APPROVED SCHEME OF AMALGAMATION IS BINDING ON THE INCOME TAX AUTHORITIES

[Mr. M. GOVINDARAJAN]

In DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-4 (4) , KOLKATA. VERSUS M/S. G.K. & SONS PVT. LTD. - 2022 (10) TMI 904 - ITAT KOLKATA  the assessee filed its income tax return on 14.09.2011 declaring income of Rs.1.27 crores.  During that year six companies merged with the assessee company.  In computation of total income the business loss of Rs.2,52,153/- and capital loss Rs.4.18 crores for the assessment year 2010-11 were brought forward and adjusted in the current year income. 

A notice was issued to the assessee as to why the brought forwarded losses should not be disallowed in terms of section 79 of the Act since the beneficial ownership of 51% voting rights has changed with amalgamation taking effect from 01.04.2010 and also why the losses claimed to be carried forward in future year should not be disallowed as per section 79 of the Act.  The assessee gave reply to the said notice.  In the said reply the assessee contended that if the management and control lies with the same group Section 79 would not be applicable.   Where there was no change in management of company which continued to remain with same set of people and change in shareholding was only due to merger, carry forward losses of company could not be denied.  The Assessing Officer rejected the reply given by the assessee and disallowed the brought forward losses.

Being aggrieved against the order of Assessing Officer the assessee filed an appeal before the Commissioner of Income Tax (Appeals).  Before the Commissioner of Income Tax (Appeals) the assessee submitted the following-

• The company of assessee is an NBFC and it got merged with six companies in pursuant to the order of High Court, Calcutta, dated 06.10.2020, with effect from 01.04.2020 along with accumulated losses incurred by the transferor company.
• According to the merger scheme, the accumulated losses incurred by the transferor company shall be deemed to be that of the transferee for all the purposes under Income Tax Act, 1961.
• The scheme is approved by High Court, Calcutta and is binding under Article 227 of the Constitution.
• Therefore the assessee claimed the losses pertaining to the amalgamated assessee company.

In this regard the assessee relied on the following judgments-

• BHARAT HEAVY ELECTRICALS LIMITED. VERSUS INCOME-TAX OFFICER - 1983 (5) TMI 70 - ITAT DELHI-B - Whatever may be the other provisions with regard to the amalgamations under the Companies Act, the amalgamation ordered under section 396 with a specific provision about the treatment of losses as in this case, the result would be that the order of amalgamation will have to be given effect to and, to that extent the provisions of the Act may be overridden.
• ELECTROCAST SALES INDIA LTD. VERSUS DCIT, CC-XXI, KOLKATA - 2018 (3) TMI 473 - ITAT KOLKATA–  The Court would exercise due diligence and would conduct detailed enquiries before sanctioning the scheme. A scheme formulated for the purposes of tax evasion cannot be held to be in ‘public interest’ and hence the same cannot be sanctioned under the provisions of Companies Act, 1956. The fact that the Calcutta High Court had accorded its sanction to the scheme of amalgamation in the assessee’s case implies that the same had been done by considering representations from the various fields and by duly considering the tax evasion point for income tax purposes.   If there are any objections for the income tax department, they could raise the same at that stage i.e., prior to sanction of scheme by the court. Once the scheme is approved, it implies that the same has been done after duly considering the representations from the Government /revenue.
• PENTAMEDIA GRAPHICS LTD. & OTHERS VERSUS INCOME TAX OFFICER - 2010 (1) TMI 753 - MADRAS HIGH COURT – Once the scheme had been sanctioned with effect from a particular date by the Court, it is binding on everyone including the statutory authorities.
• IN RE : CASBY CFS PVT. LTD., CASBY LOGISTICS PVT. LTD. - 2015 (3) TMI 816 - BOMBAY HIGH COURT once the court sanctions the scheme , the Income tax department will be bound by the same, including the appointed date and cannot review the same.
• JK (BOM.) (P.) LTD. VERSUS NEW KAISER-I-HIND SPG. & WVG. CO. LTD. JUGGILAL KAMLAPAT BANKERS AND OTHERS : CREDITORS - 1968 (11) TMI 63 - SUPREME COURT - The Principle is that a scheme sanctioned by the court does not operate as a mere agreement between the parties; it becomes binding on the company, the creditors and the shareholders and has statutory force , and therefore the joint-debtor could not invoke the principle of accord and satisfaction. By virtue of the provisions of sec. 391 of the Act, a scheme is statutorily binding even on creditors, and shareholders who dissented from or opposed to its being sanctioned. It has statutory force in that sense and therefore cannot be altered except with the sanction of the Court even if the shareholders and the creditors acquiesce in such alteration.
• SADANAND S. VARDE AND OTHERS VERSUS STATE OF MAHARASHTRA AND OTHERS - 2000 (6) TMI 16 - BOMBAY HIGH COURT - Once a scheme becomes sanctioned by the court, it ceases to operate as a mere agreement between the parties and becomes binding on the company, the creditors and the shareholders and has statutory operation by virtue of the provisions of section 391 of the Companies Act. The amalgamation, which has become final and binding, cannot be permitted to be challenged by the petitioners, without locus standi, in a collateral proceeding in the present writ petition. An amalgamation order can only be challenged under the Companies Act by an appeal under section 391(7) by any one of the parties.

Considering the judgments discussed above, the Commissioner of Income Tax (Appeals) held that the present appellant would be entitled to carried forward established and admissible losses of the transferor companies to the appellant (transferee company) to the extent that they existed at the time of amalgamation.  The scheme of amalgamation approved by High Court is having statutory effect. The Commissioner of Income Tax (Appeals) allowed the appeal filed by the assessee.

The Revenue filed appeal before the Income Tax Appellate Tribunal challenging the order of Commissioner of Income Tax (Appeals).   The Revenue contended the following before the Income Tax Appellate Tribunal-

• There was change in the management of the company but the assessee contended that there is no change in management after amalgamation.
• Therefore the Assessing Officer has rightly disallowed the brought forwarded losses and carry forward the balances.

The assessee contended the following before the Income Tax Appellate Tribunal-

• The Calcutta High Court approved the scheme of amalgamation and accordingly six companies were merged with the assessee company along with their respective unabsorbed business loss.
• Carry forward losses cannot be denied on the ground of change in shareholding due to merger if management of the company continues to remain with the same set of people.
• The Commissioner of Income Tax (Appeals) has rightly concluded by allowing the appeal of the assessee.

The Income Tax Appellate Tribunal considered the submissions of the parties to the appeal.  The Income Tax Appellate Tribunal observed that the Commissioner of Income Tax (Appeals) exhaustively dealt with the aspect of binding nature of the order of High Court, Calcutta in respect of the approval of the scheme/merger to arrive at a conclusion that scheme of amalgamation once approved has a statutory force and objections, if any, should be raised by the Income Tax Department prior to the sanction of the scheme by the High Court.  The Income Tax Department cannot disturb or reconsider the scheme of amalgamation. 

The Income Tax Appellate Tribunal allowed the adjustment of brought forward business losses against the current year’s business income and also set off the brought forward capital loss as claimed by the assessee.  The Income Tax Appellate Tribunal dismissed the appeal filed by the Revenue.