Singh, J. -
(1.)This appeal is directed against thejudgment and order of the Punjab and Haryana High Court dated 15-4-1975 answering the Income-tax Reference made to it by the Income-tax Appellate Tribunal.
(2.)Briefly, the facts giving rise to this appeal are that the appellant-Saraswati Industrial Syndicate is a limited company carrying on business of manufacturing and sale of sugar and machinery for sugar mills and other industries. Another company, namely, the Indian Sugar and General Engineering Corporation (hereinafter referred to as 'the Indian Sugar Company') was also manufacturing machinery parts for sugar mills. On 28th September 1962 under the orders of the High Court the Indian Sugar Company was amalgamated with the appellant company. After the amalgamation, the Indian Sugar Company lost its identity, as it did not carry on any business. Prior to the amalgamation the Indian Sugar Company had been allowed expenditure to the extent of Rs. 58,735/- on accrual basis in its earlier assessment. The Company had shown the aforesaid amount as a trading liability and the said trading liability was taken over by the appellant company. After amalgamation the appellant company claimed exemption on the amount of Rs. 58,735 / - from income-tax for the assessment year 1965-66 on the ground that the amalgamated company was not liable to pay tax under Section 41(1) of the Income tax Act, 1961 (herein after referred to as 'the Act') as the expenditure had been allowed to the erstwhile Indian Sugar Company which was a different entity from the amalgamated company. The Income-tax Officer disallowed the appellant's claim for exemption. The assessee filed appeal before the Appellate Assistant Commissioner who confirmed the order of the Income-tax Officer. The assessee thereafter preferred appeal before the Income-tax Appellate Tribunal. The tribunal allowed the appeal on the construction of Section 41(1) of the Act. The tribunal held that after the amalgamation of the Indian Sugar Company with the assessee company the identity of the amalgamating company was lost and it was no longer in existence, therefore, the assessee-company was a different entity not liable to tax on the aforesaid amount of Rs. 58,735 / -. On the department's application the tribunal referred the following question to the High Court:
"Whether on the facts and circumstances of the case the tribunal was justified in law in holding that the amount of Rs. 58,735/- was not chargeable to tax under sub-section (1) of Section 41 of the Income-tax Act 1961 for the assessment year, 1965-66 -
The High Court answered the question in favour of the Revenue holding that the exemption from tax liability claimed by the appellant assessee was chargeable to tax under S.41 (1) of the Act. The High Court held that on the amalgamation of the two companies, neither of them ceased to exist instead both the amalgamating companies continued their entities in a blended form. It further held that the amalgamated company was a successor in interest of amalgamating company and since the assets of both the companies were merged and blended to constitute a new company the liabilities attaching thereto must, therefore, be on the amalgamated company. On these findings of the High Court held that the amalgamated company, namely, the assessee was liable to pay tax on Rs. 58,735/- which came into its hands from the assets of the Indian Sugar Company. The assessee made application before the High Court under Section 261 of the Act read with Section 109 of Code of Civil Procedure for certificate to appeal to this Court but the High Court dismissed the same. The appellant, there upon, approached this Court by means of special leave petition under Article 136 of the Constitution. This Court granted leave. Hence this appeal.
(3.)Section 41(1) of the Act reads as under;
"41(1). Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading, liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax, as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not."
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 business expenditure in the previous year ceases to be in existence or if the assessee is changed on account of the death of the earlier assessee the income received in the year subsequent to the previous year or the accounting year cannot be treated as income received by the assessee. 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. In Commr. of Income-tax, Madhya Pradesh v. Hukumchand Mohanlal (1971) 82 ITR 624 this Court held that the Act did not contain any provision making a successor in a busines or the legal representative of an assessee to whom the allowance may have been already granted liable to tax under Section 41(1) In respect of the amount remitted on receipt by the successor or by the legal representative. In that case the wife of the assessee on the death of her husband succeeded to the business carried on by him. Another firm which had recovered certain amounts towards the sales tax from the assessee's husband succeeded in an appeal against its sales tax assessment and thereupon the firm refunded that amount to the assessee which was received during the relevant accounting period. The question arose whether the amount so received by the assessee could be assessed in her hands as a deemed profit under Section 41 (1) of the Act. This Court held that Section 41 did not apply because the assessee sought to be taxed was not the assessee as contemplated by Section 41 (1) as the husband of the assessee had died, therefore the Revenue could not take advantage of the provisions of Section 41(1) of the Act.