2017 (2) TMI 1463 - HC - Income Tax

Sanction of Scheme of Amalgamation recalled - Revenue will suffer loss as it cannot recover tax on the income of the Transferor Company - Both the companies suffering losses - Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger u/s 72A - HELD THAT - No bar either in the Companies Act or in the Income Tax Act which prevents the two companies which are suffering losses from amalgamating. Section 72A of the Act deals with the post-amalgamation scenario. By no stretch of imagination does Section 72A of the Act debar two companies from amalgamating. In fact Section 72A of the Act deals with the relationship between the Income Tax Department and the assessee in the post-amalgamated period. Therefore the contention being raised by the learned counsel for the Revenue that under Section 72A of the Act amalgamation between two companies suffering from losses is prohibited the said argument is highly misplaced. Since Section 72A of the Act does entitle the amalgamated company to claim set off and carry forward of losses and allowance depreciation therefore if any benefit accrues to the amalgamated Company that benefit cannot be denied ostensibly on the ground that it is the Revenue Department that would suffer. Hence the contention being raised by the learned counsel for the Revenue that in case the amalgamation were allowed it is the Revenue Department that would suffer as it would not be able to recover the tax as it will be entitled to even the said argument is unacceptable. Almost three years have gone by since the amalgamation was permitted by this Court. To turn the historical clock back to the year 2014 may cause injustice to the amalgamated Company. Therefore it is too late for the Revenue Department to argue that the order dated 4.4.2014 should be recalled by this Court.

Summary

Issues:
1. Application for recalling the order permitting amalgamation.
2. Interpretation of Section 72-A of the Companies Act regarding amalgamation and tax implications.

Analysis:
1. The Income Tax Department filed an application seeking to recall the order permitting the amalgamation of two companies. The Transferor Company had declared its income as 'NIL' for certain years and carried forward losses. The Transferee Company also suffered losses and carried them forward. The Revenue Department argued that allowing the amalgamation would reduce the Transferee Company's profit, affecting tax liabilities. The Revenue claimed that amalgamation would transfer losses to the Transferee Company, impacting tax recovery. The Revenue cited Section 72-A of the Act, stating that amalgamation cannot be permitted due to tax implications.

2. The Transferor Company argued that Section 72-A does not prohibit amalgamation of companies facing losses. They highlighted that the Act does not bar amalgamation based on companies' financial status. The benefits accruing from amalgamation align with legal provisions. The Transferor Company emphasized that the Revenue's potential loss should not prevent the approved amalgamation. The Transferor Company contended that Section 72-A addresses post-amalgamation scenarios and does not prohibit amalgamation itself.

3. The Court analyzed Section 72-A, noting it deems the losses of the amalgamating company as those of the amalgamated company post-amalgamation. Exceptions under sub-sections delineate conditions for not allowing set off and carry forward of losses. The Court clarified that Section 72-A governs the relationship between the Income Tax Department and the assessee post-amalgamation. The Court rejected the Revenue's argument that amalgamation is prohibited between loss-making companies under Section 72-A. Additionally, the Court emphasized that benefits entitled to the amalgamated company cannot be denied based on potential revenue loss.

4. Considering the time elapsed since the amalgamation approval, the Court deemed it unjust to recall the order after almost three years. Recalling the order at this stage would cause undue harm to the amalgamated company. Therefore, the Court dismissed the Revenue Department's application to recall the order permitting the amalgamation.