1983 (6) TMI 23 - HC - Income Tax

Summary

Issues:
1. Entitlement to carry forward loss and unabsorbed depreciation of predecessor company.
2. Succession by inheritance in the case of amalgamation of companies.

Entitlement to Carry Forward Loss and Unabsorbed Depreciation:
The case involved a reference by the Income-tax Appellate Tribunal regarding the entitlement of the assessee-company to carry forward any loss and unabsorbed depreciation of the predecessor company, Hindustan Aircraft Ltd. The Tribunal held that the assessee-company, Hindustan Aeronautics Ltd., was not entitled to carry forward these amounts. The Tribunal based its decision on the Government Order of amalgamation and the provisions of the Income Tax Act. The Tribunal referred to the decision in Indian Iron & Steel Company Ltd. v. CIT [1943] 11 ITR 328 to support its ruling that the assessee could not carry forward the losses and unabsorbed depreciation of the predecessor company. The Tribunal also highlighted that section 78(2) of the Act does not allow for such carry forward unless it is a case of succession by inheritance.

Succession by Inheritance in Amalgamation:
The Tribunal's decision was challenged in the reference, focusing on the interpretation of section 78(2) of the Income Tax Act. Section 78(2) clearly states that where a business is succeeded by another person other than by inheritance, the losses cannot be carried forward and set off against the new entity's income. The court referred to the principle that the successor in business should be treated as if it had started a new business. Citing the case of Indian Iron & Steel Co. Ltd. v. CIT [1943] 11 ITR 328 and United Steel Companies Ltd. v. Cullington [1941] 9 ITR (Suppl.) 20, the court emphasized that unabsorbed depreciation allowance of a predecessor company cannot be carried forward by a successor company in cases of amalgamation unless there is a succession by inheritance. The term "inheritance" in this context was strictly construed to mean transmission of assets or liabilities by personal law applicable to the parties.

Conclusion:
The court answered both questions in the affirmative against the assessee-company, Hindustan Aeronautics Ltd., implying that the company was not entitled to carry forward the losses and unabsorbed depreciation of Hindustan Aircraft Ltd. The decision was based on the strict interpretation of section 78(2) of the Income Tax Act and the principles established in relevant case law. No costs were awarded in the circumstances of the case.