Saraswati Industrial Syndicate Ltd v. C.I.T., Haryana, Himachal Pradesh, Delhi

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Facts

  1. The appeal[1] was filed against the Punjab and Haryana High Court’s judgement and order dated 15.4.1975 in response to the Income Tax Appellate Tribunal’s Income Tax Reference to the Court. Justice Singh had previously delivered the Court’s previous decision.
  2. The appellant Saraswati Industrial Syndicate was a limited company that continued its business of manufacturing and selling sugar and machinery for sugar mills and other diligences, which gave rise to the appeal. Another firm, the Indian Sugar and General Engineering Corporation, was also involved in the manufacturing of sugar mill machinery parts.
  3. The Indian Sugar Company was merged with the appellant company, Saraswati Industries Syndicate Ltd, on September 28, 1962, pursuant to the High Court’s guidelines and orders. The Indian Sugar Company lost its identity as a result of the merger, and it also stopped doing business.
  4. Prior to amalgamation, the Indian Sugar Company was given an accrual-based expenditure of Rs.58,735 in its previous assessment year. The amount was shown as a transaction liability by the company, and the appellant company assumed the transaction liability.
  5. The appellant company attempted to assert an income tax exemption of Rs.58,735 for the assessment year 1965-66 on the basis that the amalgamated company had no duty to pay tax u/s 41(1) of the IT Act 1961 because the expenditure was allowed to the former Indian Sugar Company, which was a separate individual entity from the amalgamated company.
  6. The appellant’s application for exemption was denied by the Income Tax Officer. The assessee (the person who is responsible for paying taxes on his or her earnings) filed an appeal with the Appellate Assistant Commissioner, who upheld the Income Tax Officer’s decision. After that, the assessee filed an appeal with the Income Tax Appellate Tribunal. 
  7. In addition, the Tribunal granted the appeal under Section 41(1) of the Act. The Tribunal held that when the Indian Sugar Company merged with the assessee company, the merging company’s name vanished and it was no longer in existence after the merger; as a result, the assessee company became a different entity and was not liable to pay the taxes. 
  8. The Tribunal, on the request of the division, referred the case to the High Court:: “Whether on the facts and situations of the case the Tribunal was acceptable in law in holding that the sum of Rs.58,735 was not payable to tax under sub-section (1) of Section 41 of the Income Tax Act 1961 for the assessment year 1965-66?”
  9. Following that, the High Court ruled in favour of the income holding entity, holding that the appellant assessee’s claim of exemption from tax liability was chargeable for tax payment under Section 41(1) of the Act. The High Court ruled that no corporation ceased to exist as a result of the merger; rather, both merging firms continued to operate their businesses in a combined form.
  10. The Court went on to say that the amalgamated company was an heir to the amalgamating company’s interest and importance, and that when the assets of both companies were combined and were to form a new company, the liabilities were also merged.
  11. The High Court also found that the amalgamated company, specifically the assessee, was liable to pay tax on Rs.58,735 derived from the Indian Sugar Company’s properties.
  12. The assessee then filed an application with the High Court for a certificate to appeal to the Court under Section 261 of the Act and Section 109 of the Code of Civil Procedure, but the High Court dismissed it. Following that, the appellant filed a special leave petition with the Supreme Court under Article 136 of the Constitution.

Judgment

  1. The Supreme Court held that while Section 41(1)[2] was enacted to charge tax on income earned by an assessee, it also extends to assessees who may have had transaction liability in the previous year.
  2. The income earned in the year following the previous year or the accounting year cannot be considered as income received by the assessee if the assessee to whom the transaction responsibility would have been allowed as a business expense in the previous year ceases to exist or if the assessee is modified due to the death of the earlier assessee.
  3. Furthermore, the Court stated that the previous year’s identity of the assessee and the following year’s identity must be the same in order to invoke the provisions of Section 41(1) for the enforcement of tax liability. There would be no tax liability under the terms of Section 41 if the assessee’s individuality changed.
  4. Two companies may merge to create a new company, or they may merge to form a new company; all are amalgamations. When two companies merge and merge in order to create a new company, or when one company is replaced by another or combined with another, the amalgamating company loses its identity.
  5. The Court ruled that when two companies merge, the transferor company’s entity dissolves and the amalgamated company takes on a new identity, making it impossible to treat the two companies as partners or jointly responsible for their liabilities and properties.
  6. The true outcome and personality of the merger are largely dependent on the terms and conditions of the merger scheme, but there is no doubt that when two companies amalgamate and combine into one, the transferor corporation loses its identity and ceases to exist as a separate organisation.
  7. Though their respective rights and liabilities are resolved under the scheme of amalgamation, the transferor company’s business entity ceases to exist as of the date the amalgamation becomes effective.
  8. The Court also agreed with the Tribunal that the amalgamating company ceased to exist in law, so the appellant was not liable to pay tax on the amount of Rs.58,735. As a result, the Court reversed the High Court’s decision and addressed the question in favour of the assessee against the Revenue

[1] Saraswati Industrial Syndicate … vs C.I.T., Haryana, Himachal, 1991 AIR 70.

[2] Income  Tax Act, 1961, s. 41(1).

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