1. Bharat Heavy Electricals Ltd., otherwise popularly known as BHEL, is one of the most prestigious undertakings of the Government of India.
The business of BHEL consists of manufacture of heavy electrical goods.
It was established sometime in the year 1964. Earlier there was a Government Corporation by name Heavy Electricals Ltd. ('HEL'), which had its units at four places, namely, Bhopal, Hyderabad, Trichi and Hardwar. When BHEL was established the units at Hyderabad, Trichi and Hardwar were taken over by it from HEL. By an order dated 27-3-1974 of the Government of India, in accordance with the provisions of Section 396 of the Companies Act, HEL was amalgamated with BHEL with effect from 1-1-1974 with the result that the fourth unit at Bhopal also came within the fold of BHEL. It is useful to refer to the preamble and a few clauses of the order passed by the Company Law Board in the Department of Company Affairs, Government of India, dated 27-3-1974.
Whereas the Company Law Board is satisfied that, for the purpose of securing the optimum use of scarce resources of equipment, people and materials and to derive the maximum benefit from the collaboration agreements entered into with foreign firms and countries and for ensuring coordination in policy and the efficient and economical expansion and working of Heavy Electrical Units, it is essential in the public interest that the Bharat Heavy Electricals (India) Limited, being companies incorporated under the Companies Act, 1956 (1 of 1956), which are engaged in the production and sale of heavy electrical equipment, should be amalgamated into a single company ; Now, therefore, in exercise of the powers conferred by Sub-sections (1) and (2) of Section 396 of the Companies Act, 1956 (1 of 1956), read with notification of the Government of India in the Department of Company Affairs No. GSR 443(E), dated the 18th October, 1972, the Company Law Board hereby makes the following order, namely :- 3. Amalgamation of the companies - As from the appointed day, the undertaking of the dissolved company subject to encumbrances thereon, if any, shall stand transferred to and vest in the Bharat Heavy Electricals Limited, which company shall immediately on such transfer be deemed to be the company resulting from the amalgamation. For accounting purposes, the amalgamation shall be carried out with reference to the audited accounts and balance sheets as on the 31st March, 1973, of the two companies and the transactions thereafter will be pooled into a common account. The dissolved company shall not be required to prepare its final accounts as of date, as Bharat Heavy Electricals Limited shall take over all assets and liabilities according to the balance sheet as on the 31st March, 1973 and accept full responsibility for all transactions to date.
Explanation : The 'undertaking of the dissolved company' shall include all rights, powers, authorities and privileges and all property, movable and immovable, including cash balances, reserves, revenue balances, investments and all other interests and rights in or arising out of such property as may belong to, or be in the possession of, the dissolved company immediately before the appointed day and all books, accounts and documents relating thereto and also all debts, liabilities and obligations of whatever kind then existing of the dissolved company.
4. Transfer of certain items of property - For the purpose of this order, all the profits or losses, if any, or both, of the dissolved company as on the appointed day and the revenue reserves or deficits, if any, or both 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 or losses, if any, or both and the revenue reserves or deficits, as the case may be, of the company resulting from the amalgamation.
Clause 8 deals with the payment of taxes of HEL and it reads as follows : 8. Provision with respect to taxation - All taxes in respect of the profits and gains of the business carried on by the dissolved company before the appointed day shall be payable by the company resulting from the amalgamation to the same extent as they would have been payable by the dissolved company if this order had not been made.
2. There was unabsorbed depreciation amounting to Rs. 29.77 crores in the hands of HEL at the time when the same was amalgamated with BHEL.
The cost of plant and machinery in the hands of HEL was Rs. 74.82 crores. Depreciation actually allowed in the sense that it was absorbed by the profits amounted to Rs. 11.81 crores and that is how the balance of Rs. 29.77 crores remained unabsorbed and was carried forward.
Similarly, there were business losses of HEL to the extent of Rs. 1.66 crores which were carried forward. The principal question that arose before the ITO in the assessment of BHEL for the assessment year 1974-75 is whether the claim of BHEL in getting the benefit of unabsorbed business loss and unabsorbed depreciation is to be allowed.
The ITO as well as the Commissioner (Appeals) for the reasons recorded in their orders did not accept the assessee's claim. The assessee-BHEL has come up in second appeal before the Tribunal.
3. Mr. Dastur raised various contentions, some of which are common in regard to unabsorbed business loss and unabsorbed depreciation. There are also some alternative grounds raised in regard to unabsorbed depreciation. The learned departmental representative mainly relied on the order of the Commissioner (Appeals) and, his emphasis was that in the case of amalgamation, the previous business loss or depreciation cannot be. allowed in the hands of the amalgamating company. On the arguments advanced the following broad issues arise for consideration before us : 1. Whether the provisions of the Companies Act, read with the order issued under Section 396, is a special provision and, therefore, overrides the provisions of the Income-tax Act 2. Whether the corporate veil should be pierced in order to find out the real person who is interested in the two companies which were amalgamated in order to decide the question of giving the benefit of unabsorbed business loss and unabsorbed depreciation of the amalgamated company in the hands of the amalgamating company 3. Whether the assessee is otherwise entitled to carry forward and set off of business losses 4. Whether the assessee is entitled to the carry forward of unabsorbed depreciation in view of the provisions of Section 43 4. The question whether the provisions of Companies Act should prevail or that the scheme under the Income-tax Act, 1961 ('the Act'), in regard to carry forward of business loss and depreciation should prevail, is a matter on which there can be no easy solution. The two enactments are on two different fields. No doubt the Government has a special power vested in it under Section 396 to order amalgamation of two or more companies in public interest. Whether an order of amalgamation passed by the Government whereby certain provisions are made in regard to the losses of the amalgamated company, the effect of such provisions could be given totally even though the provisions of the Act are at variance is a moot point It may be difficult to lay down a general proposition, accepting the contention of the assessee, that in every case the provisions of the Companies Act should prevail but in this case having regard to the peculiar features of amalgamation we are inclined to hold that the provisions of the Companies Act should prevail.
The President of India held the entire share capital of the HEL. HEL had four units initially. Three of its units were already transferred to BHEL. The fourth unit came to the fold of BHEL by virtue of amalgamation. The share capital of BHEL was also entirely held by the President of India. On the amalgamation the President of India was allotted further shares representing the value of the assets of HEL.
The Central Government passed the order of amalgamation in public interest. Lastly, the order of the Company Law Board had to be placed before the Parliament which approved it in accordance with the provisions of Section 396 of the Companies Act. Clauses 3 and 4 specifically mentioned as to what would happen to the losses of HEL.
Explanation to Clause 3 mentions that all privileges and rights of the amalgamated company will be available to the amalgamating company.
Similarly, Clause 4 provides that the profits or losses of the amalgamated company would become part of the profits or losses of BHEL.
In this situation it must be held that the Central Government was aware of the fact that the losses of HEL, whether on account of business loss or unabsorbed depreciation, should be treated as a part of the loss of BHEL. Full effect of it can be given only if its implication is carried whole hog, i.e., when its effect is given for the purpose of the assessment under the Act also. Otherwise it has no significance whatsoever. From the point of view of accountancy if some losses of amalgamated company are taken over by the amalgamating company, it would virtually amount to payment of price over and above the value of the assets. There is no need to make a provision that the losses of the amalgamated company will be part of the losses of the amalgamating company. In our view, Clause 4 is a clue to the answer to be given in favour of the assessee. It cannot be said that the Government is not aware of the provisions of the Act, when the order of amalgamation was passed. In fact it must be assumed that the Parliament is aware of the provisions of the Act when the order was passed.
In view of the above, we hold that the provisions of the Companies Act in a case like the present one must prevail over the provisions of the Act. We are not unaware that the Act is a self-contained code by itself and in respect of each of the matters provisions have been made and they have to be given effect to. The scheme, in regard to the carried forward unabsorbed losses and depreciation had been specifically mentioned in the Act. That scheme has nothing to do with a situation where by an order of the Government the losses of one unit are treated as the losses of other unit. What BHEL is claiming now is not carry forward of unabsorbed loss or depreciation. It is claiming its own losses which have to be determined with reference to the order of amalgamation particularly Clause 4. By virtue of Clause 4 the loss of BHEL is increased to the extent of the unabsorbed loss and depreciation of HEL. Viewed in this light also we feel that the revenue was not right in disallowing the claim of the assessee.
There were situations where the provisions of the Companies Act vis-a-vis, the Income-tax Act had been considered by the Courts and we need refer only two decisions. In Union of India v. India Fisheries (P.) Ltd.  57 ITR 331 (SC), the question as to whether the provisions of the Companies Act, 1913 in regard to the payment of the dividends to the shareholders by the official liquidator as against the claim of the ITO to recover its dues by adjustment of the refunds due to the assessee arose. This is what their Lordships of the Supreme Court observed : ...If there is an apparent conflict between two independent provisions of law, the special provision must prevail. Section 49E is a general provision applicable to all assessees and in all circumstances ; Sections 228 and 229 deal with the proof of debts and their payment in liquidation. In our opinion Section 49E can be reconciled with Sections 228 and 229 by holding that Section 49E applies when insolvency rules do not apply. Accordingly, agreeing with the High Court, we hold that the Income-tax Officer was in error in applying Section 49E and setting off the refund due....(pp.
334-35) The Kerala High Court also had occasion to consider this very aspect in ITO v. Official Liquidator, Swaraj Motors (P.) Ltd.  134 ITR 132 and held that the provisions of the Companies Act which are special provisions should prevail over the provisions of the Act, which are of general nature. By parity of reasoning with reference to the facts in the instant case, the same principle, in our opinion, should be applied. The special provisions in relation to the order passed by the Government of India, read with Section 396 of the Companies Act, especially, governing the treatment to be given to the losses of HEL, must give way to the general provisions under the Act. The provisions under the Act apply generally to all amalgamations but when there is a special provision like the one mentioned in clauses 3 and 4 of the order, the same should prevail. We may repeat that strictly speaking there is no conflict because Clause 4 treats the losses of HEL as the losses of BHEL. Even if a conflict is seen, the provisions of the Companies Act will have to be followed in preference to the provisions of the Act. In view of the above the assessee should succeed in regard to both business loss as well as depreciation.
5. Since, however, all the aspects have been argued and placed before us, we do not want to confine our . decision only on the above issue.
This leads to the consideration of second and third issues, which in our opinion can be discussed together. We have already seen that there is only one shareholder in both the companies and is none other than the President of India. In other words all the shares in both the companies are wholly owned by the Government of India. Government of India is alone interested in the two undertakings. The President of India is the person who receives the dividends from both the companies.
He is the real person interested in the two companies. We are, therefore, of the opinion that for the purpose of determining the issue before us, it may be necessary to remove the corporate veil. It is also to be noted that the business of both HEL and BHEL is identical. The history of the two companies points out to the fact that they cannot be treated as separate and independent units. It is only for the purpose of effective management that the Corporations had been established but there is only one person who is interested. Accordingly, the loss or profit of one will have to be considered as the loss or profit of the other and there is no question of treating the two units as separate assessees especially when we are considering the question of giving effect to the order of amalgamation.
The effect of amalgamation has been considered recently by their Lordships of the Punjab and Haryana High Court in the case of CIT v.Saraswati Industrial Syndicate Ltd.  136 ITR 366. The question that was for consideration before their Lordships was whether on the amalgamation profit under Section 41(1) of the Act, receivable by the amalgamated company is assessable in the hands of the amalgamating company. Their Lordships dealt with the matter as follows : To determine the above, the crux of the matter is as to the legal results that flow from the amalgamation of the two companies. Now, the word 'amalgamation' does not have any definite legal meaning.
Indeed, it is not a legal term or a term of art but is essentially a commercial term. Even as such, it does not seem to have an exact or definite connotation. The issue, therefore, arises whether on the amalgamation of two companies, the amalgamating company becomes totally non-existent or extinct in the eye of law Or is it that the amalgamating company blends itself and continues its existence in the amalgamated company We are inclined to the view that the latter is the correct enunciation of the legal result of amalgamation. By virtue of the court's order and the consequent valid amalgamation, the two companies merge and are absorbed into each other as one. They indeed both blend together to form one company. The end result, therefore, is that neither one nor the other becomes extinct but they continue their entities in a blended form together. We derive support for this view from the observation of Justice Buckley in Wild v. South African Supply and Cold Storage Co.  2 Ch. 268 (Ch. D), wherein the learned Judge was drawing the distinction between 'reconstruction' and 'amalgamation' and has lucidly observed as follows (p. 287) : Now what is an amalgamation An amalgamation involves, I think, a different idea. There you must have the rolling, somehow or other, of two concerns into one. You must weld two things together and arrive at an amalgam-a blending of two undertakings. It does not necessarily follow that the whole of the two undertakings should pass-substantially they must pass-nor need all the corporators be parties, although substantially all must be parties. The difference between reconstruction and amalgamation is that in the latter is involved the blending of two concerns one with the other, but not merely the continuance of one concern (p. 287) The abovesaid enunciation has received repeated approval and affirmance in the English Courts. In Corporation of the Royal Exchange Assurance v. Walker  1 Ch. 567 (CA), Lord Justice Romer, whilst agreeing with the abovesaid view of Buckley J., quoted with approval the following proposition : ...The word 'amalgamation' has no definite legal meaning. It contemplates a state of things under which two companies are so joined as to form a third entity, or one company is absorbed into and blended with another company. (pp. 370-71) If we apply the above principles enunciated by their Lordships following the English decisions, we are clearly of the view that even in the case of any other provision under the Act, the same result should follow. In the case before their Lordships no doubt it was Section 41(1) profit but in the case before us is the question of treating the unabsorbed loss and depreciation of the amalgamated company. There can be no difference in principle. The ratio of the decision is that the amalgamated company does not lose its identity.
Thus either because the corporate veil has to be removed or because the identity of the amalgamated company is not lost as per the decision of the Punjab and Haryana High Court, BHEL must be entitled to its claim in regard to both business loss and depreciation.
Before concluding on this part of the case in fairness to Mr. J.S. Rao, the learned departmental representative, we must take note of the argument that in the case of amalgamations the losses of the amalgamated company were never allowed. He invited our attention to the following passage in Kanga and Palkhivala's The Law and Practice of Income-tax, Seventh edition, volume 1 : In any case of amalgamation, whether falling under Section 2(1A) or not, if the company which merges into another has unabsorbed depreciation or carried forward losses from earlier years, the right to carry them forward would be lost and the company into which the loss-making entity is merged (hereinafter called 'the transferee company') cannot claim to carry forward the unabsorbed depreciation or the past losses of the merged company which was a different assessee. This rule cannot be circumvented in cases of amalgamation falling under Section 2(1A) by an Indian transferee company taking over the assets of the merged company at a value higher than the written down value, since Explanation 2A to Section 43(6) provides that the written down value to the Indian transferee company of the capital assets in such cases should be taken to be the same as it would have been in the case of the merged company. On the other hand, the right to carry forward unabsorbed development rebate is available to the transferee company in cases of amalgamation falling within Section 2(1A).... (p. 385) Similarly, he referred to the passage occurring in Income-tax Law by Chaturvedi and Pithisaria at pages 1975 to 1980 as also some of the passages in Law of Income-tax by Sampath Iyengar at pages 178 to 187.
In addition, he also relied on the decision of the Calcutta High Court in CIT v. Delta Jute Mills Co. Ltd.  117 ITR 492. There is no doubt that what Mr. J.S. Rao has stated is right but all these observations must be understood in the light of the decision of the Punjab and Haryana High Court, which struck different note based on English decisions. Unfortunately the line of approach adopted by their Lordships of the Punjab and Haryana High Court had not been noticed by any of the authors. It should also be remembered that there is a fundamental difference between dissolution of a company by amalgamation and dissolution by winding up order. As their Lordships of the Punjab and Haryana High Court pointed out by mere dissolution on amalgamation the identity of the amalgamated company is not totally lost. The argument of Mr. J.S. Rao that by amalgamation the HEL is dissolved and, therefore, it lost its identity cannot be accepted. Similarly, the decision of the Calcutta High Court relied on by him has no relevance.
The further argument of Mr. J.S. Rao based on the provisions of Section 72A of the Act also will have to be noticed. According to him, the insertion of Section 72A indicates the mind of the Legislature that until then the Parliament never contemplated allowance of past losses or depreciation in the case of amalgamation. According to Mr. Rao, Section 72A for the first time created that privilege and prior to that there was no such right contemplated. We do not, however, think that by insertion of Section 72A, it can be held that in no case earlier the benefit of unabsorbed losses or depreciation could be availed of in the case of amalgamation. If we compare Section 72A and the provisions of Section 396 of the Companies Act, we find a lot of similarity. In order, perhaps to obviate any possible conflict or dispute because of the provisions of the Act in relation to amalgamations under Section 396 of the Companies Act, what was contemplated under Section 396 has been incorporated in Section 72A. But that does not mean that prior to the insertion of Section 72A the provisions of the Companies Act especially Section 396 would not prevail over the provisions of the Act. Whatever may be the other provisions with regard to the amalgamations under the Companies Act, the amalgamation ordered under Section 396 with a specific provision about the treatment of losses as in this case, the result would be that the order of amalgamation will have to be given effect to and, to that extent the provisions of the Act may be overridden.
6. This leads to the consideration of the fourth issue. Though Mr.
Dastur attempted to argue that the amalgamation of BHEL and HEL would not amount to a scheme of amalgamation, we are not impressed with his arguments. The very definition of amalgamation contemplates three conditions. All the three conditions are satisfied in this case. The shareholder (in fact there is only one shareholder in both the companies and that is the President of India) holds not less than nine-tenths in value of the shares of the amalgamating company as required in Sub-clause (iii) of Section 2(1A) of the Act. There is, therefore, no doubt that there is an amalgamation of two companies within the meaning of Section 2(1A). Consequently, the order passed by the Government of India is a scheme of amalgamation.
Then we come to the provisions of Section 43 of the Act, which defines various expressions used in Sections 28 to 49. The words 'actual cost' has been defined in Clause (1) of Section 43. Mr. Dastur pointed out that actual cost in this case is worked out at Rs. 96.97 crores as per the certificate of the auditors. Since the assessee undertook the losses of HEL they have to be added to the value of the fixed asset including township and construction work in progress and that is how the cost was arrived at Rs. 96.66 crores. But the argument based on the words 'actual cost' will have no significance whatsoever if we come down to the definition of written down value as per Clause (6) of Section 43. Admittedly the assets were used in business by HEL and it is from HEL that the assets were taken over by BHEL. Explanation 2A is very relevant in this connection. It may be reproduced : Explanation 2A : Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the written down value of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its business.
It is clear from a mere reading of the above that the written down value in the case of HEL shall be the written down value in the case of BHEL. There is, thus, no merit in the contention of Mr. Dastur that the actual cost should be taken at Rs. 96.66 crores so far as BHEL is concerned. Similarly, there is also no merit in the alternative contention of Mr. Dastur that the cost should be taken at Rs. 78.82 crores which was the original cost of the HEL. The provisions of Section 43 will have to be given effect to. The written down value in the hands of HEL shall have to be ttake as the written down value in the hands of BHEL. But Mr. Dastur has another argument so far as the determination of written down value is concerned. According to him the depreciation which was actually allowed was Rs. 11.81 crores and the balance was not absorbed and, therefore, carried forward. He, therefore, urged that in finding out the written down value we have to take into account only Rs. 11.81 crores which was actually allowed. But the revenue's contention is that Explanation 3 will have to be taken into account and it reads as follows : Explanation 3 : Any allowance in respect of any depreciation carried forward under Sub-section (2) of Section 32 shall be deemed to be depreciation 'actually allowed'.
Prima facie the Explanation appears to be against the assessee because the words 'actually allowed' would mean the entire depreciation which is worked out though it might not have been fully absorbed. But what Mr. Dastur pointed out is that where the depreciation is carried forward under Sub-section (2) of Section 32 of the Act, then only that portion will have to be taken into account as equivalent to 'actually allowed'. But in a case where carried forward is not there because the HEL is not getting the benefit, according to the revenue, there is no question of taking un-absorbed depreciation as depreciation actually allowed in finding out the written down value in the case of BHEL which is the amalgamating company. Mr. Dastur also relied on the juxtaposition of Explanation 2A which came by amendment and also emphasised the fact that in case the contention is not accepted, it would result in anomaly because nobody would be getting the benefit of the depreciation especially when it comes to a question of taxing the balancing charge.
7. In our opinion, there is no merit in the contention of Mr. Dastur.
It is true that Explanation 3 creates a legal fiction and it has to be construed strictly. It is also true that HEL is not getting the benefit of the unabsorb-ed depreciation under Sub-section (2) of Section 32 since it is not being assessed on account of amalgamation. Strictly construing Explanation 3 by itself, it cannot come in the way of the assessee. This is the view taken by a Bombay Bench of the Tribunal in Palampur Vegetable Products Ltd. (In Liquidation) v. ITO [IT Appeal No.2652 (Bom.) of 1970-71, dated 20-12-1971]. But the hurdle in the way of the assessee is on account of Explanation 2A. This Explanation as already mentioned, has come into effect from 1-4-1967 and applicable for the assessment years 1967-68 onwards. The decision of the Bombay Bench of the Tribunal had no occasion to consider Explanation 2A because the appeal related to the assessment year 1965-66 to which the Explanation 2A had no application.
In our view, therefore, Explanation 2A has removed the lacuna. Whatever be the effect of Explanation 3, Explanation 2A makes the position very clear that the written down value would be the same as that of the amalgamating company. In this case the written down value in the hands of HEL would be Rs. 74.82 crores minus entire depreciation including the unabsorbed depreciation of Rs. 29.77 crores and not merely the depreciation actually absorbed. One has to assume that the amalgamating company is carrying on business and in finding out written down value of its assets one has to take into account the entire depreciation. We are, therefore, unable to agree with Mr. Dastur that only Rs. 11.81 crores has to be taken into account.
The above discussion is in a way academic in view of our decision on the first issue but as already pointed out we thought fit to decide the matter on all points and we, accordingly, gave our decision.
8. to 10. [These paras are not reproduced here as they Involve minor issues].