M/s. Hindustan Aeronautics Ltd., vs C.I.T. Bangalore

Jagannatha Shetty, J.-The Income Tax Appellate Tribunal, Bangalore Bench has referred the following two questions under S. 256(1) of the Income Tax Act for the opinion of this Court:

(i) 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.

(ii) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee company has not succeeded M/s 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 Indian Ltd., and engaged in the manufacture and production of aircraft, aero-engines, necessories 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 dt. 28th September, 1964 called The Aircraft Companies Amalgamation Order, 1964 under clause 4 of the said order it was provided as follows:

"4. 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 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 defiined 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 under S. 78(2) of the Income Tax Act, 1961.

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

That assessment order was affirmed by the Appellate Assistant Commissioner and also by the Income Tax Appellate Tribunal, The Tribunal on a consideration of the various clauses in the said Government Order and applying the ratio of the decision of the Supreme Court in Indian Iron & Steel Company Ltd. v. C.I.T. (11 I.T.R. 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 Hindustan Aircraft Ltd., and that S. 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.

S. 78(2) of the Act provides;

78(2). "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. v. Commissioner of Income Tax [1943 (11) I.T.R. 378] 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 House of Lords in Hindustan Steel Companies Ltd. v. Cullington (Inspector of Taxes) [(1941) 9 I.T.R. 20].

The term ''inheritance'' used In S. 78(2) of the Act, in our opinion must mean only a transmission of the assets or liabilities of one person to another by the personal law applicable to them and not to any other mode of transfer known to law. The section is in the nature of a corrollary to the broad principle underlying the Ss. 72 to 74 of the Income Tax 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.