2016 (8) TMI 505 - AT - Income Tax

Tribunal rules merged entity's income and book profits assessed together. Separate assessment under Section 115JB impermissible.

Deputy Commissioner of Income-tax, Circle-12, Kolkata Versus Haldia Petrochemicals Ltd.

The Tribunal held that post-merger, the income and book profits of the merged entity must be assessed together as a single unit. Separate assessment of ... MAT - Taxability of book profits of the merged entity - book profits u/s 115JB - Held that:- There was profit as per profit and loss account in the case of HPLCL and loss in the case of HPL on standalone basis. Pursuant to the merger, there was only combined loss as per profit and loss account and hence there cannot be any liability that could arise u/s 115JB of the Act in the hands of the merged entity. It is not in dispute that the merger had taken place with retrospective effect from 1.4.2008 as approved by the Hon’ble Calcutta High Court and hence valid for the period commencing from 1.4.2008 to 31.3.2009 relevant to the Asst Year 2009-10 (i.e the year under appeal before us). Pursuant to the merger, M/s HPLCL does not exist in the eyes of law. We hold that the department cannot be unjustly enriched by the taxes paid by M/s HPLCL based on standalone financials. It is well settled that the Constitution of India mandates the collection of taxes only when it is in accordance with law as per Article 265. In view of the aforesaid findings and discussions, we hold that the ld CITA had rightly directed the ld AO to recompute the book profits u/s 115JB of the Act after taking into accounts the combined accounts of both the companies (i.e merged entity) as well as their unabsorbed losses and depreciation, if any. Accordingly, we find no infirmity in the order of the ld CITA in this regard and dismiss the grounds raised by the revenue. Issues Involved:1. Whether the book profits of the merged entity could be brought to tax under Section 115JB of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Taxation of Book Profits Post-Merger:The core issue in this appeal was whether the book profits of the merged entity could be taxed under Section 115JB of the Income Tax Act, 1961. The assessee, a domestic company with a petrochemicals plant, had prepared its annual accounts for AY 2009-10 which were subject to audit by the statutory auditors appointed by the CAG. Due to a court order, the company was restrained from considering the accounts at the board meeting and from holding the AGM, leading to the accounts not being approved by the Board of Directors or laid before the shareholders for approval. Consequently, the assessee claimed that the book profit under Section 115JB could not be determined and filed a return declaring nil income, claiming a refund of the entire TDS amount.Subsequently, HPL Cogeneration Limited (HPLCL) merged with the assessee with retrospective effect from 01.04.2008 as per the order of the Hon'ble Calcutta High Court. HPLCL had filed its return separately, declaring a book profit of Rs. 3,02,70,551/- and claiming a refund based on advance tax and TDS paid. The assessee informed the AO about the merger and requested that the returns of both companies be assessed together.2. Assessment by AO and CIT(A):The AO agreed to assess the income of both companies together under normal provisions but split the assessment under Section 115JB. The AO assessed the book profit of HPLCL separately, arguing that since HPLCL's accounts were finalized and placed before the AGM, its book profit should be considered independently. The assessee contended that post-merger, HPLCL ceased to exist and its income should be combined with the assessee's income for assessment purposes.The CIT(A) accepted the assessee's contention, directing the AO to recompute the book profit by combining the accounts of both companies. The revenue appealed against this decision, arguing that HPLCL had voluntarily filed its return on a standalone basis and paid taxes accordingly.3. Tribunal's Decision:The Tribunal upheld the CIT(A)'s decision, emphasizing that once a company merges into another, it ceases to have a separate existence. The Tribunal referred to the scheme of amalgamation approved by the Hon'ble Calcutta High Court, which stated that all profits or income of the transferor company (HPLCL) would be deemed to be the profits or income of the transferee company (assessee) from the appointed date (01.04.2008). The Tribunal also cited previous decisions, including the case of Deputy Commissioner Of Income-tax vs. Beck India Ltd., where it was held that post-merger, the merging company cannot have a separate income for assessment purposes.The Tribunal concluded that the AO erred in assessing the book profit of HPLCL separately under Section 115JB. It held that the combined accounts of both companies should be considered, and since there was a combined loss, no liability could arise under Section 115JB. The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s direction to recompute the book profits by combining the accounts of both companies.Conclusion:The Tribunal's judgment clarified that post-merger, the income and book profits of the merged entity must be assessed as a single unit, and separate assessment of the merging company's book profits under Section 115JB is not permissible. The appeal by the revenue was dismissed, and the CIT(A)'s order was upheld.