State Bank Of Bikaner Andjaipur v. Commissioner Ofincome Tax

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHANBENCH AT JAIPUR ORDERIND.B. Income Tax Reference No.45 of 1983 State Bank of Bikaner andJaipur Vs. Commissioner ofIncome Tax Date of Order ::: 28.10.2010 PresentHon'ble the Chief Justice Mr. Jagdish BhallaHon'ble Mr. Justice Mohammad Rafiq Shri P.K. Kasliwal, Counsel for applicant-assesseeMs. Parnitoo Jain, Senior Standing Counsel forrespondent-revenue //Reportable// By the Court (Per Hon'ble Mohammad Rafiq, J.) This reference has been received from the Income Tax Appellate Tribunal (hereinaftershall be referred to as 'ITAT') at instance ofassessee State Bank of Bikaner and Jaipur.Question that has been referred to this Courtfor answer under Section 256 (1) of the IncomeTax Act, 1961, reads as under:- “Whether on the facts and in thecircumstances of the case theTribunal was right in law inholding that the applicant was notentitled to set off of the broughtforward losses of the State Bankof Jaipur?” Factual matrix of case is that prior to 1[st] January, 1963 assessee Bank was named asState Bank of Bikaner only. This Bank acquiredassets and liabilities of State Bank of Jaipurunder Section 38(2) of the State Bank of India(Subsidiary Banks) Act, 1959 vide order dated18[th] December, 1962 passed by Government ofIndia, Ministry of Finance, Department ofEconomic Affairs. Assessee claimed set offregarding carried forward losses in respect ofbusiness of State Bank of Jaipur which mergedwith it under Section 38 of the Act of 1959. Itwas claimed by assessee that business of StateBank of Jaipur remained in continuity and wascarried on by State Bank of Bikaner and Jaipur.It was claimed that loss of Rs.58,328/-pertaining to State Bank of Jaipur forassessment year 1963-64 should be allowed to becarried forward and set off against profits ofassessee. Assessing officer rejected claim videorder dated 17.08.1978. Assessee Bank preferredan appeal before Commissioner of Income Tax(Appeals) against order of assessing officerbut the same was rejected vide order dated16.06.1979. Further appeal filed by assesseeagainst both orders was also rejected by ITATvide order dated 28.02.1981. Assesseethereafter filed an application under Section 256 (1) of the Act of 1961 before ITAT forreferring the above referred to question tothis Court. It is in this background thatpresent reference has been received. Shri P.K. Kasliwal, learned counsel forassessee, has argued that present case squarelyfalls within the scope of Section 78(2) of theAct of 1961 which inter-alia provides that evenin cases, where a person carrying on anybusiness or profession, has been succeeded insuch capacity by another person, otherwise thanby inheritance, nothing contained in said Actshall entitle any person other than the personincurring the loss to have it carried forwardand set off against his income. Since presentone was a case of succession by inheritance,assessee would be entitled to set off regardingprocess pertaining to State Bank of Jaipur forassessment year 1963-64. It was argued thatITAT has erred in law in holding that law ofinheritance is applicable only to living personand not to jurisdictional person and thereforethe claim has wrongly been rejected. Learnedcounsel referred to provisions contained inSection 2(31) of the Act of 1961 to argue thatperson for the purpose of Act of 1961 would bea legal person, which would include a Company, it being a juridical person. What is bared inSection 78(2) of the Act of 1961 to be carriedforward and set off against income is the lossincurred by otherwise by any inheritance. Inother words, loss derived by inheritance wouldbe open to be carried forward and set offagainst income. Learned counsel further arguedthat ITAT failed to consider that all assetsand liabilities of State Bank of Jaipur weretaken over by State Bank of Bikaner, whichhitherto came to be known as State Bank ofBikaner and Jaipur. Old business of State Bankof Jaipur was continued after its merger withState Bank of Bikaner by the latter. Merechange of name would not detract from the issuethat loss suffered by earlier Bank is loss ofassessee Bank on merger and it should beallowed to be set off against income ofassessee in succeeding assessment year. Shri P.K. Kasliwal, learned counsel hasargued that Tribunal failed to correctlyconstrue/interpret Section 78(2) of the Act of1961 which should be construed in its naturalperspective having regard to compulsion ofcircumstances. Where it is possible to draw twoinferences from facts and where there is noevidence of any dishonest or improper motive on // 5 // the part of assessee, it would be just andequitable to draw such inference that wouldlead to equity and justice. It is trite lawthat where statute confers benefit on assessee,provisions should be so interpreted and wordsused therein should be assigned such meaning,as would enable the assessee to secure benefitintended to be given by Legislature. Taxingstatute has to be interpreted liberally, so asto give effect to object of provision andstatute, and advance object of provision andnot to frustrate it. Learned counsel, insupport of his submissions, relied on decisionsof Supreme Court in:- 1. 239 ITR 775 (SC) – Mysore MineralsLimited Vs. Commissioner of IncomeTax Limited Vs. Commissioner of IncomeTax 2. 196 ITR 188 (SC) – Bajaj TempoLimited Vs. Commissioner of IncomeTax Limited Vs. Commissioner of IncomeTax 3. 131 ITR 597 (SC) 4. 156 ITR 323 (SC) – Commissioner ofIncome Tax, Bangalore Vs. J.H.GotlaIncome Tax, Bangalore Vs. J.H.Gotla Per contra, Ms. Parnitoo Jain, learnedcounsel appearing for revenue, has argued that ITAT as well as CIT (Appeals) and assessingofficerwerecompletelyjustifiedindisallowing benefit of carrying forward lossesunder Section 78 (2) of the Act of 1961 becauseit was not at all the case of assessee that merger of two companies where losses of StateBank of Jaipur, which was merged with StateBank of Bikaner, could not be allowed to becarried forward because latter company withwhich former is merged, cannot be said to havereceived such losses by way of inheritance.Learned counsel has argued that right to carryforward and set off of losses belongs to personwho suffered loss and not to different person.Only exception that is carved out is the onegiven under Section 78 (2) of the Act of 1961itself, which is that if such losses arederived by way of inheritance, they could beallowed to be carried forward and set offagainst income of assessee. Ms. Parnitoo Jain, learned counsel argued that even if assessee is treated to be ajurisdictional person, that would not make anychange because what is of significance is thefact that whether or not merger of one companywith another can be taken a case of successionby inheritance. Learned counsel, in support ofher submissions, relied on judgment of thiscourt in, 1. 260 ITR 167 (Raj.) Rajasthan RajyaSahakari Spinning and GinningMills Federation Limited Vs.Income Tax Appellate Tribunal andAnotherSahakari Spinning and GinningMills Federation Limited Vs.Income Tax Appellate Tribunal andAnother and judgments of Supreme Court in, 2. 156 ITR497 (SC) – Saroj AggarwalVs. Commissioner of Income Tax,U.P. (SC)Vs. Commissioner of Income Tax,U.P. (SC) Ms. Parnitoo Jain, learned counsel argued that even if assessee is treated to be ajurisdictional person, that would not make anychange because what is of significance is thefact that whether or not merger of one companywith another can be taken a case of successionby inheritance. Learned counsel, in support ofher submissions, relied on judgment of thiscourt in, 1. 260 ITR 167 (Raj.) Rajasthan RajyaSahakari Spinning and GinningMills Federation Limited Vs.Income Tax Appellate Tribunal andAnotherSahakari Spinning and GinningMills Federation Limited Vs.Income Tax Appellate Tribunal andAnother and judgments of Supreme Court in, 2. 156 ITR497 (SC) – Saroj AggarwalVs. Commissioner of Income Tax,U.P. (SC)Vs. Commissioner of Income Tax,U.P. (SC) 3. 237 ITR579 (SC) – Commissioner ofIncome Tax Vs. Sterling Foods Income Tax Vs. Sterling Foods and judgment of Karnataka High Court in, 4. 149 ITR 795 (Kar.) - HindustanAeronauticsLimitedVs.Commissioner of Income Tax,Karnataka In order to appreciate true content andmeaning of word 'inheritance' as used inSection 78(2) of the Act of 1961, it would beapposite to reproduce the said provision inextenso for facility of reference, which we doas under:- “Where any person carrying on anybusiness or profession has beensucceeded in such capacity byanother person otherwise than byinheritance, nothing in thisChapter shall entitle any personother than the person incurringthe loss to have it carriedforward and set off against hisincome.” Reading of above provision would show that if a person has derived loss by way ofinheritance, i.e. when a person carrying on anybusiness or profession has been succeeded insuch capacity by another person otherwise thanby inheritance, he would then be entitled tohave such losses carried forward and set off against his income. What is to be seen iswhether losses of merged company with anothercan be said to have derived by latter by way ofinheritance. In other words, the issue iswhether law of inheritance in context ofpresent case be applied in the case of mergerof one company with another. This court in Rajasthan Rajya SahakariSpinning and Ginning Mills Federation Limited'scase (supra) was considering a case whereinthere was amalgamation and consequential mergerof four cooperative societies and therebyformation of one cooperative society with alltheir assets and liabilities under Section 17of the Rajasthan Cooperative Societies Act,1965. As a result thereof, individualregistrations of different four cooperativesocieties stood cancelled under Section 18(2)of the Rajasthan Cooperative Societies Act,1965 with registration of one singlecooperative society, who was the assessee. Theassessee set off brought forward losses againstits total income under Section 78(2) of the Actof 1961. It was held by this Court thatassessee was not entitled to set off the lossescarried forward by four cooperative societiesagainst its profits because those cooperative societies had their own entity and wereindependent. In terms of their profits andlosses, they could not be treated as theassessee in the year under consideration. Evenafter their merger into one society it couldnot be said that such society had succeeded orsuch society had received those losses by wayof inheritance. societies had their own entity and wereindependent. In terms of their profits andlosses, they could not be treated as theassessee in the year under consideration. Evenafter their merger into one society it couldnot be said that such society had succeeded orsuch society had received those losses by wayof inheritance. In Hindustan Aeronautics Limited's case(supra), the case before the Karnataka HighCourt was one of the amalgamation of thecompanies wherein similar benefit was claimedby assessee under Section 78(2). It was heldthat successor company was not entitled tocarry forward or set off loss or unabsorbeddepreciation incurred by its predecessor, as itis not a case of succession by inheritance. Theprinciple is that the successor in businessmust be treated as if it had commenced or setup a new business. Karnataka High Court inaforesaid case relied on judgment of PrivyCouncil in case of Indian Iron and SteelCompany Limited Vs. CIT (1943) 11 ITR 328,wherein judicial committee of Privy Councilobserved that where there is amalgamation oftwo companies, the unabsorbed depreciationallowance of one company could not be carried forward by successor company and set offagainst such successor's profits in any yearsubsequent to the change in ownership. In Saroj Aggarwal, supra, also provisions of Section 78(2) came up forconsideration before Supreme Court; therein oneof the partners had died and his widow joinedthe firm three days later. There was noprovision in partnership deed regardingcontinuation of partnership. All partners weremember of same family. Supreme Court held thatwidow could be said to have succeeded byinheritance and therefore she was entitled toset off loss of deceased husband against hereshare in profits. Supreme Court held so becauseit was a clear case of inheritance. In Commissioner of Income Tax Vs. J.H. Gotla (supra) assessee transferred part ofmachinery of his business to wife and minorchildren. Wife entered into partnership withthird person and minor children were admittedto benefits of partnership. Premises andremaining machinery were leased to said firm.Share of profits of wife and minor childrenwere included in total income of assessee andlosses incurred by assessee in his business inearlier years were brought forward. In those facts, it was held by the Supreme Court thatincome includes losses and that the assesseewas entitled under Section 24(2) of the IndianIncome Tax Act of 1922 to set off the losses inhis individual business. The share income ofthe wife and minor children in the firm wasincluded in the total income of the assesseeunder Section 16(3) of the Act of 1922, whichprovision provided that profit or loss from abusiness of wife or minor children, included intotal income of assessee, should be treated asprofit or loss from a business carried on byhim for the purpose of carry forward and setoff loss under Section 24(2). In view of above discussion, it must beheld that provisions under Section 78(2) ofthe Act do not entitle the assessee to carryforward and set off losses of State Bank ofJaipur because requisite precondition thatsucceeding company should have derived suchlosses by way of inheritance has not beenfulfilled and for that limited purpose, twocompanies shall have to be treated twodifferent persons and not same person. Even ifin law a company is treated as jurisdictionalperson, nevertheless, for the purpose ofSection 78(2), they would not be the same assessee after merger of two companies as aftermerger of State Bank of Jaipur with State Bankof Bikaner and with re-christening of thecompany as State Bank of Bikaner and Jaipur, itcannot be treated to be same “assessee” forincome tax purpose. We therefore answer the reference accordingly. (Mohammad Rafiq) J. (Jagdish Bhalla) CJ. //Jaiman//