India: Adjustment Of Previous Losses Of Co-Operative Societies After Amalgamation: Whether Permissible Under Income Tax Act

Hon'ble Apex Court in matter 'RAJASTHAN R.S.S. & GINNING MILLS FED. LTD. Vs. DY. COMMISSIONER OF INCOME TAX, JAIPUR1' has awarded an important judgment vide which the issue of computing previous losses incurred by Co-operative Societies before their amalgamation into appellant Society was filed under Income Tax return has been elaborated.

The issue in question, which was considered and decided by Hon'ble Supreme Court in present appeal by special leave is: whether the appellant society is entitled to accumulate and carry forward the losses of the societies merged in it, so that the same could be set off against the profits of the appellant society under the provisions of Section 72 of the Income Tax Act, 1961 (hereinafter referred to as 'the Act')?

The facts in brief which lead the filing of subject appeal are as under:

There were four co-operative societies in the State of Rajasthan wherein the Government of Rajasthan had substantial share holding, namely - (i) Rajasthan Cooperative Spinning Mills Ltd.; (ii) Gangapur Cooperative Spinning Mills Ltd.; (iii) Ganganagar Co-operative Spinning Mills Ltd.; and (iv) Gulabpura Cotton Ginning & Pressing Sahkari Samiti Ltd. An administrative decision was taken by the Government of Rajasthan to amalgamate all these co-operative societies into the appellant co- operative society, namely Rajasthan Rajya Sahkari Spinning & Ginning Mills Federation Ltd w.e.f. 01.01.1993. Upon amalgamation of the said societies into the appellant society, the registration of the said four cooperative societies had been cancelled and all the assets and liabilities of the said four societies had been taken over by the appellant society by virtue of the said amalgamation. These four societies were not sound financially and they had substantial accumulative losses.

When Income-Tax returns for the assessment years 1994-95 and 1995-96 were filed by the appellant society after the amalgamation of the four co-operative societies into it, the appellant society wanted to get the accumulated losses of the aforesaid societies, of about Rs.2,68,39,504/-, carried forward, so that the same could be set off against the profits of the appellant society under the provisions of Section 72 of the Act.

The assessing officer declined the appellant's claim for the reason that the said societies were not in existence after their amalgamation into the appellant society. As the said four societies were not in existence, according to the assessing officer, their accumulated losses could not have been carried forward or adjusted against the profits of the appellant society. Assessment orders were passed accordingly.

Being aggrieved by the above stated assessment orders, appeals were filed before the CIT (Appeals) and the CIT (Appeals) dismissed the said appeals. Further appeals were filed before the Income Tax Appellate Tribunal but the Tribunal also dismissed the appeals.

Being aggrieved by the common order passed by the Tribunal, the appellant filed Income Tax Appeal No.19 of 2001 before the High Court of Rajasthan and the said Income Tax Appeal was also dismissed and therefore, the appellant has approached this Court by way of the present appeal.

The contention of the counsel for the appellant was that the view taken by the assessing officer, are not correct for the reason that upon amalgamation of the aforesaid four co-operative societies into the appellant society, by virtue of the provisions of Section 16(8) of the Rajasthan Co- operative Societies Act, rights and obligations of the societies so amalgamated would not be affected and therefore, all the rights which the societies had with regard to carrying forward of their losses would continue, and as the said societies had been amalgamated into the appellant society, the appellant society ought to have been permitted to set off the losses suffered by the amalgamated societies.

It was further submitted that reading Section 72(1) of the Act with Section 16(8) of the Rajasthan Cooperative Societies Act, 1965 clearly denotes that the appellant assessee had a right to carry forward losses incurred by the amalgamating societies and set off the business losses of the said societies against the profits and gains of the appellant society. His further contention was that the word 'company' used in Section 72(A) of the Act should be given wide interpretation so as to include societies in the term 'company' because like companies, societies also have a distinct legal personality and there is no reason for the authorities under the Act to give different treatment to cooperative societies.

It was submitted that the appellant society had a vested right to get the accumulated losses of the amalgamated societies adjusted against the profits of the appellant society and the said vested right could not have been taken away by the assessing officer. The appellant relied upon the judgment delivered in the case of Commissioner of Income Tax v. M/s. Shah Sadiq and Sons2.

However, the learned counsel appearing for the authorities of the Income Tax Department had submitted that the registration of the amalgamating societies had been cancelled upon the amalgamation and as they were not in existence at the time when the appellant society was assessed, there was no question of carrying forward accumulated losses of the amalgamating societies and adjusting them against the profits of the appellant society.

It was further submitted that upon conjoint reading of Section 72 and 72A of the Act, it is clear that the cooperative societies cannot get the benefit of carrying forward and setting off accumulated losses if the said societies were not in existence. Only in case of a 'company', the benefit of set off could be availed by an amalgamated company, if the amalgamating company had accumulated losses which could have been carried forward and adjusted against the profits of the amalgamated company in accordance with the provisions of the Act. Judgments relied by Respondent are 'The Commissioner of Income Tax, Lucknow v. Sh. Madho Pd. Jatia'3; 'M/s. Baidyanath Ayurved Bhawan (Pvt.) Ltd., Jhansi v. The Excise Commissioner, U.P. and others4' and 'Commissioner of Income Tax, Bombay v. Maharashtra Sugar Mills Ltd., Bombay5'. Accordingly learned counsel appearing for the respondent authorities had submitted that the impugned judgment is just and correct and therefore, the appeal deserved to be dismissed.

Hon'ble Apex Court after hearing the arguments, pursuing records and after going through the judgments referred to them are of the view that the judgment delivered by the High Court is absolutely just and proper.

Hon'ble Apex Court has held that reason that for the purpose of getting carried forward losses adjusted or set off against the profits of subsequent years, there must be some provision in the Act. If there is no provision, the societies which are not in existence cannot get any benefit. The losses were suffered by the societies which were in existence at the relevant time and their existence or legal personality had come to an end upon being amalgamated into another society. It was stated further that the normal principle is that a non-existent person cannot file an income tax return and therefore, cannot carry forward its losses after its existence comes to an end. All those four societies, upon their amalgamation into the appellant society, had ceased to exist and registration of those societies had been cancelled. In the circumstances, those societies had no right under the provisions of the Act to file a return to get their earlier losses adjusted against the income of a different legal personality i.e. the appellant society.

Hon'ble Supreme Court clarified that there is a specific provision in the Act in the cases of Companies Amalgamation and the amalgamated company can get those losses set off against its profits subject to the provisions of the Act by virtue of Section 72 A of the Act but there is no such provision in the case of cooperative societies.

It was also ruled out that any discrimination and violation of Article 14 of the Constitution of India as the same would also not help the appellant. It was stated that there is no discrimination. The societies and companies belong to different classes and simply because both have a distinct legal personality, it cannot be said that both must be given the same treatment. Accordingly the view expressed by the High Court was upheld as there is no provision under the Act for setting off accumulated losses of the amalgamating societies against the profits of the amalgamated society, the appellant society could not have got the benefit of carrying forward losses of the erstwhile societies which were not in existence during the relevant Assessment Year. Appeal was accordingly dismissed.

Footnotes

1. 2014 STPL(Web) 343 SC

2.1987(3) SCC 516

3. 1976(4) SCC 92

4.1971(1) SCC 4

5.1971 (3) SCC 543

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