2010 (10) TMI 846 - HC - Income Tax

Set off of the brought forward losses of the State Bank of Jaipur - Carry forward and set off of losses in case of change in constitution of firm - Held that - Provisions u/s 78(2) do not entitle the assessee to carry forward and set off losses of State Bank of Jaipur because requisite precondition that succeeding company should have derived such losses by way of inheritance has not been fulfilled and for that limited purpose two companies shall have to be treated two different persons and not same person. Even if in law a company is treated as jurisdictional person nevertheless for the purpose of Section 78(2) they would not be the same assessee after merger of two companies as after merger of State Bank of Jaipur with State Bank of Bikaner and with re-christening of the company as State Bank of Bikaner and Jaipur it cannot be treated to be same assessee for income-tax purpose.

Summary

Issues:
1. Interpretation of Section 78(2) of the Income Tax Act, 1961 regarding the entitlement to set off brought forward losses.

Analysis:

Issue 1: Interpretation of Section 78(2) of the Income Tax Act, 1961

The case involved a reference from the Income Tax Appellate Tribunal regarding the entitlement of the State Bank of Bikaner and Jaipur to set off brought forward losses of the State Bank of Jaipur under Section 78(2) of the Income Tax Act, 1961. The factual background indicated that the State Bank of Bikaner acquired the assets and liabilities of the State Bank of Jaipur under a government order. The main contention was whether the losses of the State Bank of Jaipur could be carried forward and set off against the profits of the State Bank of Bikaner and Jaipur. The Appellate Tribunal, Commissioner of Income Tax (Appeals), and Assessing Officer had rejected the claim of the assessee.

The appellant argued that the merger of the two banks should be considered a case of succession by inheritance, entitling them to set off the losses. The appellant relied on the interpretation of "inheritance" under Section 78(2) and contended that the losses derived by inheritance should be allowed to be carried forward and set off against income. The appellant emphasized that the assets and liabilities of the State Bank of Jaipur were taken over by the State Bank of Bikaner, and the business continued after the merger.

On the other hand, the revenue contended that the losses could not be carried forward as the merger did not constitute succession by inheritance. The revenue argued that the right to carry forward and set off losses belongs to the entity that suffered the loss and not to a different entity. The revenue relied on previous judgments to support their position.

The court analyzed the provisions of Section 78(2) and previous judgments to determine the applicability of the law of inheritance in the case of a merger between two entities. The court referred to relevant case laws such as Rajasthan Rajya Sahakari Spg. and Ginning Mills Federation Ltd.'s case and Hindustan Aeronautics Ltd.'s case to establish the principles regarding the entitlement to carry forward losses in cases of amalgamation or succession. The court concluded that the losses of the State Bank of Jaipur could not be set off against the profits of the State Bank of Bikaner and Jaipur as the requisite precondition of deriving losses by way of inheritance was not fulfilled. The court held that even if the companies were treated as jurisdictional persons, they could not be considered the same assessee after the merger for income tax purposes.

In conclusion, the court answered the reference by stating that the provisions of Section 78(2) did not entitle the assessee to carry forward and set off losses of the State Bank of Jaipur against the profits of the State Bank of Bikaner and Jaipur due to the absence of inheritance in the merger process.