In a recent ruling, a two-judge bench of the Supreme Court categorically held that the waiver of interest by financial institutions is assessable from the hands of the Amalgamating Company on availing benefit of seciton 72A of the Income Tax Act.
A bench comprising of Justice Sikri and Justice Ashok Bhushan was hearing an appeal against the order of the Karnataka High Court wherein the Court, while quashing the order of the ITAT granting the benefit of provisions of Section 72A of the Income Tax Act to the McDowell and Company Limited, held that waiver of interest by financial institutions would not be treated as income of the assessee-Company.
Coming to the facts of the case, the assessee, M/s. McDowell and Company Limited, amalgamated with a sick industrial company, i.e, M/s. Hindustan Polymers Limited. Being a sick industrial Company, HPL owed a lot of money to banks and financial institutions. In its books of accounts, the interest which had accrued on the loans given by such financial companies were shown as the money payable on account of interest to the said banking companies and was reflected as expenditure on that count and the assessee had obtained the benefit in its assessments.
An application filed by the assessee to the Central government seeking benefit under section 72A of the Income Tax Act was approved by the Government and accordingly, the assessee were allowed to set off losses of the amalgamated company as its own loses, subject to conditions. The banks which had advanced loans to HPL agreed to waive off the interest which had accrued prior to 01.04.1977. Since the interest was claimed as expenditure by HPL in its returns, it became income in terms of Section 41(1) of the Income Tax Act on the waiver of interest.
The return filed by the assessee was rejected by the Assessing Officer on re-assessment by treating the aforesaid income at the hands of the assessee and adjusted the same from the accumulated loses.
While doing so, he held that the income which had accrued within section 41(1) of the Income Tax Act was not set off while giving benefit of accumulated losses under Section 72(A) of the Act to the assessee.
On second appeal, the ITAT allowed the plea of the assessee and held that the aforesaid income u/s 41(1) of the Act may be treated as income of the HPL and since HPL was a different assessee and a different entity, the assessee herein was not liable to pay any taxes on the said income. However, the High Court reversed the order. Aggrieved by the order, the assessee approached the Apex Court for relief.
Before the Court, the assessee contended that insofar as the benefit of carry forward of accumulated loses of HPL and seeking set off thereof is concerned, it was the statutory right of the appellant-assessee which became available to it by virtue of the declaration given by the Central Government under the aforesaid provisions. It was also submitted that since HPL was a different assessee, this income could not be held to be the income of the amalgamated company.
Rejecting the above contentions, the bench noticed the finding of the High court that the assessee had taken over the sick company-HPL through the scheme of amalgamation sanctioned in 1982 w.e.f. 01.04.1977 and that the HPL ceased to have any identity as it did not remain a ‘person’ either in fact or inlaw after amalgamation. “However, rights are determined in terms of the scheme of amalgamation and since the benefit of interest had accrued after the company had ceased to exist, it was, in fact, availed of by the assessee company. What is more important is that the assessee company was allowed to set off the amalgamated losses of the company amalgamated with it, i.e., HPL. This was the benefit which accrued to the assessee under the provisions of section 72A of the Act. When the assessee is allowed the benefit of the accumulated loses, while computing those loses, the income which accrued to it had to be adjusted and only thereafter net losses could have been allowed to be set off by the assessee company.”
Upholding the order of the High Court, the bench said 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.”
Read the full text of the Judgment below.
