Once benefit of setting off accumulated losses of amalgamating company u/s 72A was availed, waiver of interest on loans taken from FIs be taxed u/s 41(1)

Deciding upon the issue as to whether certain income accruing to an amalgamating entity would be treated as income in the hands of the amalgamated entity; the Supreme Court observed that amalgamation necessarily led to complete destruction of corporate personality of a company.

A Division Bench of Justice A K Sikri & Justice Ashok Bhushan clarified that when the Assessee availed the benefit of setting off accumulated losses of the amalgamating company u/s 72A, the waiver of interest on loans taken from Financial Institutions, was to be treated as taxable income u/s 41(1).

The Appellant-Assessee was represented by Mr. Jaideep Gupta, Senior Advocate, whereas the Respondent-Revenue was represented by Mr. YP Adhyaru, Senior Advocate.

Briefly, the Appellant-company, during the relevant period, underwent amalgamation with a company named M/s Hindustan Polymers Limited (HPL), a company which had been declared a sick industrial unit and was facing proceedings before the Board for Industrial and Financial Reconstruction (BIFR). Such amalgamation was approved by the High Court of Bombay as well as the High Court of Madras.

M/s HPL owed a lot of money to banks and financial institutions and in its books, the interest accruing on loans given by such financial companies was shown as money payable on account of interest to the banking companies and was reflected as expenditure.

Since the interest payable was treated as expenditure, benefit of the same was taken in the assessment orders passed. The Assessee approached the Central Government to seek benefit under Section 72A of the Income Tax Act 1961, pertaining to carry forward and set off of accumulated loss and unabsorbed depreciation allowance on amalgamation or demerger.

Under certain circumstances and on fulfilment of conditions laid down therein, the company which takes over the sick company is allowed to set off losses of the amalgamated company as its own loses. The Central Government made a declaration to this effect under Section 72A of the Act granting the benefit under this provision to the Assessee.

Under the scheme of amalgamation as approved by the High Court, after following the procedure in terms of Sections 391 and 392 of the Companies Act, which included the consent of the secured creditors as well, the banks which had advanced loans to HPL agreed to waive off the interest which had accrued prior to 01.04.1977. The interest was claimed as expenditure by HPL in its returns. On the waiver of this interest, it became income in terms of Section 41(1) of the Act

In the Income Tax Return filed by the Assessee for the relevant AY, the Assessee claimed set off of accumulated losses which it had taken over from M/s HPL, by virtue of the provisions, and such set off came to be allowed.

Later, the Assessing Officer (AO) noted that while allowing such benefit to the Assessee, the income which had accrued under section 41(1) of the Act had not been set off against the accumulated losses.

Therefore, the AO proposed to re-open assessment for the relevant period and during which the AO noticed that the income accruing as per Section 41(1) of the Act was not set off while giving benefit of accumulated losses under Section 72A of the Act to the Assessee. The AO thus treated the income at the hands of the assessee and adjusted the same from the accumulated losses and re-assessment order came to be passed.

On appeal, the CIT(A) sustained the findings of the AO. On further appeal, the Income Tax Appellate Tribunal (ITAT) held that income under Section 41(1) was not income in the hands of the Assessee, but rather was income in the hands of M/s HPL, and since M/s HPL was a separate entity and separate taxpayer, the Assessee was not liable to pay tax on such income.

Subsequently, the Revenue referred the issue to the High Court, which settled the issue in favour of the Revenue.

On hearing the submissions of both sides, the Bench observed that the Assessee was given the benefit of accumulated loses of the amalgamated company, the effect of which was that though these losses were incurred by the amalgamated company, they were deemed to be treated as loses of the assessee company by virtue of Section 72A of the Act.

Thus, it could not be said that the Assessee would be entitled to take advantage of the accumulated losses, but while calculating these losses at the hands of the amalgamated company, 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 losses, the benefit whereof is to be extended to the assessee.

Thus, the Supreme Court concurred with the view adopted by the High Court and dismissed the present appeal.

Cause Title: McDowell and Co. Ltd vs CIT, Karnataka Central, Bangalore [Civil Appeal No. 3893 of 2006 / 2023-Enterslice-15-SC-IT]

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