In Supreme Court of India
Saraswati Industrial Syndicate Ltd.
C.I.T., Haryana, Himachal Pradesh, Delhi
Date of Judgement
4 Sept. 1990
Justice K.N.Singh, Justice T.K.Thommen & Justice Kuldip Singh
The Appeal was raised against the judgment and order dated 15.4.1975 of Punjab and Haryana High Court responding the Income Tax Reference made to Court by the Income Tax Appellate Tribunal. The previous judgment of the Court was conveyed by Justice Singh. The facts which gave rise to the appeal are that the appellant Saraswati Industrial Syndicate was a limited company continuing their business of manufacturing and sale of sugar & machinery for sugar mills and other diligences. There was other company also namely, the Indian Sugar and General Engineering Corporation was also in the business of manufacturing machinery parts for sugar mills. On 28th September 1962 under the guidelines and orders of the High Court, the Indian Sugar Company was amalgamated with the appellant company i.e. Saraswati Industries Syndicate Ltd. After the amalgamation, the Indian Sugar Company lost its individuality, as further it didn’t carried any business. Before amalgamation, the Indian Sugar Company was allowed for an expenditure to the amount of Rs.58,735 on accrual basis in its earlier assessment year. The company showed the amount as a transaction liability and the said transaction liability was taken over by the appellant company. After the amalgamation was completed, the appellant company tried claiming the exemption of the amount of Rs.58,735 from income tax for the assessment year 1965-66 on the validity that the amalgamated company didn’t had any liability to pay tax under Section 41(1) of the Income Tax Act 1961 as the expenditure was allowed to the former Indian Sugar Company which was a different individual entity from the amalgamated company. The Income Tax Officer rejected the appellant’s claim for exemption. The assessee (the one who is under the liability to pay taxes upon his\her income) filed appeal before the Appellate Assistant Commissioner who finalized the order of the Income Tax Officer. The assessee, afterwards, moved an appeal before the Income Tax Appellate Tribunal. Furthermore, The Tribunal allowed the appeal on the basis of Section 41(1) of the Act. The Tribunal held that when the Indian Sugar Company amalgamated with the assessee company the identity of the combining company came to vanish and it was no longer in survival after the amalgamation, consequently, the assessee company was a changed entity and was not liable to pay the taxes. On the branch’s application the Tribunal passed the matter in question to the High Court: “Whether on the facts and situations of the case the Tribunal was acceptable in law in holding that the sum of Rs.58,735 was not payable to tax under sub-section (1) of Section 41 of the Income Tax Act 1961 for the assessment year 1965-66?”
Thereafter, The High Court upon the matter in question answered it in favor of the income holding entity that the exemption from tax liability which was claimed by the appellant assessee was chargeable for the payment of tax under Section 41(1) of the Act. The High Court held that on the amalgamation of the companies, none of the company ceased to exist instead both the amalgamating companies kept running their entities in a merged form. The Court further held that the amalgamated company was an inheritor in interest and importance of amalgamating company and so far the assets of both the companies were merged and were to constitute a new company the liabilities attaching was also merger thereof. On other findings as well the High Court held that the amalgamated company, specifically, the assessee was liable to pay tax on Rs.58,735 which came from the assets of the Indian Sugar Company. The assessee, thereafter, moved an application before the High Court under Section 261 of the Act read with Section 109 of the Code of Civil Procedure for certificate to appeal to the Court but the High Court terminated the same. The appellant afterwards came to Supreme Court through special leave petition under Article 136 of the Constitution.
The Supreme Court held that Section 41(1) has been enacted for charging tax on profits made by an assessee, but it applies to the assessee also to whom the transaction liability may have been allowed in the previous year. If the assessee to whom the transaction liability may have been allowed as a business expenditure in the previous year terminates to be in existence or if the assessee is changed on account of the death of the earlier assessee’s the income received in the year following to the previous year or the accounting year can’t be treated as income received by the assessee.
Further, the Court declared that in order to invite the provisions of Section 41(1) for the enforcement of tax liability, the previous year’s identity of the assessee and the succeeding year must be the same. If there stands any change in the individuality of the assessee there would be no tax liability under the provisions of Section 41. Two companies may combine to form a new company, but there may be merger of one by the other, both amount to amalgamation. When two companies get merged and are joined in furtherance to form a third company or one is absorbed by the other or combined with another, the amalgamating company tends to lose its entity.
The Court stated that when the amalgamation of two companies occur the entity of the transferor company terminates and the amalgamated company acquires a fresh standing and it is not possible to take the two companies as partners or conjointly liable in respect of their liabilities and assets. The true consequence and personality of the amalgamation entirely depends on the terms and conditions of the scheme of merger, but there can be no question that when the two companies amalgamate and merges into one, the transferor company tends to lose its entity as it gets terminated to have its business. Though, their corresponding rights or liabilities are resolute under the scheme of amalgamation but the business entity of the transferor company terminates with effect from the date the amalgamation is made operative.
Furthermore, the Court agreed with the Tribunal’s view point that the amalgamating company ceased to exist in the eye of law, therefore the appellant was not liable to pay tax on the amount of Rs.58,735. The appeal is accordingly allowed and we set aside the order of the High Court and answer the question in favor of the assessee against the Revenue. There will be no order as to costs. Hence, the Appeal was allowed.
Edited by Chiranjeeb Prateek Mohanty
Approved & Published – Sakshi Raje