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1990 (4) TMI 84 - AT - Income TaxAmalgamating Company, Business Loss, Capital Gains, Central Government, Extinguishment Of Right, High Court, Market Value
Issues Involved:
1. Loss claimed on account of non-recovery of trade advances due from erstwhile companies. 2. Allowance of capital loss in respect of equity capital invested in Tata-Merlin & Gerin Ltd. (TMG). Issue-Wise Detailed Analysis: 1. Loss Claimed on Account of Non-Recovery of Trade Advances: The assessee, engaged in the business of electrical machinery supplies, claimed a loss of Rs. 2,19,74,819 due to non-recovery of trade advances from TMG and NEI, which were amalgamated with the assessee. The ITO disallowed these claims on various grounds, including: - Valuation of Assets: The ITO argued that the value at which the assets were taken over should be considered, not the written down value of assets as per the Income-tax Rules. - Double Deduction: Since the past losses of TMG and NEI were allowed to the assessee-company under Section 72-A, additional allowance of irrecoverable trade advances would amount to double deduction. - Nature of Loss: The ITO considered the loss on account of irrecoverable trade advances as excess payment for acquiring a new business. - Capital Loss: The loss in the value of investment by the appellant-company in TMG was not allowable as it was not incidental to business and could only be treated as a capital loss, which was not allowable without a transfer under Section 2(47). The CIT(A) upheld the ITO's decision, stating that the amalgamation was intended to safeguard the financial interests of all creditors, including the assessee. It was also noted that the liabilities of TMG and NEI became the liabilities of the assessee, thus no trading loss or bad debt could be claimed under Sections 28, 29, or 36. The Tribunal agreed with the CIT(A), emphasizing that the amalgamation resulted in the liabilities of TMG and NEI becoming the liabilities of the assessee. Therefore, there was no question of loss or profit arising from such adjustments. The right of recovery from the amalgamating companies was offset by the liability of those companies, leading to no net loss for the assessee. 2. Allowance of Capital Loss in Respect of Equity Capital Invested in TMG: The CIT(A) allowed the assessee's claim for a deduction of capital loss of Rs. 19,38,900 under the head 'capital gain' in respect of equity capital of TMG. The CIT(A) observed that the shares held by the assessee became worthless due to amalgamation, and the extinguishment of the assessee's right in those shares was a transfer under Section 2(47) of the Act. The Tribunal, however, reversed this decision, stating that for a loss to be allowable under the head 'capital gains,' there must be a transfer of a capital asset for consideration. The Tribunal held that the shares of TMG became worthless due to the merger, and there was no consideration for such a transfer by extinguishment. The undertaking of TMG vested in the assessee by operation of law in pursuance of the scheme of amalgamation under Sections 394 and 395 of the Companies Act, not as consideration for the transfer of the assessee's rights by extinguishment. The Tribunal referenced several court decisions, including the Supreme Court's ruling in Rasiklal Maneklal (HUF), which held that capital gain arising on amalgamation was not taxable due to the lack of transfer and consideration. The Tribunal concluded that there was neither extinguishment of the rights of the assessee nor any consideration for such extinguishment, thereby disallowing the claimed loss under Section 45 of the Act. Conclusion: The Tribunal upheld the disallowance of the assessee's claim for the loss of Rs. 2,19,74,819 due to non-recovery of trade advances, agreeing with the CIT(A) that the amalgamation resulted in the liabilities of TMG and NEI becoming the liabilities of the assessee. Additionally, the Tribunal reversed the CIT(A)'s allowance of capital loss of Rs. 19,38,900, concluding that there was no transfer or consideration involved in the extinguishment of the assessee's rights in the shares of TMG.
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