The Supreme Court has clarified that a contractual or scheme-based language in amalgamation order cannot substitute for statutory entitlement where governing taxing statute itself does not create such a right. Accordingly, the Court ruled that in the absence of statutory provision similar to Section 72A of Income Tax Act, 1961, losses suffered by amalgamating company cannot automatically be treated as losses of amalgamated company under Kerala Agricultural Income Tax Act, 1991.

A Two-Judge Bench comprising Justice Rajesh Bindal and Justice Vijay Bishnoi observed that Section 72A of the Income Tax Act, expressly provides that in case of amalgamation, the accumulated loss and unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected.

The Bench noted that Clause 14.2 of the scheme of amalgamation, provided that with effect from the appointed date, all profits or income accruing or arising to Pullangode Rubber & Produce Co. Ltd. and all expenditure or losses arising or incurred by it shall, for all purposes, be treated as and deemed to accrue as the profits, income, expenditure or losses, as the case may be, of Aspinwall & Co. It is an undisputed fact, that no notice of the amalgamation proceedings had been issued to the State of Kerala to raise objection with reference to any terms of the amalgamation scheme.

Now, the Bench explained that Section 54 of the Kerala Agricultural Income Tax Act, dealing with succession to business, provides that where a person carrying on any business has been succeeded in such capacity by another person, each shall be assessed in respect of his actual share of agricultural income in the previous year. The proviso provides that where the person succeeded cannot be found, assessment in respect of agricultural income up to the date of succession and for the preceding years may be made on the successor, and tax assessed on the person succeeded can be recovered from the person succeeding. The Bench read this provision as dealing with assessment and recovery of tax liability upon succession, and not as conferring any right upon the successor to claim carry forward and set-off of losses suffered by the predecessor.

There is a clear distinction between the Kerala Act and Section 72A of the Income Tax Act, 1961. Section 72A begins with a non-obstante clause and specifically enacts that the accumulated loss and unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or allowance for unabsorbed depreciation of the amalgamated company, added the Bench.

The Bench’s clear observation was that such a deeming fiction is expressly created in the 1961 Act, but there is no corresponding provision under the Kerala Agricultural Income Tax Act, 1991. Therefore, in the absence of a statutory provision similar to Section 72A, the losses suffered by the amalgamating company could not automatically be treated as the losses of the amalgamated company under the Kerala Act.

Under the Kerala Agricultural Income Tax Act, there is no provision by which the accumulated losses suffered by an amalgamating company can be carried forward and set-off against the income of the amalgamated company. Section 12 of the Kerala Act permits carry forward and set-off only of loss sustained by the person claiming such set-off, and Section 54 dealing with succession to business only provides for assessment and recovery of tax liability in the case of succession; it does not create any right in favour of the successor to claim the predecessor’s losses, added the Bench.

On the other hand, the Bench pointed out that Section 72A of the Income Tax Act, which expressly deems the accumulated loss and unabsorbed depreciation of the amalgamating company to be that of the amalgamated company, is materially different from the Kerala Act, and in the absence of any corresponding statutory deeming provision in the Kerala Act, such benefit cannot be claimed by implication.

Clause 14.2 of the scheme of amalgamation, even though it provided that the losses of the amalgamating company would be treated as those of the amalgamated company, could not by itself confer a tax benefit under the Kerala Act, particularly when no notice of the amalgamation proceedings had been issued to the State of Kerala. Further, where the losses in question pertain to a period beyond eight years, Section 12 of the Kerala Act independently bars their carry forward and set-off, added the Bench.

Briefly, a company named Pullangode Rubber & Produce Co. Ltd., was amalgamated with the assessee Aspinwall and Co. Ltd., which was sanctioned in November 2006, and the appointed date under the scheme was fixed as January 01, 2006. Since there were accumulated losses in the balance sheet of the amalgamating company, the issue arising for consideration was whether those accumulated losses could be claimed as a set-off against the income of the amalgamated company. The assessee argued that under Section 54 of the Kerala Agricultural Income Tax Act, 1991, the amalgamated company, being the successor of the amalgamating company, was entitled to set-off the losses suffered by the amalgamating company. It was further contended that Section 12 of the Kerala Act permitted losses suffered by an assessee to be carried forward for eight years for set-off against income of subsequent years.

The respondent Department, on the other hand, argued that under Section 12 of the Kerala Act, set-off of accumulated losses could be claimed only by the assessee who had actually suffered the losses, and since the amalgamated company had not suffered those losses, it could not claim the set-off. It was also contended that under Clause 17.1 of the scheme of amalgamation, the amalgamating company stood dissolved without winding up, and thus the assessee which had suffered the losses was no longer in existence. It was also argued that the proviso to Section 54 of the Kerala Act merely enabled recovery of an existing tax demand of the succeeded person from the successor, and did not confer any substantive benefit of loss set-off upon the successor.

Appearances:

For Appellant/Taxpayer: Senior Advocate S. Ganesh, AOR M/S. K J John & Co., along with Advocates Surekha Raman, Shreyash Kumar, Siddharth Nair, Harshit Singh, and Yashwant Sanjenbam

For Respondent/Revenue: Senior Advocate Pallav Shishodia, AORs C. K. Sasi and M. T. George, along with Advocates Dr. Kk Geetha and Meena K Poulose