O R D E R

The appeal is dismissed in terms of the signed

reportable judgment.

(Nidhi Ahuja) (Mala Kumari Sharma)

Court Master Court Master

[Signed reportable judgment is placed on the file.]

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