M/S. MCDOWELL & COMPANY LTD. versus COMMISSIONER OF INCOME-TAX, KARNATAKA CENTRAL,  BANGALORE
[2017] 2 S.C.R. 856, Supreme Court of India, 2017
Outcome: Dismissed (Dismissed)
Segment: Facts
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[20 I 7] 2 S.C.R. 856 
MIS. MCDOWELL & COMPANY LTD. 
v. 
COMMISSIONER OF INCOME-TAX, KARNATAKA CENTRAL, 
BANGALORE 
(Civil Appeal No. 3893 of2006) 
MARCH 09, 2017 
[ A. K. SIKRI AND ASHOK BHUSHAN, JJ.J 
Income Tax Act, 1961 - s. 72A - Provisions relating to carry 
forward and set off of accumulated loss_. and unabsorbed 
depreciation allowance in certain cases of amalgamation - Benefit 
of provisions of s. 72A - Grant of - Waiver of interest by financial 
institutions, if to be ·treated as income of assessee company, which 
took·over sick company through scheme of amalgamation - Tribunal 
granted benefit of provisions of s. 72A and also held that waiver of 
interest by financial institutions would not be treated as income of 
assessee uls. 41(/) - Said order set aside by the High Cozirt - On 
appeal, held: Assessee took over the sick company-HPL and"HPL 
ceased to have any identity - Since the benefit of interest accrued 
after the company had ceased to exist and was in fact, availed of 
by assessee, the assessee company was allowed to· set off the 
amalgamated losses of the company amalgamated with it :.... When 
assessee is allowed the benefit of the accumulated loses, while 
computing those loses, the income which accrued to it had to be 
adjusted and only thereafter net losses could have been allowed to 
be set off by the assessee co111pany - It cannot be said that the 
assessee would be entitled to take advalllage of the accumulated 
loses but
while calculating these accumulated loses at the hands of 
amalgamated company, the inco111e accrued uls. 41 (/) at the hands 
of HPL would not be accounted for - Order passed by the High 
Court upheld. 
Dismissing the appeal, the Court 
HELD: 1.1 Tl!e High Court took note of the fact that the 
assessee had taken over the sick company-HPL through the 
scheme of amalgamation and that the HPL ceased to have any 
identity as it did not remain a 'person' either in fact or in law after 
856
MIS. MCDOWELL & COMPANY LTD. v. COMMISSIONER OF 
INCOME-TAX 
amalgamation. However, rights are determined in terms of the 
scheme of amalgamation and since the benefit of interest had 
accrued after the company had ceased to exist, it was, in fact, 
availed of by the assessee company. The assessee company was 
allowed to set off the amalgamated losses of the company 
amalgamated with HPL. This was the benefit which accrued to 
the assessee under section 72A of the Income Tax Act. When 
the assessee is allowed the benefit of the accumulated loses, while 
computing those loses, the income which accrued to it had to be 
adjusted a:nd only thereafter net losses could have been allowed 
to be set off by the assessee company. Calculations to this effect 
are given by the Assessing Officer in his assessment order and 
there is no dispute about the same. [Para 10] [862-E-H] 
1.2 The assessee was given the benefit of accumulated loses 
of the amalgamated company. The effect thereof is that though 
these loses were suffered by the amalgamated company they were 
deemed to be treated as lose~ of the assessee company by virtue 
of Section 72A. 1t·caunot be said that the assessee would be 
entitled to take advantage of the accumulated loses but while 
calculating these accumulated loses at the hands of amalgamated 
company, i.e., HPL, the income accrued under section 41(1) at 
the hands·of HPL would not be accounted for. That had to be 
necessarily adjusted in order to see what are the
actual 
accnmnlated loses, the benefit whereof is to be extended to the 
assessee. Thus, the High Court's analysis of Section 41(1) along 
with Section 72A, is concurred with. [Para 10] [863-B-D] 
Sara~wati Industrial Syndicate v. CIT (1990) Supp. SCC 
§75 : (1990] Suppl. SCR 332 - distinguished. 
Case Law Reference· 
[1990] Suppl. SCR 332 
distin~uished 
Para 10 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3893 
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From the Judgment and Order dated 05 .04.2005 of the High Court 
ofKarnataka at Bangalore in l.T.R.C. No. 12 of2002. 
Jaideep Gupta, Sr. Adv., Kuna! Chatterji, Ms. Maitrayee Banerjee, 
Advs. for the Appellant. 
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Y. P. Adhyaru, Sr. Adv., Rupesh Kumar, S. A. Haseeb, Mrs. Anil 
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Katiyar, Advs. for the Respondent. 
The Judgment of the Court was delivered by 
A. K. SIKRI, J. I. This appeal is preferred against judgment 
dated 05.04.2005 of the High Court of Karnataka whereby the appeal 
of Commissioner oflncome Tax (Revenue) was allowed setting aside 
the order to the Income Tax Appellate Tribunal(IT AT) 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 ofinterest by financial institutions would not 
be treated as income of the appellant-assessee under Section 41 (I) of 
the Act. 
2. Brief summary of the facts which have led to the present appeal 
may be taken note of at this stage. 
3. 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 (BIFR) under Sick Industrial 
Companies Act (SICA). At that stage, petitions under Section 39 I and 
392 of the Companies Act, 1956, were filed in the High Court ofBombay 
and Madras for amalgamation ofHPL with the assessee-appellant herein 
i.e., M/s. McDowell and Company Limited. Both the High Courts 
approved the scheme of amalgamation as a result of which, w.e.f.
01.04.1977, HPL stood amalgamated with the assessee/appellartt-
company. 
4. As mentioned above, HPL, which was an industrial undertaking, 
had become a sick company and it owed a lot of money to banks and 
financial institutions, ln its books of accounts, the interest which had 
accrued on the loans given by such financial companies were shown as 
the money payable on account of interest to the said banking companies 
and was reflected as expenditure on that count. As the interest payable 
was treated as expenditure, benefit thereof was taken in the assessment 
orders made. The assessee had approached the Central Government, 
before moving the High Court, with the scheme of amalgamation for 
getting benefits of Section 72Aofthe Act. This section makes provisions 
relating to carry forward and set off accumulated loss and unabsorbed 
depreciation allowance in certain cases of amalgamation or demerger
MIS. MCDOWELL & COMPANY LTD. v. COMMISSIONER OF 
859 
INCOME-TAX [A. K. SIKRI, J.] 
etc. Under certain circumstances and on fulfillment of conditions laid 
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. down therein, the company which takes.over the sick company is allowed 
to set off losses of the amalgamated company as its own loses. The 
Central Government had made a declaration tothis effect under Section 
72A of the Act granting the benefit of the said provision to the assessee. 
5.' Under the scheme of amalgamation tha.t was approved by the 
High Court, after following the procedure in terms of Sections 391 and 
392 of the Companies Act, which includes the consent of the secured 
creditors as well; the banks which had advanced loans to HPL agreed to 
waive off the interest which had accrued prior to 01.04.1977. As already 
stated above, this interest was claimed as expenditure by HPL in its 
returns.. On the waiver of this interest, it became income in terms of 
Section 41 (1) of the Act. In the return filed by the assessee for the 
Assessment Year 1983-1984, the assessee claimed set off of the · 
accumulated loses.whi_ch it had taken over from HPL by virtue of the 
provisions contained i11 section 72A of the Act. This was allowed. 
However, later ori, it came to the notice of the Assessing Officer that 
while allowing the aforesaid benefit to the assessee, the income which 
had accrued mid er section 41 (1) of the Act had not been set off against 
the accumulated loses. It so happened that on certain grounds,
the 
assessment was reopened by the Assessing Officer and while undertaking 
the exercise of reassessment, the Assessing Officer also noticed that 
the aforesaid fact, viz., the income which had accrued within section 
41(1) of the Act as mentioned above, was not set off while giving benefit 
of accumulated losses under Section 72(A) of the Act to the assessee. 
The Assessing Officer, therefore, treated the aforesaid income at the 
hands of the assessee herein and.adjusted the same from the accumulated 
loses. The assessment order was drawn accordingly. This reassessment 
was challenged by the assessee by filing appeal before the Commissioner 
of Income Tax (Appeals), which was dismissed. However, in further 
appeal before the !TAT, the assessee succeeded inasmuch as the ITAT 
held that the aforesaid income under Section 41 (I) of the Act was not at 
the hands of the assessee herein but it may be treated as income of the 
HPL and since HPL was a different assessee and a different entity, the 
assessee herein was not liable to pay any taxes on the said income. 
Feeling aggrieved thereby, the Revenue sought reference unde( Section 
256 of the Act and ultimately, the reference was made on the following 
questions oflaw: 
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SUPREME COURT REPORTS 
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"Whether on the facts and in the circumstances of the case, the 
Tribunal was justified in law in upholding that the over due interest 
waived by the financial institutions amounting to Rs.25.02 lakhs is 
not assessable in the hands of the assessee?" 
6. This question oflaw has been decided in favour of Revenue by 
the impugned judgment. 
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7. It is argued by Mr. Jaideep Gupta, learned senior counsel 
appearing for the assessee-appellant, ·that the High Court has not 
appreciated the provisions of the Act, viz., Section 72A or Section 41 (I) 
in their proper perspective and has also committed error in not properly 
understanding the ratio of the judgment of this Court in 'Saraswati 
Industrial Syndicate v. CIT [ (1990) Supp. SCC 675 ] thereby 
committing serious error in answering the said question. It was argued 
that the benefit of section 72A of the Act was given as the assessee 
fulfilled all the conditions stipulated therein and the Central Government 
while giving declaration was satisfied that the eligibility conditions for 
taking advantage of carry forward and set off of accumulated loses of 
the HPL were fulfilled. He, thus, submitted that insofar as the benefit of 
carry forward of accumulated loses ofHPL and seeking set off thereof 
is concerned, it was the statutory right of the appellant-assessee which 
became available to it by virtue of the declaration given by the Central 
Government under
the aforesaid provisions. 
8. On the other hand, submitted the learned counsel, that insofar 
as Section 41 (I) is concerned, language thereof makes it abundantly 
clear that the income has to be treated at the hands of"first mentioned 
person" which is HPL in the il1stant case. 
This HPL was a distinct 
entity in law and was also a different assessee. Therefore, any such 
income earned by the HPL could not have been treated as income of the 
assessee herein. Mr. Gupta submitted that this is, in fact, the ratio of the 
judgment of this Court in 'Saraswati Industrial Syndicate' (supra) 
wherein section 41(1) of the Act is interpreted in the following manner: 
"Section 41 (I) has been enacted for charging tax on profits made 
by an assessee, but it applies to the assessee to whom the trading 
liability may have been allowed in the previous year. If the assessee 
to whom the trading liability may have been allowed as a business 
expenditure in the previous year ceases to be in existence or if 
the assessee is changed on account of the death of the earlier
MIS. MCDOWELL & COMPANY LTD. v. COMMISSIONER OF 
INCOME-TAX [A. K. SIKRI, J.] 
assessees the income received in the year subsequent to the 
previous year or the accounting year cannot be treated as income 
received by the assessee. In order to attract the provisions of 
Section 41(1) for enforcing the tax liability, the identity of the 
assessee in the previous year and the subsequent year must be 
the same. If there is any change in the identity of the assessee 
there would be no tax liability under the provisions of Section 41. 
In CIT 1i Hukumchand Mohan/al this Court held that the Act 
did not contain any provision making a successor in a business or 
the legal representatives of an assessee to whom the allowance 
may have been already granted liable to tax under Section 41 (I) 
in respect of the amount remitted on receipt by the successor or 
by the legal representative. In that case the wife of the assessee 
on the death of her husband succeeded to the business carried on 
by him. Another firm which had recovered certain amounts 
towards the sales tax from the assessee's husband succeeded in 
an appeal against its sales tax assessment and thereupon the firm 
refunded that amount to the assessee which was received during 
the relevant acounting period. The question arose whether the 
amount so received by the assessee could be assessed in her 
hands as a deemed profit under Section 41(1) of the Act. This 
Court held that Section 41 did not apply because the assessee
sought to be taxed was not the assessee as contemplated by 
Section 41 (I) as the husband of the assessee had died, therefore 
the revenue could not take advantage of the provisions of Section 
41(1) of the Act. 
9. He also drew attention of this Court to the discussion contained 
· in paragraph 6 of the said judgment in support of his submission that 
since HPL was a different assessee, this income could not be held to be 
the income of the amalgamated company, Le., the assessee herein, for 
the purposes of Section 41(1) of the Act which aspect is explained by 
this Court in the following manner: 
"In the instant case the Tribunal rightly held that the appellant 
company was a separate entity and a different assessee, 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 (I) of the Act. 
The High Court was in error in holding that even after amalgamation 
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of two companies, the transferor company did not become non-
existent instead it continued its entity in a blended form with the 
appellant company. The High Court's view that on amalgamation 
there is no complete destruction of corporate personality of the 
transferor company 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 or 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 effective." 
I 0. The aforesaid arguments appear to be attractive in the first 
blush, but a little deeper scrutiny thereof in the light of the situation 
prevailing in the instant case would reflect that these arguments need to 
be rejected. In fact, same arguments were advanced before the High 
Court as well which did not find merit therein. The High Court took note · 
of the fact that the assessee had taken over the sick company-HPL 
through the scheme of amalgamation sanctioned in l 982 w.e.f. 0 l
.04.1977 
and that the HPL ceased to have any identity as it did not remain a 
'person' either in fact or in law after amalgamation. However, rights 
are determined in tenns of the scheme of amalgamation and since the 
benefit of interest had accrued after the company had ceased to exist, it 
was, in fact, availed of by the assessee company. What is more important 
is that the assessee company was allowed to set off the amalgamated 
losses of the company amalgamated with it, i.e., HPL. This was the 
benefit which accrued to the assessee under the provisions of section 
72A of the Act. When the assessee is allowed the benefit of the 
accumulated loses, while computing those loses, the income which 
accrued to it had to be adjusted and only thereafter net losses could 
have been allowed to be set off by the assessee company. Calculations 
to this effect are given by the Assessing Officer in his assessment order 
and there is no dispute about the same. Judgment of this Court in 
Saraswathi Industrial Syndicate Ltd. (supra) deals with the provisions 
of Section 41(!) of the Act per se. Section 72A of the Act was not the
MIS. MCDOWELL & COMPANY LTD. v. COMMISSIONER OF 
INCOME-TAX (A. K. SIKRI, J.] 
subject matter of the said decision. Therefore, the principle laid· down in 
the said case may not be applicable in the instant case inasmuch as the 
position would be totally different in those cases where the income has 
accrued. to an amalgamated company under Section 41 (I) of the Act 
and, obviously, that cannot be treated as income at the hands of the 
company which has taken over the amalgamated company. However, 
in the instant case, the assessee was given the benefit of accumulated 
loses of the amalgamated company. The effect thereof is·that though 
these loses were suffered by the amalgamated company they were 
deemed to be treated as loses of the assessee company by virtue of 
Section 72A of the Act. In a case like this, it cannot be said that the 
assessee would be entitled to take advantage of the accumulated loses 
but while calculating these accumulated loses at the hands of amalgamated 
company, i.e., HPL,the income accrued under section 41(1) of the Act 
at the hands of HPL would not be accounted fof: That had to be 
necessarily adjusted in order to see what are the actual accumulated 
loses,· the benefit whereof is to be extended to the assessee. We, thus, 
agree with. the High Court in its analysis of Section 41 (I} along with 
Section 72AoftheAct, which is to the following effect: 
"! 0. Though the ITO proposed to treat the waiver of interest 
portion as revenue receipt in the
hands of assessee's company 
under Section 41 (I) of the Act, the same is to be read with Section 
72A of the Act. The Finance Minister in his Budget speech while 
introducing Section 72A of the Act stated that the sickness among 
industrial undertaking was regarded as a matter of grave national 
concern inasmuch as closure of any sizable manufacturing unit 
industry entailed social costs in tenns of production loss and 
unemployment as also waste of valuable capital assets,· and 
experience had shown that taking over of such sick units by 
Governments was not always a satisfactory or ec01\omical solution; 
it was felt that a more effective method would be to. facilitate 
amalgamation of sick industrial units with sound ones by providing 
incentives and removing impediments in the way of such 
amalgamation which would not merely relieve the Government of 
un-economical burden of taking over and running sick units but 
save the Government from social costs in terms of loss of 
production and unemployment. With such objection in view, in 
order to facilitate the merger of sick industrial units with sound 
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ones and as and by way of offering an incentive in that behalf 
section 72A was introduced, whereunder, by a deeming fiction, 
the accumulated loss or unabsorbed depreciation of the 
amalgamating company is treated to be a loss or, as the case may 
be. The Revenue before the first appellate authority emphasized 
the application of section 72AoftheAct, to the facts of the case. 
The first appellate authority and also the Tribunal failed to consider 
the scope and object of section 72A of the Act. Thus, the Tribunal 
committed an error in treating the waiver of interest as not income 
of the assessee." 
11. We, thus, find that this appeal is withoutany merit and is, 
accordingly, dismissed. 
Nidhi Jain 
Appeal dis111issed.