COMMISSIONER OF INCOME-TAX VS T. SUNDARAM IYENGAR & SONS (PVT.) LTD., 2000 PTD-MADRAS-HIGH-COURT-INDIA 3489 (1998)

Income-tax---

----Company in which public are not substantially interested---Additional tax on undistributed profits---Amalgamation of companies---Failure of amalgamating company to distribute statutorily prescribed amount as dividends--Amalgamated company is liable to pay additional tax under S.104---Indian Income Tax Act, 1961, S.104---Indian Companies Act, 1956, S.394. '

' An order of amalgamation made by the High Court under the provisions of section 394 of the Companies Art, 1956, is not an order which is meant to relieve either of the legal entities which are parties to the scheme of amalgamation, from the liability for, payment of tax. An order of amalgamation is intended to facilitate reconstruction and amalgamation of the companies expeditiously in a manner, which is beneficialto the company and -the shareholders of the two companies so long as such amalgamation is not opposed to public interest. None of the provisions of the Companies Act, 1956, providing for amalgamation, nor any other provision in the Act, confers immunity from payment of tax to either of the entities, which are parties to the order of amalgamation. That is the reason why the scheme of amalgamation invariably includes a provision for taking over by the amalgamated company of all liabilities and assets of the amalgamating company. In cases where such liabilities are not taken over, the company. Court would have to be satisfied that suitable provision is made for the payment of liabilities before the assets are allowed to be transferred from the amalgamating company to the amalgamated company. The procedure prescribed for amalgamation of companies also provides for convening a meeting of creditors besides considering the wishes of the shareholders, the object being that by reason of amalgamation the claims of creditors against the two companies involved in the scheme are not to be adversely affected solely by reason of amalgamation. What is true; for the creditors is true in even greater measure with regard to the statutory liabilities, particularly income-tax. It is not open to the amalgamated company which has taken over all assets and liabilities of the amalgamating company to claim that it is not in any way liable for the tax, payable by the amalgamating company, even though the order under section 104 of the Income Tax Act, 1961, came to be made after the order of amalgamation and after dissolution of the amalgamating company but on account of acts of omission and commission committed by the amalgamating company and its failure to carry out the obligations which were required to be carried out. The fact that the liability had not crystallised and the charge had not been created would not entitle the amalgamated company to avoid the payment of the tax under section 104 that would have been payable if the amalgamating company had continued to exist. The failure on the part of the amalgamating company to distribute the statutory percentage of the accumulated profits is the foundation for. the order passed by the Income-tax Officer under section 104. Such failure on the part of the amalgamating company is an act of omission, which has within itself the potential for an order under section 104 being made against it, at any time within a period of four years. By proposing a scheme of amalgamation and amalgamating itself with the amalgamated company, the obligation to comply with an order under section 104 when made does not get wiped out. That obligation becomes the obligation of the amalgamated company. The dissolution of the amalgamating company thereafter is not an even of any relevance and has no effect on the obligation, which had been taken over by the amalgamated company in terms of the order of amalgamation. One of the consequences of amalgamation is that the amalgamating company becomes incapable of having the benefit of section 105. Had it continued to exist it would have had to option of distributing the undistributed profits, thereby avoiding the liability to tax under section 104. That circumstance, however, cannot be used as a shield by the amalgamated company to avoid payment of tax. The Revenue is in no way responsible for the amalgamating company's act of being a party to the scheme of amalgamation and thereby rendering itself incapable of taking the benefit of section 105. The provisions of the Companies Act, 1956, should be read harmoniously with -those of the Income Tax Act, 1961. After the transfer of all assets and liabilities, debts and obligations of the amalgamating company, to the amalgamated company in terms of the sanction accorded by the company Court under section 394 of the Companies Act, 1956, the striking out of the' name of the amalgamating company from the register does not wipe out the obligation to comply with an order made by the Income-tax Officer under section 104 and the order is capable of being enforced against the amalgamated company.

Birla Cotton, Spinning and Weaving Mills Ltd. w. CIT (1980) .123 ITR.354 (Delhi); Blue Star Engineering Co. (P.) Ltd. v. CIT (1980) 122 ITR 156 (Cal.); CIT v. J.K. Commercial Corporation Ltd. (1976) 105 ITR 219 (SC); Parikh (M.M.) ITO v. Navanagar Transport and Industries Ltd. (1967) 63 ITR 663 (SC) and Pillani Investment Corporation Ltd. v. ITO (1972) 83 ITR 217 (SC) ref.

C.V. Rajan for the Commissioner.

S.A. Balasubramanian for the Assessee.

JUDGMENT

R. JAYASIMHA BABU, J---As to whether on account of the failure of the amalgamating company to distribute the statutorily prescribed portion of the undistributed profits an order under section 104 of the Income Tax Act, 1961, cannot be made against the amalgamated company is the question that has been referred to us at the instance of the Revenue. It is not in dispute that the charge for the additional tax is created by section 104 of the Income Tax Act, 1961, as -there is no other provision in the Act, which creates a charge for tax on such undistributed profits. It is also not in dispute that the order was made within the period of limitation prescribed under the section.

The amalgamated company is T.V. Sundaram Lyengar & Sons (Private) Limited, Madras, and the amalgamating company was Sundaram Motor (Private) Limited. An order of amalgamation was passed by this Court in C.P. No.52 of 1970, the petition having been filed by the two companies on which this Court sanctioned a scheme of arrangement and amalgamation that had been proposed by the companies and approved by the shareholders in the general meeting. Clause 2 of the scheme provided that all the property, rights, powers and claims of the amalgamating company (that company, same was referred to in the scheme as the transferor company) were transferred to be vested in the amalgamated company, which company was referred to in the scheme as the transferee-company. Clause 3 of the scheme provided that T.V. Sundaram Iyengar & Sons (Private) Limited shall pay and discharge all liabilities, duties and obligations of whatsoever nature of Sundaram Motor. (Private) Limited and shall be liable for and pay and discharge all levies, taxes and public charges whatsoever including income-tax and sales tax due to any Government or public authority.

The Income-tax Officer having found that the amalgamating company had failed to distribute the statutory percentage of the distributable income of that company for the assessment year 1970-71, initiated proceedings under section 104 of the Act on January 31, 1975, and notice was sent to the amalgamated company, which resisted the same on the ground that the amalgamating company which had failed to distribute the statutory percentage of its distributable income was no longer in-existence, and, therefore, no proceedings against a non-existing company could be initiated or continued. The amalgamating company, Sundaram Motors (Private) Limited, by the time the notice was issued by the Income-tax Officer, had been dissolved and all its assets and liabilities had been taken over by the amalgamated assessee-company.

The Commissioner of Income-tax (Appeals) to whom the amalgamated company. T.V. Sundaram Iyengar & Sons (Private) Limited, appealed, held that the liability sought to be enforced was that of a company which was no longer in existence and that no proceedings could be initiated or continued against the amalgamated company. That view of the Commissioner was affirmed by the Tribunal.

The Tribunal relied upon a decision of the Supreme Court in the case of M.M. Parikh, ITO v. Navanagar Transport and Industries Ltd. (1967) 63 ITR 663 and the Supreme Court was there concerned with section 23A of the Indian Income-tax Act, 1922, which more or less corresponds to section 104 of the Income Tax Act, 1961. The Court held that the order made under section 23A is not an order of the assessment and that the liability for payment of levy under that section arises only after the Income-tax Officer makes an order and not at any earlier point of time. The correctness of the decision rendered in the case of M.M. Parikh, ITO (1967) 63 ITR 663 (SC) was questioned before a larger Bench in the case of Pillani Investment Corporation Ltd. v. ITO (1972) 83 ITR 217 (SC). The apex Court held that the decision in M.M: Parikh ITO's case (1967) 63 ITR 663 (SC) could not be said to be erroneous, and did not call for any review. While holding so, the Court observed that the taxable event is the non-?distribution of some part of the profits, which have already been assessed. In the case of CIT v. J.K. Commercial Corporation Ltd. (1976) 105 ITR 219 the apex Court referred to the case of M.M. Parikh, ITO (1967) 63 ITR 663 (SC) and held that though the order made under section 23A of the 1922 Act may not be an order of assessment, nevertheless for the purpose of section 35(1) of the Act, the order must be regarded as one which is supplementary assessment order.

The liability of a company, which had failed to distribute the -statutory percentage of profits, therefore, arises only when any order is made under section 104 of the Act. Learned counsel for the Revenue, however, submitted relying upon the decision of the Calcutta High Court in Blue Star Engineering Co. (P.) Ltd. v. CIT (1980) 122 ITR 156, that the liability of the company to pay tax on the undistributed profits arises when there is a failure to distribute such profits and would not be postponed till such time that an order is made under section 104 of the Act. With respect, we are unable to agree with that view. As laid down by the apex Court in the case of Parikh (M.M.) (1967) 63 ITR 663, the liability to pay tax under section 104 does not arise at any point of time prior to the making of an order in accordance with the requirements of that section.

Learned counsel for the assessee submitted that as no liability had accrued for the amalgamating company, the amalgamated company cannot be made to suffer a tax liability for payment of which was not taken over by it, and the tax demanded was not in respect of profits and gains of the amalgamated company but related to those of the amalgamating company. Learned counsel invited our attention to the decision of the Delhi High Court in the case of Birla Cotton, Spinning and Weaving Mills Ltd. v. CIT (1980)' 123 ITR 354 in support of his submission that no proceedings can lie against a dissolved company. The High Court in, that judgment held that the reference brought before the High Court was incompetent as the reference was properly required to 'be made before the High Court of Rajasthan and not the High Court of Delhi. Even after having held so, one of the Judges who constituted the Bench observed that the appeal which had been preferred by the amalgamated company before the Tribunal from whose order the reference arose, was incompetent and was null and void as the proceedings initiated against the dissolved company were wholly invalid and no grievance could be said to exist in respect of such action on the part of the Income-tax Officer. With respect we are unable to subscribe to the view of the Delhi High Court that under no circumstances, a proceedings can be initiated against the amalgamated company in respect of a liability though un-crystallised of the amalgamating company. Moreover, the case before the Delhi High Court arose out of the notice issued to a non-existing company and not the amalgamated company and the company to which the notice had been issued had been dissolved long prior to the issuance of the notice.

An order of amalgamation made by the High Court, under the provisions of section 394 of the Companies Act is not an order, which is meant to relieve either of the legal entities, which are parties to the scheme of amalgamation, from the liability for payment of tax. An order of amalgamation is intended to facilitate reconstruction and amalgamation of the companies expeditiously in a manner, which is beneficial to the companies and its shareholders of the two companies, so long as such amalgamation is not opposed to public interest. None of the provision of the Companies Act providing for amalgamation, nor any other provision in the Act, confers immunity from payment of tax on either of the entities, which are parties to the order of, amalgamation. That 4 the reason why the scheme of amalgamation invariably includes a provision for taking over by the amalgamated company of all liabilities and- assets of the amalgamating company. In case where such liabilities are not taken over, the company Courtwould -have to be satisfied that suitable provision is made for thepayment of liabilities before the assets are allowed to be transferred from the amalgamating company to the amalgamated company. The procedure prescribed for amalgamation of the companies also provided for convening a meeting of creditors besides considering the wishes of the shareholders, the object being that by reason of amalgamation the claims of creditors against the two companies involved in the scheme are not to be adversely affected solely by reason of amalgamation. What is true for the creditors is true in, even greater measure with regard to the statutory liabilities particularly income-tax.

It is not open to the amalgamated company which has taken overall the assets and liabilities of the amalgamating company to claim that it is not in any way liable for the tax payable by the amalgamating company, even though the order under section 104 came to be made after the order of amalgamation and after the dissolution of the amalgamating company, but on account of acts of omission and commission committed by the amalgamating company, and its failure to carryout the obligation which were required to be carried out. The fact that the liability had not crystallised and the charge had not been created would not entitle the amalgamated company to avoid the payment of the tax under section 104 that would have been payable if the amalgamating company had continued to exist.

Notice in this case was given by the Income-tax Officer rightly to the amalgamated company as the amalgamating company had been dissolved by the time the notice was issued and the liability, after amalgamation, was that of the amalgamated company. Under the terms of amalgamation, the amalgamated company had taken over the obligation to pay and discharge "all liabilities, debts and obligations of whatsoever nature" of the amalgamating company. The liability of the amalgamating company to pay tax under section 104 of the Act, became the liability or obligation of the amalgamated company which had taken overall liabilities, duties and obligations of the amalgamating company in terms of the order of amalgamation.

The failure on the part of the amalgamating company to distribute the statutory percentage of the accumulated profits is the foundation for the order passed by the Income-tax Officer under section 104. Such failure on the part of- the amalgamating company is an omission, which had within itself the potential for an order under section 104 being made against it, at any time within a period of four years by proposing a scheme of amalgamation and amalgamating itself with the amalgamated company, the obligation to comply with an order under section 104 when made did not get wiped out That obligation became the obligation of the amalgamated company. The dissolution of the amalgamating company thereafter was not an event of any relevance and had no effect on the obligation, which had been taken over by the amalgamated company in terms, of the order of amalgamation.

One of the consequences of amalgamation was that the amalgamating company became incapable of having the benefit of section 105. Had it continued to exist it would have had the option of distributing the undistributed profits, thereby avoiding the liability to tax, under section 104. That circumstances, however, cannot be used as a shield by the amalgamated company to avoid payment of tax. The Revenue is in no way responsible for the amalgamating company's Act of being a party to the scheme of amalgamation and thereby rendering itself incapable of taking the benefit of section 105.

The provisions of the Companies Act should be read harmoniously with those of the Income-tax Act. After the, transfer of all assets and liabilities, debts and obligations of the amalgamating company to the amalgamated company in terms of the sanction accorded by the company Court under section 394 of the Companies Act, the striking out of the name of the amalgamating company from the register does not wipe out the obligation to comply with an order made by the Income-tax Officer under section 104, and the order is capable of being enforced against the amalgamated company.

Our answer to the question that has been referred to us, therefore, is that the Tribunal was not right in holding that the proceedings against the amalgamated company could not be initiated on account of the failure of the amalgamating company to distribute the statutory percentage of the accumulated profits, our answer is-in favour of the Revenue and against the assesssee. The Revenue shall be entitled to costs in the sum of Rs.750 (Rupees seven hundred and fifty only).

M. B. A./103/FC???????????????????????????????????????????????????????????????????????????????? Reference answered.