Monday, 5 May 2014

Supreme Court rules on carry forward and set off of losses in cases of amalgamation of cooperative societies

We are pleased to release a Tax alert which summarizes a recent decision of the Supreme Court (SC) in the case of Rajasthan R.S.S. & Ginning Mills Fed. Ltd. on whether an amalgamated cooperative society is entitled to carry forward and set off accumulated losses of the amalgamating cooperative society. The SC ruled that, on amalgamation, the amalgamating cooperative society ceases to exist and, in the absence of a specific provision in the Indian Tax Laws (ITL), which grants benefit of carry forward and set off of losses for companies, banks etc., but does not specifically cover cooperative societies, accumulated losses of the amalgamating cooperative society cannot be carried forward and set off by the amalgamated cooperative society. While ruling this, the SC held that there is no equity in taxation and the ITL should be construed strictly.

In this ruling, the SC holds that carry forward and set off of accumulated losses is permitted in terms of the specific provisions of the ITL. In the absence thereof, the benefit of such carry forward and set off is not available once the entity ceases to exist. The SC does acknowledge the fact that the Societies had a separate/distinct legal existence and, on this count, are similar to companies. Having noted the same, the SC, however, reiterated that there is no equity in tax and a provision under the ITL needs to be construed literally as well as strictly. Generally, in a scheme of amalgamation, all the assets and liabilities of the amalgamating entity “vest” in the amalgamated entity. Although the SC noted the contention that, in terms of the specific provision of RSCA, all assets and liabilities of the societies vest in the Taxpayer, including the right to carry forward tax losses, it, however, does not seem to have dealt with this aspect. Incidentally, on the basis of a liberal/purposive interpretation, the SC, in the case of Veerabhadra Rao [155 ITR 152] granted deduction in respect of bad debt write off to a successor of business, though the debt was created by the predecessor.

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