1983 (5) TMI 70 - AT - Income Tax

Tribunal rules in favor of BHEL, allowing carry forward of losses and depreciation

Bharat Heavy Electricals Limited. Versus Income-Tax Officer.

The Tribunal held that in the specific amalgamation case, the provisions of the Companies Act, particularly under section 396, prevail over the Income-tax ... Amalgamating Company, Business Loss, Carry Forward And Set Off, Unabsorbed Depreciation Issues Involved:1. Whether the provisions of the Companies Act, read with the order issued under section 396, override the provisions of the Income-tax Act.2. Whether the corporate veil should be pierced to determine the real person interested in the amalgamated companies.3. Whether the assessee is entitled to carry forward and set off business losses.4. Whether the assessee is entitled to carry forward unabsorbed depreciation in view of the provisions of section 43.Detailed Analysis:1. Provisions of the Companies Act vs. Income-tax Act:The Tribunal considered whether the provisions of the Companies Act, particularly those under section 396, should prevail over the Income-tax Act in the context of amalgamation. The Tribunal noted that the Companies Act and the Income-tax Act operate in different fields. The Government's power under section 396 to order amalgamation in public interest was emphasized. The order of amalgamation, which included specific provisions about the treatment of losses, was approved by Parliament, indicating awareness of the implications for tax assessments. Clauses 3 and 4 of the amalgamation order specifically addressed the treatment of losses, stating that the losses of the amalgamated company (HEL) would become part of the losses of the amalgamating company (BHEL). The Tribunal concluded that in this specific case, the provisions of the Companies Act should prevail over the Income-tax Act, allowing BHEL to claim the losses and unabsorbed depreciation of HEL.2. Piercing the Corporate Veil:The Tribunal considered whether the corporate veil should be pierced to identify the real person interested in the amalgamated companies. It was noted that both HEL and BHEL were wholly owned by the Government of India, with the President of India holding all shares. The Tribunal opined that for the purpose of determining the issue at hand, it was necessary to remove the corporate veil, recognizing that the Government of India was the real interested party. The business activities of HEL and BHEL were identical, and the amalgamation was intended for effective management. The Tribunal cited the Punjab and Haryana High Court's decision in CIT v. Saraswati Industrial Syndicate Ltd., which held that the amalgamating company does not lose its identity but continues in a blended form with the amalgamated company. Thus, BHEL was entitled to claim the business losses and depreciation of HEL.3. Carry Forward and Set Off of Business Losses:The Tribunal examined whether BHEL was entitled to carry forward and set off the business losses of HEL. The Tribunal reiterated that the amalgamation order under section 396 of the Companies Act specifically provided for the treatment of losses, which should be recognized for tax purposes. The Tribunal rejected the argument that the insertion of section 72A of the Income-tax Act indicated that prior to its introduction, the carry forward of losses in amalgamations was not contemplated. The Tribunal held that the provisions of the Companies Act, particularly section 396, would prevail over the general provisions of the Income-tax Act, allowing BHEL to carry forward and set off the business losses of HEL.4. Carry Forward of Unabsorbed Depreciation:The Tribunal addressed whether BHEL was entitled to carry forward the unabsorbed depreciation of HEL under section 43 of the Income-tax Act. The Tribunal noted that the definition of 'written down value' in section 43(6) and Explanation 2A were relevant. Explanation 2A stipulates that in a scheme of amalgamation, the written down value of transferred assets should be the same as it would have been if the amalgamating company continued to hold the assets. The Tribunal rejected the argument that only the depreciation actually absorbed should be considered, holding that the entire depreciation, including unabsorbed depreciation, should be taken into account. Thus, the written down value in the hands of BHEL would be the same as it was for HEL, allowing BHEL to claim the unabsorbed depreciation of HEL.Conclusion:The Tribunal concluded that the provisions of the Companies Act, particularly those under section 396, should prevail over the Income-tax Act in the context of the specific amalgamation case. The corporate veil was pierced to recognize the Government of India as the real interested party. BHEL was entitled to carry forward and set off the business losses and unabsorbed depreciation of HEL. The written down value of assets for tax purposes would include the entire depreciation, both absorbed and unabsorbed, as per Explanation 2A of section 43.