COMMISSIONER OF INCOME-TAX VS MASS PRODUCTS (IND.) LTD., 1998 PTD-ALLAHABAD-HIGH-COURT-INDIA 1096 (1996)

Income-tax---

----Unabsorbed depreciation---Loss--Carry forward and set off--Assessee a public limited company---Its manufacturing activities suspended in 1965 and restarted in 1971---Claim for setting off losses and unabsorbed depreciation of earlier years in assessment year 1973-74---Limited company a distinct legal entity---Change in ownership of shares does not affect legal identity of company---Finding of fact by Tribunal that both constituted same business- Loss and unabsorbed depreciation of earlier years can be set off in the year; 1973-74--Indian Income Tax Act, 1961, Ss.32(2) & 72.

The assessees, a public limited company, manufactured articles like steel and metal sheets. The manufacturing operations were suspended on November 30, 1965, and restarted on September 1, 1971. In the assessment year 1973-7-t. the assessee claimed set off of losses and unabsorbed depreciation carried forward from 1965-66 to 1968-69. The Income-tax Officer did not allow the same. But the Tribunal on second appeal, held in favour of the assessee. On a reference, the Revenue contended that there was a change in the ownership of the majority shareholding of the company and it amounted to a change in the ownership of the company. It is also contended that the two lines of business carried on by the company in 1965 and 1971 did not constitute the same business within the meaning of section 72(1)(i) of the Income-tax Act, 1961 and the assessee's claims for adjustment of unabsorbed depreciation in respect of the assessment year prior to 1967-68 should not be allowed:

Held, (i) that a limited liability company was different from a partnership and it was a distinct legal entity. Since the assessee was a limited liability company, change in the ownership of its shares would have no effect on the legal identity of the company;

(ii) that the Income-tax Appellate Tribunal had recorded a finding that there was only a temporary suspension of business during the period November 30, 1965 to September 1, 1971, and that the manufacturing activities resumed from September 1, 1971, were not in anyway different from the manufacturing activities which the company carried on till November 30, 1965. The Tribunal had also recorded a finding of fact that the assessee satisfied the conditions mentioned in section 32(2) of the Act. Therefore, in the assessment year 1973-74, the assessee could set off the losses and unabsorbed depreciation of earlier years.

JUDGMENT

M. KATJU, J.---This is an Income-tax reference under section 256(2) of the Income-tax Act, 1961, by which the following questions have been referred to this Court for its opinion:

"(1) Whether, on the facts and in the circumstances of the case having held that there was a change in the ownership of majority share holding of the assessee-company, the Tribunal was legally correct in holding that it did not amount to a change in the ownership of the assessee-company?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the two lines of business carried on by the assessee-company in 1965 and 1971 constituted the same business within the meaning of section 72(1)(i) of the Income tax Act, 1961.

(3) Whether, on the fact and in the circumstances of the case, the Tribunal was legally correct in allowing the assessee's claim for adjustment of unabsorbed depreciation in respect of the assessment years prior to the assessment year 1967-68, in spite of the fact that the allowance was never deemed to be the depreciation allowance for the assessment year 1967-68 onwards?"

We have heard learned counsel or the parties.

The facts of the case are that the assessee is a public limited company registered under the Indian Companies Act which manufactures articles like metal and metal sheets including lanterns, stoves, metal boxes, cover, etc. Its manufacturing operations we suspended on November 30, 1965, and restarted on September 1, 1971. In the relevant assessment year 1973-74, the assessee claimed set-off of the losses and unabsorbed depreciation, carried forward from the assessment years 1965-66 to 1968-69. The Income-tax Officer did not allow the said carry forward and set-off and his order was upheld in appeal by the Appellate Assistant Commissioner.

However, in second appeal the Tribunal held in favour of the assessee and hence, this reference at the instance of the Department.

As regards the first question referred, it appears that the majority shares in the assessee-Company, were earlier held by Narang Group but later the ownership of the majority shares were transferred to Kapoor Group which started manufacturing electrical goods. In our opinion, the first question referred to us has to the answered in the negative and against the Department because it is settled law that a limited liability company is a distinct legal entity separate from its shareholder, Change in the shareholders of the company does not change the legal identity of the company. A limited liability company is thus different from a partnership firm because while a company is distinct from its shareholders and directors, a partnership-firm is not different from its partners and it is not a distinct legal entity. Since the assessee is a limited liability company change .in the ownership of its shares will have no effect on the legal identity of the company.

As regards the second question it may be noticed that the Income-tax Appellate Tribunal has recorded a finding of fact (in paragraph 18 of its order) that there was only a temporary suspension of business during the period November 30, 1965, and September 1, 1971, and that the manufacturing activities resumed from September 1, 1971, is not in any way difference from manufacturing activity which the company carried on till November 30, 1965. This being a finding of fact, the second question has also to be decided in favour of the assessee and against the Department.

As regards the third question here also the finding of fact is that the assets of the assessee were not transferred but there is a continued ownership by the company. The finding of the Tribunal in paragraph 22 of its order is that the conditions mentioned in section 32!2) of the Income-tax Act hence been fully satisfied These are findings of facts and we cannot interfere with them in advisory jurisdiction under section 256.

For the above reasons, all the questions are answered against the Department and in favour of the assessee. There will be no order as to costs.

M.B.A./1974/FCReference answered.