By TIOL News Service

NEW DELHI, APR 18, 2017: THE issue is - Whether when the assessee had availed the benefit of setting off accumulated losses of the amalgamating company u/s 72A, the waiver of interest on loans taken from FIs is to be treated as taxable income u/s 41(1). YES is the verdict.

Facts of the case

There was a company known as M/s. Hindustan Polymers Limited (HPL) which had become a sick. Even as the proceedings were pending before the Board for Industrial and Financial Reconstruction (BIFR), petitions were filed in the High Court of Bombay and Madras for amalgamation of HPL with the assessee M/s. McDowell and Company Limited. Both the High Courts approved the scheme of amalgamation. HPL 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. 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 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. The 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 income which had accrued within section 41(1) of the Act 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 income at the hands of the assessee 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 income under Section 41(1) 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, the Revenue sought reference under Section 256 of the Act and the question of law was decided in favour of Revenue.

On appeal, the Apex Court held that,

++ 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 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 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. 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 losses 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 losses 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 losses but while calculating these accumulated losses 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 losses, 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.

(See 2017-TIOL-175-SC-IT)