JUDGMENT

SINGH, J.:— 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 appellants 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 departments 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 incurre