1983 (5) TMI 70 - AT - Income Tax

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

The Tribunal held that in the specific amalgamation case, the provisions of the Companies Act, particularly under section 396, prevail over the Income-tax ... Amalgamation under section 396 of the Companies Act - Precedence of special statutory provision over general tax code - Treatment of carried forward business losses and unabsorbed depreciation on amalgamation - Piercing the corporate veil in cases of common sole shareholder - Identity of amalgamated company and legal consequences of amalgamation - Written down value on transfer in a scheme of amalgamation - Explanation 2A to section 43 - Legal fiction deeming carried forward depreciation as 'actually allowed' - Explanation 3 to section 43Amalgamation under section 396 of the Companies Act - Precedence of special statutory provision over general tax code - Treatment of carried forward business losses and unabsorbed depreciation on amalgamation - The order of amalgamation under section 396 read with clauses 3 and 4 must be given effect for income-tax purposes and, therefore, the losses and unabsorbed depreciation of HEL are to be treated as losses of BHEL. - HELD THAT: - The Tribunal held that the Company Law Board's order (approved under section 396) specifically transferred the undertaking and provided that profits, losses and revenue reserves of the dissolved company shall form part of those of the amalgamating company. Given that both companies were wholly owned by the President of India and the amalgamation was effected in public interest, the special scheme embodied in the Companies Act order must prevail over the general provisions of the Income-tax Act. Clause 4 of the amalgamation order showing that HEL's losses become part of BHEL's losses is a determinative indication that the order's effect must extend to assessment under the Income-tax Act; accordingly the revenue's denial of the claim was erroneous and the assessee should succeed on both business loss and depreciation grounds. [Paras 4]The Tribunal allowed the claim that the losses and unabsorbed depreciation of HEL must be treated as losses of BHEL for assessment purposes.Piercing the corporate veil in cases of common sole shareholder - Identity of amalgamated company and legal consequences of amalgamation - Treatment of carried forward business losses and unabsorbed depreciation on amalgamation - The corporate veil may be pierced and, following authorities on amalgamation, the amalgamated company's identity does not cease such that the amalgamating company must be treated as entitled to the amalgamated company's losses. - HELD THAT: - The Tribunal observed that both HEL and BHEL had the same sole shareholder (the President of India) and identical businesses; therefore, for purposes of giving effect to the amalgamation order it was necessary to disregard separate corporate personalities. Reliance was placed on the Punjab and Haryana High Court exposition that amalgamation results in a blending and the amalgamated company does not completely lose identity. On this basis, either by removing the corporate veil or by recognising the blended identity post-amalgamation, the losses of HEL are to be regarded in determining BHEL's taxable position. [Paras 5]The Tribunal held that the corporate veil can be pierced and the blended identity consequent on amalgamation supports treating HEL's losses as BHEL's losses.Written down value on transfer in a scheme of amalgamation - Explanation 2A to section 43 - Legal fiction deeming carried forward depreciation as 'actually allowed' - Explanation 3 to section 43 - Treatment of unabsorbed depreciation on transfer of capital assets - For determining written down value on transfer in the scheme of amalgamation, Explanation 2A requires that the written down value to the amalgamating company be taken as the same as it would have been in the amalgamated company, and Explanation 3 does not limit that treatment to only depreciation previously absorbed. - HELD THAT: - The Tribunal held that Explanation 2A (applicable from 1-4-1967) makes clear that where a capital asset is transferred in a scheme of amalgamation to an Indian amalgamating company, the written down value shall be the same as it would have been had the amalgamating company continued to hold the asset. Thus the written down value in BHEL must reflect HEL's written down value including unabsorbed depreciation. Although Explanation 3 creates a legal fiction treating carried forward depreciation under section 32(2) as 'actually allowed', the crucial provision for this transfer situation is Explanation 2A which removes any lacuna and requires taking the full written down value as in the hands of HEL rather than merely the portion of depreciation actually absorbed. [Paras 6, 7]The Tribunal held that Explanation 2A governs the written down value on amalgamation and the written down value in BHEL must be taken as that of HEL inclusive of unabsorbed depreciation.Final Conclusion: The Tribunal allowed the assessee's claim: the Government's amalgamation order under section 396 (clauses 3 and 4) must be given effect for income-tax purposes so that HEL's business losses and unabsorbed depreciation are treated as BHEL's; the corporate veil may be lifted or the blended identity recognised in this factual matrix; and Explanation 2A to section 43 requires that written down value on transfer in the amalgamation be taken as it was in the transferor company, inclusive of 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.