Case: Saraswati Industrial Syndicate Limited Vs. Commissioner of Income Tax, Haryana Himachal Pradesh and Delhi III

that section 41 did not apply because the assessee sought to be taxed was not the assessee as contemplated by section 41(1), as the husband of the assessee had died ; therefore, the Revenue could not take advantage of the provisions of section 41(1) of the ActThe question is whether, on the amalgamation of the Indian Sugar Company with the appellant-company, the Indian Sugar Company continued to have its identity and was alive for the purposes of section 41(1) of the Act. The amalgamation of the two companies was effected under the order of the High Court in proceedings under section 391 read with section 394 of the Companies Act. The Saraswati Industrial Syndicate, the transferee-company, was a subsidiary of the Indian Sugar Company, namely, the transferor-company. Under the scheme of amalgamation, the Indian Sugar Company stood dissolved on October 29, 1962, and it ceased to be in existence thereafter, though the scheme provided that the transferee-company, the Saraswati Industrial Syndicate Ltd., undertook to meet any liability of the Indian Sugar Company which that company incurred or it could incur, before the dissolution or not (sic) thereafter. 4. Generally, where only one company is involved in a change and the rights of the shareholders and creditors are varied, it amounts to reconstruction or reorganisation or scheme of arrangement. In an amalgamation, two or more companies are fused into one by merger or by one over the other. Reconstruction or amalgamation has no precise legal meaning. Amalgamation is a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company become substantially the shareholders in the company which is to carry on the blended undertakings. There may be amalgamation either by the transfer of two or more undertakings to a new company, or by the transfer of one or more undertakings to an existing company. Strictly, "amalgamation" does not cover the mere acquisition by a company of the share capital of the other company which remains in existence and continues its undertaking but the context in which the term is used may show that it is intended to include such an acquisition. See Halsburys Laws of England, 4th Edition, Volume 7, para 1539. Two companies may join to form new company, but there may be absorption or blending of one by the other and both amount to amalgamation. When two companies are merged and are so joined as to form a third company or one is absorbed into the other or blended with another, the amalgamating company loses its entityIn General Radio and Appliances Co. Ltd. v. M. A. Khader 1986 (60) CC 1013, the effect of amalgamation of two companies was considered. General Radio and Appliances Co. Ltd. was the tenant of a premises under an agreement providing that the tenant shall not sub-let the premises or any portion thereof to any one without the consent of the landlord. General Radio and Appliances Co. Ltd. was amalgamated with National Ekco Radio and Engineering Co. Ltd. under a scheme of amalgamation and order of the High Court under sections 391 and 394 of Companies Act, 1956. Under the amalgamation scheme, the transferee-company, namely, National Ekco Radio and Engineering Company, had acquired all the interest, rights including leasehold and tenancy rights of the transferor-company, and the same vested in the transferee-company. Pursuant to the amalgamation scheme, the transferee-company continued to occupy the premises which had been let out to the transferor-company. The landlord initiated proceedings for eviction on the ground of unauthorised sub-letting of the premises by the transferor-company. The transferee-company set up a defence that, by amalgamation of the two companies under the order of the Bombay High Court, all interests, rights including leasehold and tenancy rights held by the transferor-company, blended with the transferee-company and, therefore, the transferee-company was a legal tenant and there was no question of any sub-letting. The Rent Controller and the High Court both decreed the landlords suit. This court, in appeal, held that under the order of amalgamation made on the basis of the High Courts order, the transferor-company ceased to be in existence in the eye of law and it effaced itself for all practical purposes. This decision lays down that, after the amalgamation of the two companies, the transferor-company ceased to have any identity and the amalgamated company acquired a new status and it was not possible to treat the two companies as partners or jointly liable in respect of their liabilities and assets. In the instant case, the Tribunal rightly held that the appellant-company was a separate entity and a different assessee and, therefore, the allowance made to Indian Sugar Company which was a different assessee could not be held to be the income of the amalgamated company for purposes of section 41(1) of the Act. The High Court was in error in holding that, even after amalgamation of the two companies, the transferor-company did not become non-existent but instead it continued its entity in a blended form with the appellant-company. The High Courts view that, on amalgamation, there is no complete destruction of the corporate personality of the transferor-company but instead there is a blending of the corporate personality of one with another corporate body and it continues as such with the other is not sustainable in law. The true effect and character of the amalgamation largely depends on the terms of the scheme of merger. But there cannot be any doubt that, when two companies amalgamate and merge into one, the transferor-company loses its entity as it ceases to have its business. However, their respective rights and liabilities are determined under the scheme of amalgamation but the corporate entity of the transferor-company ceases to exist with effect from the date the amalgamation is made effectiveIn view of the above discussion, we agree with the Tribunals view that the amalgamating company ceased to exist in the eye of law and therefore, the appellant was not liable to pay tax on the amount of Rs. 58, 735.

Court's decision (1 = petition accepted / positive for appellant, 0 = rejected / negative): 1

Reasoning from the judgment:
1[ds]Generally, where only one company is involved in a change and the rights of the shareholders and creditors are varied, it amounts to reconstruction or reorganisation or scheme of arrangement. In an amalgamation, two or more companies are fused into one by merger or by one over the other. Reconstruction or amalgamation has no precise legal meaning. Amalgamation is a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company become substantially the shareholders in the company which is to carry on the blended undertakings. There may be amalgamation either by the transfer of two or more undertakings to a new company, or by the transfer of one or more undertakings to an existing company. Strictly, "amalgamation" does not cover the mere acquisition by a company of the share capital of the other company which remains in existence and continues its undertaking but the context in which the term is used may show that it is intended to include such an acquisition. See Halsburys Laws of England, 4th Edition, Volume 7, para 1539. Two companies may join to form new company, but there may be absorption or blending of one by the other and both amount to amalgamation. When two companies are merged and are so joined as to form a third company or one is absorbed into the other or blended with another, the amalgamating company loses its entityIn General Radio and Appliances Co. Ltd. v. M. A. Khader 1986 (60) CC 1013, the effect of amalgamation of two companies was considered. General Radio and Appliances Co. Ltd. was the tenant of a premises under an agreement providing that the tenant shall not sub-let the premises or any portion thereof to any one without the consent of the landlord. General Radio and Appliances Co. Ltd. was amalgamated with National Ekco Radio and Engineering Co. Ltd. under a scheme of amalgamation and order of the High Court under sections 391 and 394 of Companies Act, 1956. Under the amalgamation scheme, the transferee-company, namely, National Ekco Radio and Engineering Company, had acquired all the interest, rights including leasehold and tenancy rights of the transferor-company, and the same vested in the transferee-company. Pursuant to the amalgamation scheme, the transferee-company continued to occupy the premises which had been let out to the transferor-company. The landlord initiated proceedings for eviction on the ground of unauthorised sub-letting of the premises by the transferor-company. The transferee-company set up a defence that, by amalgamation of the two companies under the order of the Bombay High Court, all interests, rights including leasehold and tenancy rights held by the transferor-company, blended with the transferee-company and, therefore, the transferee-company was a legal tenant and there was no question of any sub-letting. The Rent Controller and the High Court both decreed the landlords suit. This court, in appeal, held that under the order of amalgamation made on the basis of the High Courts order, the transferor-company ceased to be in existence in the eye of law and it effaced itself for all practical purposes. This decision lays down that, after the amalgamation of the two companies, the transferor-company ceased to have any identity and the amalgamated company acquired a new status and it was not possible to treat the two companies as partners or jointly liable in respect of their liabilities and assets. In the instant case, the Tribunal rightly held that the appellant-company was a separate entity and a different assessee and, therefore, the allowance made to Indian Sugar Company which was a different assessee could not be held to be the income of the amalgamated company for purposes of section 41(1) of the Act. The High Court was in error in holding that, even after amalgamation of the two companies, the transferor-company did not become non-existent but instead it continued its entity in a blended form with the appellant-company. The High Courts view that, on amalgamation, there is no complete destruction of the corporate personality of the transferor-company but instead there is a blending of the corporate personality of one with another corporate body and it continues as such with the other is not sustainable in law. The true effect and character of the amalgamation largely depends on the terms of the scheme of merger. But there cannot be any doubt that, when two companies amalgamate and merge into one, the transferor-company loses its entity as it ceases to have its business. However, their respective rights and liabilities are determined under the scheme of amalgamation but the corporate entity of the transferor-company ceases to exist with effect from the date the amalgamation is made effectiveIn view of the above discussion, we agree with the Tribunals view that the amalgamating company ceased to exist in the eye of law and therefore, the appellant was not liable to pay tax on the amount of Rs. 58, 735.