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Orkay Silk Mills (P.) Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1983)5ITD661(Mum.)
AppellantOrkay Silk Mills (P.) Ltd.
Respondentincome-tax Officer
Excerpt:
.....conferred under section 1(2) of the taxation laws (amendment) act, 1975, this amendment came into effect with effect from 1-4-1976. it was the plea of the learned counsel for the assessee that as explained by the learned judges of the calcutta high court in the case of bombay photo stores (p.) ltd. (supra), the provisions of the amendment which came into force considerably after the close of the accounting period, did not apply to the assessee's case under consideration. it is brought to our notice that the accounts of orkay knitting industries (p.) ltd., were closed on 30-6-1975. as the company had already amalgamated with the orkay silk mills (p.) ltd., no annual general meeting was held. the net profits as per the books of account were rs. 15,23,004, out of which an amount of rs......
Judgment:
1. The assessee has filed the present appeal against the order of the Commissioner (Appeals) upholding the ITO's order under Section 104 of the Income-tax Act, 1961 ('the Act') and thus confirming the levy of additional tax amounting to Rs. 1,07,755.

2. Formerly there were two limited companies by the name of Orkay Silk Mills (P.) Ltd. and Orkay Knitting Industries (P.) Ltd. They amalgamated. The amalgamation was approved by the Bombay High Court by their order, dated 16-10-1975, in the Company Petition 308 of 1975. The amalgamation was effective with effect from 1-7-1975 subject to the terms of the order of the High Court according to the scheme of amalgamation attached to the order. In spite of the amalgamation with effect from 1-7-1975 whereunder the Orkay Knitting Industries (P.) Ltd. went out of existence on its merger with the present assessee, the Orkay Knitting Industries (P.) Ltd., filed its return of income for the assessment year 1976-77. The income-tax assessment with reference to this return was completed by the ITO on 31-3-1977. The ITO found that the Orkay Knitting Industries. (P.) Ltd. had a distributable surplus of Rs. 4,31,820 which it had not distributed as required under Section 104. He, therefore, passed an order under Section 104 levying an additional tax of Rs. 1,07,755 as being payable by the Orkay Knitting Industries (P.) Ltd. for the assessment year 1976-77. That company appealed before the Commissioner (Appeals) on various grounds. The first ground was that the assessment on that company, which had gone out of existence in July 1975, was bad and illegal. The consequent order under Section 104 in respect of that company was stated to be equally bad. The Commissioner (Appeals) accepted this position. The revenue appealed against the order of the Commissioner (Appeals) before the Tribunal which came up for hearing before the Tribunal as IT Appeal 1490 (Bom.) of 1980. The Tribunal by their order dated 25-3-1981 upheld the order of the Commissioner (Appeals).

3. In the meanwhile taking a clue from the order of the Commissioner (Appeals) in the case of Orkay Knitting Industries (P.) Ltd., the ITO assessing the present assessee, initiated proceedings against the assessee under Section 104. The assessee objected to being subjected to the proceedings under Section 104 in respect of the liability of Orkay Knitting Industries (P.) Ltd. for the assessment year under consideration on various grounds. For the detailed reasons mentioned by the ITO in his order, he proceeded to finalise the proceedings under Section 104 and levied the additional tax amounting to Rs. 1,07,755.

4. The assessee objected to the order of the ITO in appeal before the Commissioner (Appeals) on various grounds. One of the principal objections was that on the date of the amalgamation, i.e., 1-7-1975, the assessee was not liable for the declaration of the dividends out of the profits of Orkay Knitting Industries (P.) Ltd., as required under Section 104. Nor was Orkay Knitting Industries (P.) Ltd., liable to declare any dividends as required by Section 104 on the date of amalgamation, The Commissioner (Appeals) rejected this plea observing that it was not denied by the assessee that the amalgamated company had taken over all the assets and liabilities of the amalgamating company.

There was no denying of the fact that there was a liability under Section 104 in respect of the amalgamating company. The assessee having undertaken to discharge the liabilities as per the scheme of amalgamation as obtained in the order of the High Court, the assessee cannot absolve itself of this liability on the plea that the liability did not exist as on the date of amalgamation. A further argument was made before the Commissioner (Appeals) that the Taxation Laws (Amendment) Act, 1975 amending the relevant provisions with effect from 1-4-1976 had no application to the facts of the present case. The Commissioner (Appeals) overruled this objection on the basis of the Supreme Court decision in the case of CIT v. Isthmian Steamship Lines [1951] 20 ITR 572 to the effect that in income-tax matters the law to be applied is the law in force in the assessment year unless otherwise stated or implied. He also overruled the assessee's objection on the basis of the Calcutta High Court decision in the case of CIT v. Bombay Photo Stores (P.) Ltd. [1970] 76 ITR 84. Accordingly, he upheld the order of the ITO under Section 104.

5. Being aggrieved by the order of the Commissioner (Appeals), the assessee has appealed before the Tribunal. In the first place, it is submitted on behalf of the assessee that the amalgamation took place between the two companies with effect from 1-7-1975 by the order of the High Court, dated 16-10-1975, whereby Orkay Knitting Industries (P.) Ltd., amalgamated with the assessee. The accounting periods in both the companies case for the present assessment year was the year ended 30-6-1975. It was an admitted fact that both the companies were industrial companies. Being industrial companies, under the provisions of Section 104 as they were before their amendment by the Taxation Laws (Amendment) Act, 1975, both the companies were exempt from the operation of Section 104. By Section 27 of the Taxation Laws (Amendment) Act, 1975, the exemption in favour of industrial companies was removed and Section 104(4) exempted only a company which was neither an Indian company nor a company which had made the prescribed arrangements for the declaration and payments of dividends within India. By Notification SO 475(E), dated 5-9-1975, issued by the Central Government in exercise of the powers conferred under Section 1(2) of the Taxation Laws (Amendment) Act, 1975, this amendment came into effect with effect from 1-4-1976. It was the plea of the learned counsel for the assessee that as explained by the learned judges of the Calcutta High Court in the case of Bombay Photo Stores (P.) Ltd. (supra), the provisions of the amendment which came into force considerably after the close of the accounting period, did not apply to the assessee's case under consideration. It is brought to our notice that the accounts of Orkay Knitting Industries (P.) Ltd., were closed on 30-6-1975. As the company had already amalgamated with the Orkay Silk Mills (P.) Ltd., no annual general meeting was held. The net profits as per the books of account were Rs. 15,23,004, out of which an amount of Rs. 11,00,000 was laid aside by way of provision for taxation. The balance of Rs. 4,23,004 was carried over as surplus. The liability of the amalgamating company as on the date of amalgamation was Rs. 23,32,354 as per the accounts in respect of the sundry creditors for goods and services rendered. Further there were loans, secured and unsecured, amounting to Rs. 72,094 and Rs. 19,67,409. The amalgamating company did not make any provision for any liability by way of dividends to the shareholders as there was no such liabilities, statutory or otherwise, on the date of amalgamation. The assessee had taken over the existing liabilities of the amalgamating company.

Therefore, even under the amalgamation order issued by the Court on 16-10-1975, the assessee was not liable for any such liability.

Further, it is submitted on behalf of the assessee that the profits of the amalgamating company in the previous year were not the profits of the assessee for the previous year. They continued to be the profits of a separate entity in the preceding year. Therefore, the assessee could not be held responsible under Section 104 in respect of the profits of a separate entity.

6. We have carefully considered the facts and circumstances of the case and the arguments. The assessee, viz., the Orkay Silk Mills (P.) Ltd. and Orkay Knitting Industries (P.) Ltd. were amalgamated with effect from 1-7-1975 by the High Court order dated 16-10-1975. The accounting period for both the companies is the year ending 30-6-1975. The assessee's argument is that it had taken over only the existing liabilities of the amalgamating company as on the date of amalgamation.

The liability under Section 104 was not one of the liabilities contemplated in the amalgamation order issued by the High Court as this was neither a known liability nor an anticipated liability under Section 104. The assessee could not anticipate this liability because according to the law that existed on 30-6-1975, being industrial companies, neither company was exposed to Section 104. In our opinion, there is no substance in this argument. We are inclined to take this view because under the amalgamation order the assessee was liable for all the liabilities of the amalgamating company for periods prior to the amalgamation. Under Section 104 as amended, the amalgamating company was exposed to the action under Section 104 as the exemption available under the unamended Section 104 to industrial companies was withdrawn. This liability had arisen out of the operation of a statute.

The liability, if it was legally sustainable in respect of the amalgamating company, the assessee was fully liable for it. The assessee cannot take shelter under the terms of the amalgamation order on the plea that this was not a liability existing on the date of amalgamation.

7. This takes us to the second limb of the argument on behalf of the assessee, namely, the accounting period of both the companies having come to an end on 30-6-1975, Section 104, which was amended with effect from 1-4-1976 in consequence of the Government notification dated 5-9-1975, did not apply to the assessee for the year under consideration. This argument of the assessee is based on the Calcutta High Court decision in the case of Bombay Photo Stores (P.) Ltd. (supra). The facts of that case show that the assessment year involved was 1960-61 for which that the assessee's previous year ended on 30-6-1959. The income-tax authorities sought to apply the provisions of Section 23A of the Indian Income-tax Act, 1922, corresponding to Section 104 of the 1961 Act, as amended with effect from 1-4-1960 for levying additional taxes in respect of the undistributed profits. The Calcutta High Court by their order in the aforesaid case held that the revenue authorities were not competent to apply the provisions of the amended Section 23A, which came into effect at a considerably later date. It was the case of the assessee before us that this was the only case on the subject from any High Court in India. The Tribunal being an All India body was bound to follow this decision in the absence of any contrary decision from any other High Court. In our opinion, the assessee is on firm ground on this limb of the argument. The facts are on all fours. In the case before the Calcutta High Court also the accounting period came to an end on 30-6-1959 and the amendment of Section 23A took effect from 1-4-1960. In the instant case, the accounting period of the two amalgamating companies and also the amalgamated company, i.e., the assessee, came to an end on 30-6-1975 and the amendment of Section 104 takes effect from 1-4-1976. No decision contrary to the Calcutta High Court decision in the case of Bombay Photo Stores (P.) Ltd. (supra) has been brought to our notice.

In the circumstances, we have no alternative but to follow the Calcutta High Court decision as we are an All India Tribunal. In this connection, reference may be made to the Bombay High Court decision in the case of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589 wherein the learned judges have held that the Tribunal has to respect the law laid down by the High Court, though of a different State, so long as there is no contrary decision of any other High Court on the subject.

In the circumstances, we are inclined to hold that, following the Calcutta High Court decision in the case of Bombay Photo Stores (P.) Ltd. (supra), the provisions of Section 104 as amended by the Taxation Laws (Amendment) Act, 1975, which took effect from 1-4-1976, did not apply to the facts of the case. The question whether the provisions of Section 104 applied to the assessee's case will have to be considered in the light of the law before its amendment, according to which the assessee and both the amalgamating companies being industrial companies, they were not exposed to the action under Section 104.


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