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TMI Blog1983 (5) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany Law Board in the Department of Company Affairs, Government of India, dated27-3-1974. " Whereas the Company Law Board is satisfied that, for the purpose of securing the optimum use of scarce resources of equipment, people and materials and to derive the maximum benefit from the collaboration agreements entered into with foreign firms and countries and for ensuring co-ordination in policy and the efficient and economical expansion and working of Heavy Electrical Units, it is essential in the public interest that the Bharat Heavy Electricals (India) Limited, being companies incorporated under the Companies Act, 1956 (1 of 1956), which are engaged in the production and sale of heavy electrical equipment, should be amalgamated into a single company ; Now, therefore, in exercise of the powers conferred by sub-sections (1) and (2) of section 396 of the Companies Act, 1956 (1 of 1956), read with notification of the Government of India in the Department of Company Affairs No. GSR 443(E), dated the 18th October, 1972, the Company Law Board hereby makes the following order, namely :--- 3. Amalgamation of the companies --- As from the appointed day, the undertaking of the dissolved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with BHEL. The cost of plant and machinery in the hands of HEL was Rs. 74.82 crores. Depreciation actually allowed in the sense that it was absorbed by the profits amounted to Rs. 11.81 crores and that is how the balance of Rs. 29.77 crores remained unabsorbed and was carried forward. Similarly, there were business losses of HEL to the extent of Rs. 1.66 crores which were carried forward. The principal question that arose before the ITO in the assessment of BHEL for the assessment year 1974-75 is whether the claim of BHEL in getting the benefit of unabsorbed business loss and unabsorbed depreciation is to be allowed. The ITO as well as the Commissioner (Appeals) for the reasons recorded in their orders did not accept the assessee's claim. The assessee-BHEL has come up in second appeal before the Tribunal. 3. Mr. Dastur raised various contentions, some of which are common in regard to unabsorbed business loss and unabsorbed depreciation. There are also some alternative grounds raised in regard to unabsorbed depreciation. The learned departmental representative mainly relied on the order of the Commissioner (Appeals) and, his emphasis was that in the case of amalgamation, the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment passed the order of amalgamation in public interest. Lastly, the order of the Company Law Board had to be placed before the Parliament which approved it in accordance with the provisions of section 396 of the Companies Act. Clauses 3 and 4 specifically mentioned as to what would happen to the losses of HEL. Explanation to clause 3 mentions that all privileges and rights of the amalgamated company will be available to the amalgamating company. Similarly, clause 4 provides that the profits or losses of the amalgamated company would become part of the profits or losses of BHEL. In this situation it must be held that the Central Government was aware of the fact that the losses of HEL, whether on account of business loss or unabsorbed depreciation, should be treated as a part of the loss of BHEL. Full effect of it can be given only if its implication is carried whole hog, i.e., when its effect is given for the purpose of the assessment under the Act also. Otherwise it has no significance whatsoever. From the point of view of accountancy if some losses of amalgamated company are taken over by the amalgamating company, it would virtually amount to payment of price over and above the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions 228 and 229 by holding that section 49E applies when insolvency rules do not apply. Accordingly, agreeing with the High Court, we hold that the Income-tax Officer was in error in applying section 49E and setting off the refund due...." The Kerala High Court also had occasion to consider this very aspect in ITO v. Official Liquidator, Swaraj Motors (P.) Ltd. [1982] 134 ITR 132 and held that the provisions of the Companies Act which are special provisions should prevail over the provisions of the Act, which are of general nature. By parity of reasoning with reference to the facts in the instant case, the same principle, in our opinion, should be applied. The special provisions in relation to the order passed by the Government of India, read with section 396 of the Companies Act, especially, governing the treatment to be given to the losses of HEL, must give way to the general provisions under the Act. The provisions under the Act apply generally to all amalgamations but when there is a special provision like the one mentioned in clauses 3 and 4 of the order, the same should prevail. We may repeat that strictly speaking there is no conflict because clause 4 treats the losses o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term of art but is essentially a commercial term. Even as such, it does not seem to have an exact or definite connotation. The issue, therefore, arises whether on the amalgamation of two companies, the amalgamating company becomes totally non-existent or extinct in the eye of law ? Or is it that the amalgamating company blends itself and continues its existence in the amalgamated company ? We are inclined to the view that the latter is the correct enunciation of the legal result of amalgamation. By virtue of the court's order and the consequent valid amalgamation, the two companies merge and are absorbed into each other as one. They indeed both blend together to form one company. The end result, therefore, is that neither one nor the other becomes extinct but they continue their entities in a blended form together. We derive support for this view from the observation of Justice Buckley in Wild v. South African Supply and Cold Storage Co. [1904] 2 Ch. 268 (Ch. D), wherein the learned Judge was drawing the distinction between 'reconstruction' and 'amalgamation' and has lucidly observed as follows : ' Now what is an amalgamation ? An amalgamation involves, I think, a different idea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation or carried forward losses from earlier years, the right to carry them forward would be lost and the company into which the loss-making entity is merged (hereinafter called 'the transferee company') cannot claim to carry forward the unabsorbed depreciation or the past losses of the merged company which was a different assessee. This rule cannot be circumvented in cases of amalgamation failing under section 2(1A) by an Indian transferee company taking over the assets of the merged company at a value higher than the written down value, since Explanation 2A to section 43(6) provides that the written down value to the Indian transferee company of the capital assets in such cases should be taken to be the same as it would have been in the case of the merged company. On the other hand, the right to carry forward unabsorbed development rebate is available to the transferee company in cases of amalgamation failing within section 2(1A)....." Similarly, he referred to the passage occurring in Income-tax Law by Chaturvedi and Pithisaria at pages 1975 to 1980 as also some of the passages in Law of Income-tax by Sampath Iyengar at pages 178 to 187. In addition, he also relied on the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 6. This leads to the consideration of the fourth issue. Though Mr. Dastur attempted to argue that the amalgamation of BHEL and HEL would not amount to a scheme of amalgamation, we are not impressed with his arguments. The very definition of amalgamation contemplates three conditions. All the three conditions are satisfied in this case. The shareholder (in fact there is only one shareholder in both the companies and that is the President of India) holds not less than nine-tenths in value of the shares of the amalgamating company as required in sub-clause (iii) of section 2(1A) of the Act. There is, therefore, no doubt that there is an amalgamation of two companies within the meaning of section 2(1A). Consequently, the order passed by the Government of India is a scheme of amalgamation. Then we come to the provisions of section 43 of the Act, which defines various expressions used in sections 28 to 49. The words 'actual cost' has been defined in clause (1) of section 43. Mr. Dastur pointed out that actual cost in this case is worked out at Rs. 96.97 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs to be against the assessee because the words 'actually allowed' would mean the entire depreciation which is worked out though it might not have been fully absorbed. But what Mr. Dastur pointed out is that where the depreciation is carried forward under sub-section (2) of section 32 of the Act, then only that portion will have to be taken into account as equivalent to 'actually allowed'. But in a case where carried forward is not there because the HEL is not getting the benefit, according to the revenue, there is no question of taking unabsorbed depreciation as depreciation actually allowed in finding out the written down value in the case of BHEL which is the amalgamating company. Mr. Dastur also relied on the juxtaposition of Explanation 2A which came by amendment and also emphasised the fact that in case the contention is not accepted, it would result in anomaly because nobody would be getting the benefit of the depreciation especially when it comes to a question of taxing the balancing charge. 7. In our opinion, there is no merit in the contention of Mr. Dastur. It is true that Explanation 3 creates a legal fiction and it has to be construed strictly. It is also true that H ..... X X X X Extracts X X X X X X X X Extracts X X X X
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