2016 (3) TMI 31 - HC - Income Tax

Validity of reopening of assessment - whether notices under Section 148 could be issued to the Assessee after the said company stood dissolved in terms of a scheme of amalgamation of the Assessee with the Petitioner approved under Section 391 and 394 of the Companies Act, 1956? - Held that - It is well settled that the in a case of amalgamation, the amalgamating company would stand dissolved from the date on which the amalgamation/transfer takes effect. The contention that the impugned notices issued under Section 148 of the Act were invalid as having been issued to an Assessee that had ceased to exist, must be accepted. The impugned notices are, therefore, liable to be set aside on this ground alone. See Marshall Sons & Co. (India) Ltd. v. Income-tax Officer 1996 (11) TMI 6 - SUPREME Court Having stated the above, we must also add that in our view, the impugned notices must also be set aside as the AO had no reason to believe that the income of the Assessee for the relevant assessment years had escaped assessment. Concededly, the AO had no tangible material in regard to any of the transactions pertaining to the relevant assessment years. Although the AO may have entertained a suspicion that the Assessee s income has escaped assessment, such suspicion could not form the basis of initiating proceedings under Section 147 of the Act. A reason to believe not reason to suspect - is the precondition for exercise of jurisdiction under Section 147 of the Act. - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of notices issued under Section 148 of the Income Tax Act to a dissolved entity.
2. Whether the Assessing Officer (AO) had tangible material to believe that income had escaped assessment.
3. Approval of the impugned notices by the competent authority.

Issue-wise Detailed Analysis:

1. Validity of Notices Issued to a Dissolved Entity:

The principal controversy was whether notices under Section 148 could be issued to the Assessee after it stood dissolved due to a scheme of amalgamation with the Petitioner, approved under Sections 391 and 394 of the Companies Act, 1956. The Court noted that in cases of amalgamation, the amalgamating company stands dissolved from the effective date of amalgamation. Citing *Marshall Sons & Co. (India) Ltd. v. Income-tax Officer* and *SPICE Infotainment Ltd. v. Commissioner of Income Tax*, the Court held that issuing notices to a dissolved entity is invalid and constitutes a jurisdictional defect. Consequently, the impugned notices were set aside on this ground alone.

2. Tangible Material for Belief of Escaped Income:

The AO issued the notices based on an assessment order for AY 1994-95, which disallowed a depreciation claim on the grounds of a sham transaction. However, the Court emphasized that a suspicion of escaped income cannot justify the initiation of proceedings under Section 147. The AO must have a "reason to believe," not merely a "reason to suspect." The Court highlighted that there was no tangible material linking the transactions of earlier years to the alleged sham transaction of AY 1994-95. Furthermore, the assessment order for AY 1994-95, which was the basis for the re-assessment, had been set aside by the Commissioner of Income Tax (Appeals). Thus, the impugned notices were also set aside for lack of tangible material.

3. Approval by the Competent Authority:

The Petitioner contended that the impugned notices were issued without the necessary approval from the competent authority. Although this issue was raised, the Court found it unnecessary to examine this contention in detail, given that the notices were already set aside on the grounds of being issued to a non-existent entity and lack of tangible material.

Conclusion:

The Court allowed the petitions, setting aside the impugned notices issued under Section 148 of the Income Tax Act. The interim order dated 10th March 2000 was made absolute, and each party was left to bear its own costs.