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APPROVED SCHEME OF AMALGAMATION IS BINDING ON THE INCOME TAX AUTHORITIES

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APPROVED SCHEME OF AMALGAMATION IS BINDING ON THE INCOME TAX AUTHORITIES
Mr. M. GOVINDARAJAN By: Mr. M. GOVINDARAJAN
January 24, 2023
All Articles by: Mr. M. GOVINDARAJAN       View Profile
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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-

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.  

 

By: Mr. M. GOVINDARAJAN - January 24, 2023

 

 

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