1990 (9) TMI 1 - SC - Income Tax

Amalgamation extinguishes transferor's corporate identity; transferee not liable to tax for transferor's allowances under Section 41(1)

Saraswati Industrial Syndicate Limited Versus Commissioner of Income-Tax, Haryana Himachal Pradesh And Delhi III

SC held that on amalgamation the transferor company ceased to exist as a separate corporate entity and the appellant (transferee) remained a distinct ... Trading liability - Manufacture and sale of sugar and machinery for sugar mills and other industries - exemption from tax liability - Whether, on the amalgamation of the Indian Sugar Company with the appellant-company, the Indian Sugar Company continued to have its identity and was alive for the purposes of section 41(1) of the Act? Held that:- In the instant case, the Tribunal rightly held that the appellant-company was a separate entity and a different assessee and, 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 the two companies, the transferor-company did not become non-existent but 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 the corporate personality of the transferor-company but 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 and 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. Therefore, the appellant was not liable to pay tax. Issues:Interpretation of Section 41(1) of the Income-tax Act, 1961 in the context of amalgamation of companies.Detailed Analysis:The case involved an appeal against the judgment of the Punjab and Haryana High Court regarding the tax liability of an amalgamated company. The appellant, a limited company engaged in the business of manufacturing sugar and machinery, amalgamated with another company. The issue was whether the amalgamated company was liable to pay tax on the trading liability taken over from the amalgamating company, as per Section 41(1) of the Income-tax Act, 1961.The High Court held that the amalgamated company was liable to pay tax on the trading liability acquired from the amalgamating company, as both entities continued their existence in a blended form post-amalgamation. The High Court reasoned that since the assets of both companies were merged to form a new entity, the liabilities attached to those assets must also be borne by the amalgamated company.The Supreme Court analyzed the provisions of Section 41(1) and previous case law to determine the tax liability in cases of amalgamation. It emphasized that for the provisions of Section 41(1) to apply, the identity of the assessee must remain the same in the previous and subsequent years. In cases of change in the identity of the assessee, the tax liability under Section 41(1) does not arise.The Court referred to the case of CIT v. Hukumchand Mohanlal, where it was held that the Act does not make a successor in business liable under Section 41(1) if the identity of the assessee changes. In the present case, the amalgamation resulted in the loss of identity of the amalgamating company, making it a different entity from the amalgamated company.The Court further discussed the legal implications of amalgamation, emphasizing that when two companies merge, the amalgamating company loses its entity, and the amalgamated company becomes a separate entity. It cited the case of General Radio and Appliances Co. Ltd. v. M. A. Khader to support the principle that post-amalgamation, the transferor company ceases to exist, and the amalgamated company assumes a new status.Based on the analysis, the Supreme Court agreed with the Tribunal's view that the amalgamating company ceased to exist legally post-amalgamation, and hence, the amalgamated company was not liable to pay tax on the trading liability acquired. The appeal was allowed, setting aside the High Court's order, and the question was answered in favor of the assessee.