MCDOWELL & COMPANY LTD. vs. COMMNR. OF INCOME-TAX, BANGALORE

C.A. No.-003893-003893 - 2006Supreme Court,2017 INSC 22009 March 2017Bench: HON'BLE MR. JUSTICE A.K. SIKRI HON'BLE MR. JUSTICE ASHOK BHUSHANAuthor: HON'BLE MR. JUSTICE A.K. SIKRI11 pages
For Petitioner: KUNAL CHATTERJIFor Respondent: B. V. BALARAM DAS
AI SummaryDismissed

What were the facts?

The appellant, M/s. McDowell & Company Ltd. (assessee), amalgamated with M/s. Hindustan Polymers Limited (HPL), a sick industrial company, effective April 1, 1977. HPL owed significant interest to financial institutions, which it had treated as expenditure. Under the amalgamation scheme, these institutions waived the accrued interest. The assessee claimed the benefit of Section 72A of the Income Tax Act, 1961, to set off HPL's accumulated losses. The Assessing Officer, during reassessment, noted that the waived interest, taxable under Section 41(1) as income, had not been set off against the accumulated losses. The Assessing Officer adjusted this income against the losses. The Income Tax Appellate Tribunal (ITAT) held that the waived interest was not assessable in the hands of the assessee, as HPL was a distinct entity. The Revenue appealed to the High Court, which set aside the ITAT's order, holding the waived interest assessable in the assessee's hands.

What did the Supreme Court hold?

The Supreme Court dismissed the appeal, agreeing with the High Court's analysis. The Court held that while the judgment in 'Saraswati Industrial Syndicate' dealt with Section 41(1) per se and might not be directly applicable where income accrues to an amalgamated company (which cannot be treated as income of the taking-over company), the present case is different. Here, the assessee was given the benefit of accumulated losses of the amalgamated company (HPL) under Section 72A. The Court reasoned that when the assessee is allowed the benefit of these losses, which were suffered by HPL but are deemed to be the assessee's losses by virtue of Section 72A, it is not open for the assessee to claim the benefit of accumulated losses without accounting for the income accrued under Section 41(1) at the hands of HPL. This income had to be necessarily adjusted to ascertain the actual accumulated losses for which the benefit is extended to the assessee. The High Court's reasoning, which considered the objective of Section 72A in facilitating mergers of sick units and the deeming fiction it creates, was upheld. The Court found that the waived interest was effectively availed of by the assessee company, and when it sought the benefit of HPL's accumulated losses, the income accrued to HPL had to be accounted for.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the overdue interest waived by the financial institutions amounting to Rs. 25.02 lakhs is not assessable in the hands of the assessee, considering the provisions of Section 41(1) and Section 72A of the Income Tax Act, 1961? Assessee's contentions: The assessee argued that the High Court erred in appreciating Section 72A and Section 41(1) and the ratio of 'Saraswati Industrial Syndicate v. CIT'. It contended that the benefit of Section 72A was a statutory right, granted after fulfilling conditions and a declaration by the Central Government. Regarding Section 41(1), the assessee argued that the language clearly indicates the income should be at the hands of the "first mentioned person" (HPL), a distinct entity, citing 'Saraswati Industrial Syndicate' for the principle that identity of the assessee must be the same for Section 41(1) to apply. Revenue's contentions: The Revenue argued that the High Court correctly considered Section 41(1) along with Section 72A. It emphasized the scope and object of Section 72A, which facilitates amalgamation of sick units, and stated that the Tribunal failed to consider this. The Revenue contended that when the assessee is allowed the benefit of accumulated losses of the amalgamated company under Section 72A, the income accrued under Section 41(1) at the hands of the amalgamated company must be accounted for and adjusted to determine the net losses.

Which sections of the Income-tax Act were involved?

Section 72A,Section 41(1),Section 256

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
'REPORTABLE' IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 3893 OF 2006 M/s. MCDOWELL & COMPANY LTD. ... Appellant VERSUS COMMISSIONER OF INCOME-TAX, KARNATAKA CENTRAL, BANGALORE ... Respondent

J U D G M E N T A. K. SIKRI, J.

This appeal is preferred against judgment dated 05.04.2005 of the High Court of Karnataka whereby the appeal of Commissioner of Income Tax (Revenue) was allowed setting aside the order to the Income Tax Appellate Tribunal(ITAT) which had granted the benefit of provisions of Section 72A of the Income Tax Act, 1961 (hereinafter referred to as 'Act') to the appellant-assessee and, at the same time, held that waiver of interest by financial institutions would not be treated as income of the appellant-assessee under Section 41(1) of the Act.

Brief summary of the facts which have led to the present appeal may be taken note of at this stage.

There was a company known as M/s. Hindustan Polymers Limited (HPL) which had become a sick industrial company.

Proceedings in respect of the said company were pending before the Board for Industrial and Financial Reconstruction

The order continues below.

Read the full judgment

A free account opens 10 full judgments a month. Re-reading one you have already opened does not count again.

Create a free accountSign in

See plans and prices

The summary, the parties, the sections and the citations above are open to everyone and always will be. Only the text of the order and the PDF are metered.

More judgments on Section 72A

All 92 judgments and leading authorities on Section 72A →

Recent GST High Court judgments

Search GST case law →