SARASWATI INDUSTRIAL SYNDICATE LTD. versus C.I.T., HARYANA, HIMACHAL PRADESH, DELHI

Citation: [1990] SUPP. 1 S.C.R. 332 · Decided: 04-09-1990 · Supreme Court of India · Bench: K.N. SINGH · Disposal: Appeal(s) allowed

Judgment (excerpt)

A 
B 
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D 
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G 
H 
SARASWATI INDUSTRIAL SYNDICATE LTD. 
v. 
C.I.T., HARYANA, HIMACHAL PRADESH, DELHI 
SEPTEMBER 4, 1990 
[K.N ... SINGH, T.K. THOM\l!EN AND KULDIP SINGH, JJ.] 
Income Tax Act, 1961-Section 41( /)-Object and scope of. 
Income-Tax Act, 1961: Section 41-Application of-Condition 
-Identity of assessee in previous year and subsequent year to be 
same-Change in the assessee's identity-No tax liability. 
Income Tax Act, 1961-Section 41( 1) read with Sections 391 and 
394, Companies Act, 1956--Amalgamation of two Companies-Effect-
of-Exemption from tax liability granted to the transferor company 
whether can be claimed by the transferee company. 
Under the scheme of amalgamation and order of the High Court 
under Sections 391 and 394 of the Companies Act, 1956 on 28.9.1962 
one Indian Sugar Company was amalgamated with the appellant-
assessee company. The transferor company had been allowed expendi-
ture to the extent of Rs.58, 734. The appellant transferee company 
claimed exemption on the amount of Rs .58, 735 from income-tax for the 
assessment year of 1965-66 on the ground that the amalgamated trans-
feree coml'any was not liable to pay tax under Section 41(1) of the 
Income-tax Act, as the expenditure had been allowed to the erstwhile 
transferor-company. The claim was disallowed by the Income Tax 
Officer. The transferee-appellant company's appeal was also rejected 
by the Appellate Assistant Commissioner. The appellankompany pre-
ferred appeal before the Income Tax Tribunal which was allowed on the 
ground that after amalgamation, the transferor company's identity was 
lost and it was no longer in existence and the transferee-company was a 
different entity. 
When the question was referred to the High Court, it answered 
the reference in favour of the Revenue, holding that on amalgamation 
of the two companies, neither of them ceased to exist, instead both the 
companies continued their entities in a blended form and the amal-
gamated company was a successor-in-interest of the amalgamating 
company. 
332 
SARASWATI INDUSTRIAL v. C.!.T. 
333 
The Appellant Company's application under Section 291 of the 
Income-Tax Act read with Section 109, Code of Civil Proce<\ure was 
dismissed by the High Court. 
Hence the present appeal. 
A 
Allowing the appeal of the assessee-Appellant company, this 
B 
Court, 
HELD: 1. Section 41(1) has been enacted for charging tax on 
profits made by an assessee, but it applies to the assessee to whom the 
trading liability may have been allowed in the previous year. If the 
assessee to whom the trading liability may have been allowed as a busi-
ness expenditure in the previous year ceases to be in existence or if the 
assessee is changed on account of the death of the earlier assessees the 
income received in the year subsequent to the previous year or the 
accounting year cannot be treated as income received by the assessre. [ 146C-E) 
2. In order to attract the provisions of Section 41(1) for enforcing 
the tax liability, the identity of the assessee in the previous year and the 
subsequent year must be the same. If there is any change in the identity 
of the assessee there would be no tax liability under the provisions of 
Section 41. [146E) 
3. Two companies may join to form a new company, but there 
may be absorption or blending of one by the other, both amount to 
amalgamation. When two companies are merged and are so joined, as 
to form a third company or one is absorbed into the other or blended 
with another, the amalgamating company loses its entity. [147G] 
4. After the amalgamation of two companies the transferor com-
pany ceased to have any entity and the amalgamated company acquired 
a new status and it was not possible to treat the two companies as 
partners or jointly liable in respect of their liabilities and assets. [148E] 
c 
D 
E 
F 
5. The true effect and character of the amalgamation largely 
depends on the terms of the scheme of merger. But there can be no 
G 
doubt that when two companies amalgamate and merge into one, the 
transferor company loses its entity_ as it ceases to have its business_. 
However, their respective rights or liabilities are determined undet the 
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scheme of amalgamation but the corporate entity of the transferor com-
pany ceases to exist with effect from the date the amalgamation is made 
effective. [148H; 149A-B] 
H 
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A 
B 
c 
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334 
SUPREME COURT REPORTS 
[ 1990] Supp. 1 S.C.R. 
Commissioner of Income Tax, Madhya Prad

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