Hindustan Aeronautics Ltd. vs Commissioner of Income Tax

The Tribunal, Bangalore Bench, has referred the following two questions u/s 256(1) of the income tax Act, 1961 (''the Act''), for the opinion of this Court: 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-company is not entitled to carry forward any loss and unabsorbed depreciation allowance of Hindustan Aircraft Ltd.

Whether, on the facts and in the circum stances of the case, the Tribunal was right in holding that the assessee-company has not succeeded Hindustan Aircraft Ltd. by inheritance?

The essential facts behind the legal formulation are as follows: There were two companies incorporated under the Indian Companies Act, 1913, in the public sector, the Hindustan Aircraft Ltd. and the Aeronautics India Ltd., and engaged in the manufacture and production of aircraft, aero engines, accessories and missiles. The Government of India decided to amalgamate these two companies into a single company called Hindustan Aeronautics Ltd. That was given effect to by order, dated 28-9-1964, called ''The Aircraft Companies Amalgamation Order, 1964''. Under clause 4 of the said order, it was provided as follows:

Transfer of certain items of property - For the purposes of this order, all the profits and/or losses, if any, of the dissolved company for the year 1963-64 and for the period from the 1st day of April, 1964 to the 30th September, 1964 and the revenue reserves and/or deficits, if any, of the dissolved company, when transferred to the company resulting from the amalgamation under the provisions of this order, shall, respectively, form part of the profits and/or losses, if any, and revenue reserves and/or deficits of the company resulting from the amalgamation for the said year and the said period.

Dissolved company was defined under clause 2 to mean ''the Hindustan Aircraft Ltd.''

A return was filed by the assessee, the Hindustan Aeronautics Ltd., the petitioner herein, for the assessment year 1965-66 including the loss of Hindustan Aircraft Ltd. for the period 1-4-1964 to 30-9-1964 and claimed, set off u/s 78(2) of the Act.

The ITO held that the loss of that period of Hindustan Aircraft Ltd. could not be assessed in the hands of the Hindustan Aeronautics Ltd. and he excluded the same from assessment.

That assessment order was affirmed by the AAC and also by the Tribunal. The Tribunal on a consideration of the various clauses in the said Government order and applying the ratio of the decision of the Privy Council in Indian Iron & Steel Co. Ltd. v. CIT [1943] 11 ITR 328 held that the Explanation to clause 3 of the amalgamation order could not be taken advantage of by the assessee-company to carry forward the losses and unabsorbed depreciation of Hindus tan Aircraft Ltd. and that section 78(2) also does not enable the assessee-company to carry forward such losses and unabsorbed depreciation allowance of Hindustan Aircraft Ltd., since it was not a case of succession by inheritance.

The view taken by the Tribunal is challenged in this reference.

Section 78(2) provides:

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.

It is clear from the above provision that the successor company has no right to carry forward and set off any loss incurred by its predecessor, unless it is 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.

In Indian Iron & Steel Co. Ltd.''s case (supra) the Judicial Committee of the Privy Council observed that when there is an amalgamation of two companies, the unabsorbed depreciation allowance of the one company could not be carried forward by the successor company and set off against such successor''s profits in any year subsequent to the change in ownership. Similar was the view taken by the House of Lords in United Steel Co. Ltd. v. Cullington (Inspector of Taxes) [1941] 9 ITR (Suppl.) 20.

The term ''inheritance'' used in section 78(2), in our opinion, must mean only a transmission person to of the assets or liabilities of one person to another by the personal law applicable to them and not in any other mode of transfer known to law. Section 78(2) is in the nature of a corollary to the broad principle underlying sections 72 to 74 of the Act and that should be strictly construed. In this view, our answers to the questions are in the affirmative and against the assessee-company.

In the circumstances of the case, we make no order as to costs.