Pradeep Parikh, A.M.
1. The Department is in appeal before us against the order of the learned CIT(A) dt. 24th Jan., 2000 for asst. yr. 1996-97. The grievance of the Department is that deduction under Section 80HHC of the IT Act, 1961 (the Act) was allowed keeping in view the accounts of M/s AESPL only despite the fact that as per the order of the Delhi High Court, dt. 18th March, 1996, the amalgamation was to take effect from 1st April, 1995.
2. The assessee-company is engaged in the business of manufacturing, trading, servicing and export of scientific instruments. It had returned a total income of Rs. 21,89,840 for the year under consideration. It was seen that two companies, viz., Aimil Exports & Services (P) Ltd. (AESPL for short) and Aimil Sales & Agencies (P) Ltd. (ASAPL for short) had amalgamated with Aimil (P) Ltd. (APL for short) under the scheme of amalgamation effective from 1st April, 1995 and thereafter APL was converted into a public limited company with the name Aimil Ltd., the assessee-company. Along with its return of income, the assessee-company had filed its consolidated balance sheet and P&L a/c for the year ending 31st March, 1996 in which the financial results of all the three companies were merged. It was observed that whereas total taxable income was computed on the basis of merged final accounts, deduction under Section 80HHC was computed and claimed on the basis of the financial results of one of the two transferor companies viz., AESPL. The AO was of the view that once when all the three companies stood amalgamated w.e.f. 1st April, 1995 and the assessee having filed a single return of income on the basis of merged accounts, it was not left to the convenience of the assessee-company to claim deduction under Section 80HHC only on the basis of separate accounts of AESPL. According to him, effective from 1st April, 1995, the three separate legal entities had merged into a single legal entity with the name Aimil Ltd., and hence, deduction under Section 80HHC was allowable only on the basis of the consolidated final accounts. Accordingly, the AO proceeded to recompute the impugned deduction. As per his computation the profit on export of traded goods resulted into a negative figure of Rs. 5,03,530 and hence denied the deduction to the assessee, who otherwise had claimed the deduction of Rs. 17,62,385.
3. The CIT(A) drew a distinction between the “appointed date” and “effective date” as per the scheme of amalgamation. According to him, the appointed date, i.e., 1st April, 1995 was to assume significance only after the scheme of amalgamation became finally effective, and the effective date in the present case was 3rd April, 1996, that is the date on which the two transferor companies stood dissolved as per the certificate of the Registrar of Companies (ROC for short). Referring to the provisions of the scheme, the CIT(A) observed that till the scheme finally took effect (i.e., till 3rd April, 1996), the transferor companies were to carry on their business activities for and on account of and in trust for the transferee company which was supposed to be the ultimate beneficiary. He held that the assets and benefits, as existing on 31st March, 1996 vested in the transferee company w.e.f. 1st April, 1995. Thus, though the transferee company was the beneficial owner of the assets from 1st April, 1995 till 3rd April, 1996, the transferor company remained the legal owner and hence the benefit under Section 80HHC was rightly claimed on the basis of the results of the transferor company.
4. The learned Departmental Representative strongly assailed the order of the CIT(A). At the outset, he referred to the consolidated accounts in detail to show that even as per the said accounts, the three companies stood amalgamated w.e.f. 1st April, 1995 and the same was also confirmed by the auditors in their report. He then referred to the scheme of amalgamation and the order of the High Court approving the scheme to reiterate that for all purposes the companies stood amalgamated from 1st April, 1995 only. If it was not so, it was pointed out, then separate return should have been filed by AESPL and should have claimed the deduction by way of such separate return.
5. The learned counsel also referred to the scheme to point out that it was the “effective date” which was relevant for the transferor companies to cease to exist. Till then, they were to hold the assets in trust for the benefit of the transferee company. In such a case, provisions of Section 166 r/w Section 160 would come into play and the AO could have exercised option to tax either the beneficiary or the trustee. In support of this contention, the learned counsel placed reliance on the judgment of the Supreme Court in the case of CIT v. Smt, Kamalini Khatau (1994) 209 ITR 101 (SC). If it was held that entire assessment was rightly made in the hands of the assessee-company, then alternatively, total turnover cannot be taken as Rs. 14,45,05,270 as done by the AO because it also included sales to AESPL effected after the date of arrangement but before the date of the High Court order, as there cannot be sales to self.
6. We have duly considered the rival contentions and the material on record. Let us first consider the relevant clauses in the scheme of amalgamation as approved by the Delhi High Court. Clause 2(a) of the scheme provides as follows :
2(a) With effect from commencement of 1st April, 2005 (hereinafter called the ‘appointed date’) and subject to the provisions of this scheme in relation to the mode of transfer and vesting, the undertaking and the entire business and all the properties, assets, capital, work-in-progress, current assets, investments, powers, authorities, allotments approvals and consents, licences, registration, contracts, engagements, arrangements, rights, titles, interests, benefits and advantages of whatsoever nature and wheresoever situate belonging to or in the ownership, power or possession and in the control of or vested in or granted in favour of or enjoyed by the transferor companies, including but without being limited to all patents, trademarks, tradenames and other industrial rights of any nature whatsoever and licences in respect thereof, privileges, liberties, easements, advantages, benefits, leases, tenancy rights, ownership flats, quota rights, permits, approvals, authorizations, right to use and avail of telephones, telexes, facsimile connections and installations, utilities, electricity and other services, reserves, provisions, funds, benefits of all agreements and all other interests arising to ASA and/or AEX (hereinafter collectively referred to as the “the said assets”) shall be transferred to be vested in and/or deemed to be transferred and vested in the transferee company pursuant to the provisions of Section 394 of the said Act for all the estate, right, title and interest of the transferor companies therein.
Clause 3 of the scheme provides as follows :
With effect from the appointed date, all debts, liabilities, duties and obligations of the transferor companies (ASA and/or AEX) (hereinafter referred to as ‘the said liabilities’) shall also be and stand transferred or deemed to be transferred, without further act, instrument or deed to the transferee company, pursuant to the provisions of Section 394 of the said Act so as to become as and from the appointed date, the debts, liabilities, duties and obligations of the transferee company (AIMIL) and further that it shall not be necessary to obtain the consent of any third party or other person who is a party to any contract or arrangement by virtue of which such debts, liabilities, duties and obligations have arisen, in order to give effect to the provisions of this clause.” Clause 4 of the scheme provides as follows :
This scheme, though effective from the appointed date shall be operative from the last of the following dates or such other dates as the Court may direct, namely :
(a) the date on which the last of all the consents, approvals, permissions, resolutions, sanctions and orders as are hereinafter referred to have been obtained or passed, and
(b) the date on which certified copies of the order of the Court under Sections 391, 392 and 394 of the said Act are filed with the ROC; and such date shall be, hereinafter referred to as ‘the effective date’.
Sub-clause (a), (b), and (c) of Clause 5 provide as follows :
5. With effect from the appointed date upto the date on which this scheme finally takes effect (viz., the effective date) :
(a) the transferor companies (i.e., ASA and/or AEX) shall carry on and be deemed to have carried on all its business and activities and shall be deemed to have held and stood possessed of and shall hold and stand possessed of all the said assets for and on account of in trust for the transferee company (i.e. AIMIL);
(b) all the profits or incomes accruing or arising to the transferor companies (i.e., ASA and/or AEX) or expenditure or losses arising or incurred by the ASA and/or AEX shall for all purposes be treated and be deemed to be and accrue as the profits or incomes or expenditure or losses of the transferee company (i.e., AIMIL), as the case may be;
(c) the transferor companies shall carry on its business activities with reasonable diligence, business prudence and shall not alienate, charge, mortgage, encumber or otherwise deal with the said assets or any part thereof, except in the ordinary course of business, or without the prior consent of the transferee company or pursuant to any pre-existing obligation undertaken by the transferor companies prior to the appointed date;
From the above clauses it is clear that the scheme has to take effect from 1st April, 1995, that is, the transfer/vesting of assets from the transferor companies have to take place on 1st April, 1995 which, as per the scheme, is called the “appointed date”. The Court approved the scheme on 18th March, 1996 with effect from the appointed date, i.e., 1st April, 1995, ,as is evident from its order. The Court further ordered that the transferor companies shall within 30 days of the date of the order of the Court, cause certified copies of the Court order to be delivered to the ROC for registration and on such certified copies being so delivered, the transferor companies shall be dissolved, and the ROC shall place all documents relating to the transferor companies and registered with him on the file kept by him in relation to the transferor company and the files relating to the said companies shall be consolidated accordingly. This date, i.e., the date on which the certified copies of the order are to be delivered to the ROC finds a mention in sub-cl. (b) of cl. 4 of the scheme. It was on 3rd April, 1996 that the Court order was delivered to the ROC and on that day, the transferor companies stood dissolved. This date, as per the scheme, is called the “effective date”. Clause 4 of the scheme mentions that the scheme, though effective from the appointed date shall be operative from the “effective date”. The contention on behalf of the assessee is that till the effective date, the transferor companies were having their independent existence. If this contention is accepted, then the appointed day from which the scheme is to be effective (as mentioned in cl. 4) will be rendered totally otiose and redundant. The High Court has also approved the scheme as to be effective from 1st April, 1995 and not from the “effective date”. In expressing this view, we gather strength from no less an authority than the Supreme Court as was held in the case of Marshall Sons & Co. (India) Ltd v. ITO (1997) 223 ITR 809 (SC).
7. In the case of Marshall Sons & Co. (supra), the assessee-company was to amalgamate with its holding company w.e.f. 1st April, 1982. Sanction of two High Courts was involved and accordingly one High Court approved the scheme on 21st Jan., 1983 and the other High Court approved it on llth Jan., 1984. The certified copies of the Court orders were delivered to the respective ROCs on 29th Jan., 1984 and 24th Feb., 1984. The name of the subsidiary company was struck off the Register of Companies on 21st Jan., 1986. On 25th Jan., 1984, the ITO issued a notice under Section 139(2) of the Act to the subsidiary company calling upon it to file a return of its income for asst. yrs. 1984-85 and 1985-86. The subsidiary resisted the requirement on the ground that it had already amalgamated with the holding company w.e.f. 1st Jan., 1982. In the proceedings that ensued, the ITO, inter alia, claimed that : (a) the amalgamation became effective only when it was sanctioned by the Court and after certified copies of the orders of the Courts were filed with the ROCs; (b) that only when the name of the subsidiary company was struck off the register by the ROCs could the subsidiary company be said to have ceased to exist. Finally, rejecting the above contentions, the Supreme Court observed as follows at pp. 823-824 of the report:
Every scheme of amalgamation has to necessarily provide a date with effect from which the amalgamation/transfer shall take place. The scheme concerned herein does so provide, viz., 1st Jan., 1982. It is true that while sanctioning the scheme, it is open to the Court to modify the said date and prescribe such date of amalgamation/transfer as it thinks appropriate in the facts and circumstances of the case. If the Court so specifies a date, there is little doubt that such date would be the date of amalgamation/date of transfer. But where the Court does not prescribe any specific date but merely sanctions the scheme presented to it-as has happened in this case-it should follow that the date of amalgamation/date of transfer is the date specified in the scheme as “the transfer date “. It cannot be otherwise. It must be remembered that before applying to the Court under Section 39(1), a scheme has to be framed and such scheme has to contain a date of amalgamation/transfer. The proceedings before the Court may take some time; indeed they are bound to take some time because several steps provided by Sections 391 to 394A and the relevant rules have to be followed and complied with. During the period the proceedings are pending before the Court, both the amalgamating units, i.e., the transferor company and the transferee company may carry on business, as has happened in this case, but normally provision is made for this aspect also in the scheme of amalgamation. In the scheme before us, cl. 6(b) does expressly provide that with effect from the transfer date, the transferor company (subsidiary company) shall be deemed to have carried on the business for and on behalf of the transferee company (holding company) with all attendant consequences. It is equally relevant to notice that the Courts have not only sanctioned the scheme in this case, but have also not specified any other date as the date of transfer/ amalgamation. In such a situation, it would not be reasonable to say that the scheme of amalgamation takes effect on and from the date of the order sanctioning the scheme. We are, therefore, of the opinion that the notices issued by the ITO (impugned in the writ petition) were not warranted in law. The business carried on by the transferor company (subsidiary company) should be deemed to have been carried on for and on behalf of the transferee company. This is the necessary and the logical consequence of the Court sanctioning the scheme of amalgamation as presented to it. The order of the Court sanctioning the scheme, the filing of the certified copies of the orders of the Court before the ROC, the allotment of shares, etc. may have all taken place subsequent to the date of amalgamation/transfer, yet the date of amalgamation in the circumstances of this case would be 1st Jan., 1982. This is also the ratio of the decision of the Privy Council in Raghubar Dayal v. Bank of Upper India Ltd. AIR 1919 PC 9.
Counsel for the Revenue contended that if the aforesaid view is adopted then several complications will ensue in case the Court refuses to sanction the scheme of amalgamation. We do not see any basis for this apprehension. Firstly, an assessment can always be made and is supposed to be made on the transferee company taking into account the income of both the transferor and transferee companies. Secondly, and probably the more advisable course from the point of the Revenue would be to make one assessment on the transferee company taking into account the income of both the transferor or transferee companies and also to make separate protective assessments on both the transferor and transferee companies separately. There may be a certain practical difficulty in adopting this course inasmuch as separate balance sheets may not be available for the transferor and transferee companies. But that may not be an insuperable problem, inasmuch as assessment can always be made, on the available material, even without a balance sheet. In certain cases, best judgment assessment may also be resorted to. Be that as it may, we need not pursue this line of enquiry because it does not arise for consideration in these cases directly.
8. Reverting to the facts of the present case, the High Court has not specified any date other than 1st April, 1995. It may be argued that the High Court has sanctioned the whole of the scheme as was presented to it and hence there is the sanction for “effective date” as well. But as per the scheme, the “effective date” is nothing but the date on which the certified copies of the Court order has to be delivered to the ROC who in turn will then strike off the names of the transferor companies from the register of companies. Despite these formalities being carried out subsequently, the Supreme Court held that the effective date was 1st Jan., 1982. Consequently, in the present case it will be 1st April, 1995 and not 3rd April, 1996. When we have a direct authority on the issue of the effective date of amalgamation, the arguments relating to the taxing of the income in the hands of either the beneficiary or trustees pale away into insignificance and hence the judgment in the case of Smt. Kamalini Khatau (supra) will have no applicability. Accordingly, we hold that the effective date of amalgamation in the present case is 1st April, 1995 and consequently the claim of the assessee to claim deduction under Section 80HHC only on the basis of the results of AESPL has to be rejected. With regard to the alternate claim of the learned counsel to take into consideration the correct figure of total turnover, the AO is directed to examine this contention of the assessee, give it an opportunity of being heard and then decide it in accordance with law.
9. In the result, the appeal of the Department is allowed.