DBITR45/1983 // 1 // IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR ORDER IN D.B. Income Tax Reference No.45 of 1983 State Bank of Bikaner and Jaipur Vs. Commissioner of Income Tax Date of Order ::: 28.10.2010 Present Hon'ble the Chief Justice Mr. Jagdish Bhalla Hon'ble Mr. Justice Mohammad Rafiq Shri P.K. Kasliwal, Counsel for applicant- assessee Ms. Parnitoo Jain, Senior Standing Counsel for respondent-revenue #### //Reportable// By the Court (Per Hon'ble Mohammad Rafiq, J.) This reference has been received from the Income Tax Appellate Tribunal (hereinafter shall be referred to as 'ITAT') at instance of assessee State Bank of Bikaner and Jaipur. Question that has been referred to this Court for answer under Section 256 (1) of the Income Tax Act, 1961, reads as under:- “Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the applicant was not entitled to set off of the brought forward losses of the State Bank of Jaipur?” Factual matrix of case is that prior to DBITR45/1983 // 2 // 1st January, 1963 assessee Bank was named as State Bank of Bikaner only. This Bank acquired assets and liabilities of State Bank of Jaipur under Section 38(2) of the State Bank of India (Subsidiary Banks) Act, 1959 vide order dated 18th December, 1962 passed by Government of India, Ministry of Finance, Department of Economic Affairs. Assessee claimed set off regarding carried forward losses in respect of business of State Bank of Jaipur which merged with it under Section 38 of the Act of 1959. It was claimed by assessee that business of State Bank of Jaipur remained in continuity and was carried on by State Bank of Bikaner and Jaipur. It was claimed that loss of Rs.58,328/- pertaining to State Bank of Jaipur for assessment year 1963-64 should be allowed to be carried forward and set off against profits of assessee. Assessing officer rejected claim vide order dated 17.08.1978. Assessee Bank preferred an appeal before Commissioner of Income Tax (Appeals) against order of assessing officer but the same was rejected vide order dated 16.06.1979. Further appeal filed by assessee against both orders was also rejected by ITAT vide order dated 28.02.1981. Assessee thereafter filed an application under Section DBITR45/1983 // 3 // 256 (1) of the Act of 1961 before ITAT for referring the above referred to question to this Court. It is in this background that present reference has been received. Shri P.K. Kasliwal, learned counsel for assessee, has argued that present case squarely falls within the scope of Section 78(2) of the Act of 1961 which inter-alia provides that even in cases, where a person carrying on any business or profession, has been succeeded in such capacity by another person, otherwise than by inheritance, nothing contained in said Act shall entitle any person other than the person incurring the loss to have it carried forward and set off against his income. Since present one was a case of succession by inheritance, assessee would be entitled to set off regarding process pertaining to State Bank of Jaipur for assessment year 1963-64. It was argued that ITAT has erred in law in holding that law of inheritance is applicable only to living person and not to jurisdictional person and therefore the claim has wrongly been rejected. Learned counsel referred to provisions contained in Section 2(31) of the Act of 1961 to argue that person for the purpose of Act of 1961 would be a legal person, which would include a Company, DBITR45/1983 // 4 // it being a juridical person. What is bared in Section 78(2) of the Act of 1961 to be carried forward and set off against income is the loss incurred by otherwise by any inheritance. In other words, loss derived by inheritance would be open to be carried forward and set off against income. Learned counsel further argued that ITAT failed to consider that all assets and liabilities of State Bank of Jaipur were taken over by State Bank of Bikaner, which hitherto came to be known as State Bank of Bikaner and Jaipur. Old business of State Bank of Jaipur was continued after its merger with State Bank of Bikaner by the latter. Mere change of name would not detract from the issue that loss suffered by earlier Bank is loss of assessee Bank on merger and it should be allowed to be set off against income of assessee in succeeding assessment year. Shri P.K. Kasliwal, learned counsel has argued that Tribunal failed to correctly construe/interpret Section 78(2) of the Act of 1961 which should be construed in its natural perspective having regard to compulsion of circumstances. Where it is possible to draw two inferences from facts and where there is no evidence of any dishonest or improper motive on DBITR45/1983 // 5 // the part of assessee, it would be just and equitable to draw such inference that would lead to equity and justice. It is trite law that where statute confers benefit on assessee, provisions should be so interpreted and words used therein should be assigned such meaning, as would enable the assessee to secure benefit intended to be given by Legislature. Taxing statute has to be interpreted liberally, so as to give effect to object of provision and statute, and advance object of provision and not to frustrate it. Learned counsel, in support of his submissions, relied on decisions of Supreme Court in:- 1. 239 ITR 775 (SC) – Mysore Minerals Limited Vs. Commissioner of Income Tax 2. 196 ITR 188 (SC) – Bajaj Tempo Limited Vs. Commissioner of Income Tax 3. 131 ITR 597 (SC) 4. 156 ITR 323 (SC) – Commissioner of Income Tax, Bangalore Vs. J.H. Gotla Per contra, Ms. Parnitoo Jain, learned counsel appearing for revenue, has argued that ITAT as well as CIT (Appeals) and assessing officer were completely justified in disallowing benefit of carrying forward losses under Section 78 (2) of the Act of 1961 because it was not at all the case of assessee that DBITR45/1983 // 6 // merger of two companies where losses of State Bank of Jaipur, which was merged with State Bank of Bikaner, could not be allowed to be carried forward because latter company with which former is merged, cannot be said to have received such losses by way of inheritance. Learned counsel has argued that right to carry forward and set off of losses belongs to person who suffered loss and not to different person. Only exception that is carved out is the one given under Section 78 (2) of the Act of 1961 itself, which is that if such losses are derived by way of inheritance, they could be allowed to be carried forward and set off against income of assessee. Ms. Parnitoo Jain, learned counsel argued that even if assessee is treated to be a jurisdictional person, that would not make any change because what is of significance is the fact that whether or not merger of one company with another can be taken a case of succession by inheritance. Learned counsel, in support of her submissions, relied on judgment of this court in, 1. 260 ITR 167 (Raj.) Rajasthan Rajya Sahakari Spinning and Ginning Mills Federation Limited Vs. Income Tax Appellate Tribunal and Another DBITR45/1983 // 7 // and judgments of Supreme Court in, 2. 156 ITR497 (SC) – Saroj Aggarwal Vs. Commissioner of Income Tax, U.P. (SC) 3. 237 ITR579 (SC) – Commissioner of Income Tax Vs. Sterling Foods and judgment of Karnataka High Court in, 4. 149 ITR 795 (Kar.) - Hindustan Aeronautics Limited Vs. Commissioner of Income Tax, Karnataka In order to appreciate true content and meaning of word 'inheritance' as used in Section 78(2) of the Act of 1961, it would be apposite to reproduce the said provision in extenso for facility of reference, which we do as under:- “Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, nothing in this Chapter shall entitle any person other than the person incurring the loss to have it carried forward and set off against his income.” Reading of above provision would show that if a person has derived loss by way of inheritance, i.e. when a person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, he would then be entitled to have such losses carried forward and set off DBITR45/1983 // 8 // against his income. What is to be seen is whether losses of merged company with another can be said to have derived by latter by way of inheritance. In other words, the issue is whether law of inheritance in context of present case be applied in the case of merger of one company with another. This court in Rajasthan Rajya Sahakari Spinning and Ginning Mills Federation Limited's case (supra) was considering a case wherein there was amalgamation and consequential merger of four cooperative societies and thereby formation of one cooperative society with all their assets and liabilities under Section 17 of the Rajasthan Cooperative Societies Act, 1965. As a result thereof, individual registrations of different four cooperative societies stood cancelled under Section 18(2) of the Rajasthan Cooperative Societies Act, 1965 with registration of one single cooperative society, who was the assessee. The assessee set off brought forward losses against its total income under Section 78(2) of the Act of 1961. It was held by this Court that assessee was not entitled to set off the losses carried forward by four cooperative societies against its profits because those cooperative DBITR45/1983 // 9 // societies had their own entity and were independent. In terms of their profits and losses, they could not be treated as the assessee in the year under consideration. Even after their merger into one society it could not be said that such society had succeeded or such society had received those losses by way of inheritance. In Hindustan Aeronautics Limited's case (supra), the case before the Karnataka High Court was one of the amalgamation of the companies wherein similar benefit was claimed by assessee under Section 78(2). It was held that successor company was not entitled to carry forward or set off loss or unabsorbed depreciation incurred by its predecessor, as it is not a case of succession by inheritance. The principle is that the successor in business must be treated as if it had commenced or set up a new business. Karnataka High Court in aforesaid case relied on judgment of Privy Council in case of Indian Iron and Steel Company Limited Vs. CIT (1943) 11 ITR 328, wherein judicial committee of Privy Council observed that where there is amalgamation of two companies, the unabsorbed depreciation allowance of one company could not be carried DBITR45/1983 // 10 // forward by successor company and set off against such successor's profits in any year subsequent to the change in ownership. In Saroj Aggarwal, supra, also provisions of Section 78(2) came up for consideration before Supreme Court; therein one of the partners had died and his widow joined the firm three days later. There was no provision in partnership deed regarding continuation of partnership. All partners were member of same family. Supreme Court held that widow could be said to have succeeded by inheritance and therefore she was entitled to set off loss of deceased husband against here share in profits. Supreme Court held so because it was a clear case of inheritance. In Commissioner of Income Tax Vs. J.H. Gotla (supra) assessee transferred part of machinery of his business to wife and minor children. Wife entered into partnership with third person and minor children were admitted to benefits of partnership. Premises and remaining machinery were leased to said firm. Share of profits of wife and minor children were included in total income of assessee and losses incurred by assessee in his business in earlier years were brought forward. In those DBITR45/1983 // 11 // facts, it was held by the Supreme Court that income includes losses and that the assessee was entitled under Section 24(2) of the Indian Income Tax Act of 1922 to set off the losses in his individual business. The share income of the wife and minor children in the firm was included in the total income of the assessee under Section 16(3) of the Act of 1922, which provision provided that profit or loss from a business of wife or minor children, included in total income of assessee, should be treated as profit or loss from a business carried on by him for the purpose of carry forward and set off loss under Section 24(2). In view of above discussion, it must be held that provisions under Section 78(2) of the Act do not entitle the assessee to carry forward and set off losses of State Bank of Jaipur because requisite precondition that succeeding company should have derived such losses by way of inheritance has not been fulfilled and for that limited purpose, two companies shall have to be treated two different persons and not same person. Even if in law a company is treated as jurisdictional person, nevertheless, for the purpose of Section 78(2), they would not be the same DBITR45/1983 // 12 // assessee after merger of two companies as after merger of State Bank of Jaipur with State Bank of Bikaner and with re-christening of the company as State Bank of Bikaner and Jaipur, it cannot be treated to be same “assessee” for income tax purpose. We therefore answer the reference accordingly. (Mohammad Rafiq) J. (Jagdish Bhalla) CJ. //Jaiman//