2017 (4) TMI 1037 - SC - Income Tax

Benefit of provisions of Section 72A - whether waiver of interest by financial institutions would not be treated as income of the appellant-assessee under Section 41(1)? - Held that - In the instant case, the assessee was given the benefit of accumulated loses of the amalgamated company. The effect thereof is that thought these loses were suffered by the amalgamated company they were deemed to be treated as loses of the assessee company by virtue of Section 72A of the Act. In a case like this, it cannot be said that the assessee would be entitled to take advantage of the accumulated loses but while calculating these accumulated loses at the hands of amalgamated company, i.e., HPL, the income accrued under section 41(1) of the Act at the hands of HPL would not be accounted for. That had to be necessarily adjusted in order to see what are the actual accumulated loses, the benefit whereof is to be extended to the assessee. We, thus, agree with the High Court in its analysis of Section 41(1) along with Section 72A of the Act held that - in order to facilitate the merger of sick industrial units with sound ones and as and by way of offering an incentive in that behalf section 72A was introduced, whereunder, by a deeming fiction, the accumulated loss or unabsorbed depreciation of the amalgamating company is treated to be a loss or, as the case may be. The Revenue before the first appellate authority emphasized the application of section 72A of the Act, to the facts of the case. The first appellate authority and also the Tribunal failed to consider the scope and object of section 72A of the Act. Thus, the Tribunal committed an error in treating the waiver of interest as not income of the assessee

Summary

Issues Involved:
1. Applicability of Section 72A of the Income Tax Act, 1961.
2. Treatment of waived interest under Section 41(1) of the Income Tax Act, 1961.
3. Interpretation of amalgamation and its impact on tax liabilities.

Detailed Analysis:

1. Applicability of Section 72A of the Income Tax Act, 1961:
The appellant-assessee, M/s. McDowell and Company Limited, sought the benefit of Section 72A of the Income Tax Act, 1961, which allows the carry forward and set off of accumulated loss and unabsorbed depreciation allowance in cases of amalgamation. The Central Government had granted this benefit to the assessee. The High Court of Karnataka, however, set aside the ITAT's order which had granted this benefit, leading to the present appeal.

The Supreme Court upheld the High Court's decision, emphasizing that while the assessee was entitled to the benefit of accumulated losses of the amalgamated company (HPL), the income accrued under Section 41(1) had to be adjusted against these losses to determine the actual accumulated losses.

2. Treatment of Waived Interest under Section 41(1) of the Income Tax Act, 1961:
The primary contention was whether the waived interest by financial institutions, which was initially claimed as expenditure by HPL, should be treated as income under Section 41(1) in the hands of the appellant-assessee. The ITAT had ruled that this income should be treated as that of HPL, a separate entity, and not the assessee.

The Supreme Court rejected this argument, agreeing with the High Court's view that since HPL had ceased to exist post-amalgamation, the benefit of waived interest accrued to the assessee. Thus, the income under Section 41(1) had to be treated as income of the assessee and adjusted against the accumulated losses.

3. Interpretation of Amalgamation and Its Impact on Tax Liabilities:
The appellant argued that under the judgment in 'Saraswati Industrial Syndicate v. CIT', the identity of the assessee must remain the same for Section 41(1) to apply. However, the Supreme Court clarified that this principle did not apply in the present case due to the specific provisions of Section 72A, which treats the losses of the amalgamated company as those of the amalgamating company.

The Court noted that the true effect of amalgamation is that the transferor company (HPL) loses its entity and ceases to exist. Therefore, the income accrued under Section 41(1) must be adjusted while calculating the accumulated losses for the benefit of Section 72A.

Conclusion:
The Supreme Court dismissed the appeal, agreeing with the High Court's interpretation that the income accrued under Section 41(1) should be adjusted against the accumulated losses of the amalgamated company to determine the actual losses that the assessee could carry forward under Section 72A. The Court emphasized the importance of considering the provisions of Section 72A in conjunction with Section 41(1) to ensure a fair and accurate computation of tax liabilities post-amalgamation.