Notice cannot be issued against an Amalgamating Company Post Merger is void ab initio

[CA Bimal Jain]

The Hon’ble Delhi High Court in the case HCL INFOSYSTEMS LTD. VERSUS COMMISSIONER OF STATE TAX & ANR.  - 2024 (11) TMI 1331 - DELHI HIGH COURT quashed the show cause notice and the final order issued in the name of Amalgamating Company post-merger because they were against Section 87 of the Central Goods and Services Tax Act (“the CGST Act”) and 160 of the CGST Act.  The court held that the preceding cannot be brought to a merged entity and it is a substantive error that cannot be cured.

Facts:

M/s HCL Infosystem Ltd. (“Petitioner/ Amalgamated Company”), Digilife Distribution and Marketing Services Limited (“Amalgamating Company”) formulated a Scheme of Arrangement. The scheme was approved by the National Company Law Tribunal (“NCLT”) in its Order dated August 10, 2022 with effective from April 1, 2022. This was duly informed to the registrar of the company. 

On October 12, 2022, the Amalgamating Company moved an application for cancellation of their existing GST registration citing the reason for the filing of that application as being “transfer of business on account of amalgamation, merger, demerger, sale”. It was during the pendency of consideration, the GST registration of the Amalgamating Company with effect from October 12, 2022 was suspended.

The Petitioner also filed an application for the transfer of Input Tax Credit (“ITC”) from Amalgamating Company to the Amalgamated Company.

The Petitioner contended that they had duly apprised of the Scheme having been approved and the Amalgamating Company. Thus, having ceased to exist, a SCN in the name of the Amalgamating Company came to be issued by the State Tax Officer (“the Respondents”) on September 29, 2023 for Financial Year 2017-2018.

Hence, the proceedings for FY 2017-2018 were dropped on the merits of the case. However, notwithstanding those disclosures having been duly made, the second respondent proceeded to issue yet another SCN dated December 03, 2023 (“the Impugned SCN”) in the interregnum, for FY 2018-2019, which was in the name of the Amalgamating Company.

Despite the Petitioner, having clearly and in unequivocal terms informed and having apprised the Respondents that Digilife Distribution and Marketing Services Limited could no longer be viewed as existing in law, the Respondents proceeded to frame a final order on April 27, 2024 (“the Impugned Order”) in the name of the Amalgamating Company.

Thus, aggrieved by the Impugned SCN and the Impugned Order, the Petitioner filed the present writ petition.

Issue:

Whether SCN and Order cannot be served to the amalgamating company post-merger?

Held:

The Hon’ble Delhi High Court in HCL INFOSYSTEMS LTD. VERSUS COMMISSIONER OF STATE TAX & ANR.  - 2024 (11) TMI 1331 - DELHI HIGH COURT held as under:

• Relied on, INTERNATIONAL HOSPITAL LIMITED, RELIGARE ENTERPRISES LIMITED (AS SUCCESSOR-IN-INTEREST OF RELIGARE SECURITIES LTD) , BABA LEASE & INVESTMENT PVT. LTD., GARTNER INDIA RESEARCH AND ADVISORY SERVICES PRIVATE LIMITED, BSBK ENGINEERS PRIVATE LIMITED (RESULTING COMPANY OF VOGUE LEASING AND FINANCE PVT. LTD.) RELIGARE ENTERPRISES LTD. (AS SUCCESSOR-IN-INTEREST OF RGAM INVESTMENT ADVISERS PRIVATE LIMITED) VERSUS DCIT CIRCLE 12 (2) , ASSISTANT COMMISSIONER OF INCOME TAX & ORS., INCOME TAX OFFICER, WARD NO. 15 (1) , DELHI, THE ASSESSING OFFICER NATIONAL FACELESS ASSESSMENT CENTRE DELHI & ANR., DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 16 (1) , DELHI & ANR., PRINCIPAL COMMISSIONER OF INCOME TAX-4 N. DELHI & ANR. - 2024 (9) TMI 1631 - DELHI HIGH COURT  wherein the court had an occasion to deal with the canvassed and perceived distinction between the principles which had been enunciated by the Supreme Court in PR. COMMISSIONER OF INCOME TAX, NEW DELHI VERSUS MARUTI SUZUKI INDIA LIMITED - 2019 (7) TMI 1449 - SUPREME COURT and the stand of the Respondents there that the dictum in Maruti Suzuki stood diluted by virtue of the subsequent judgment handed down by the Supreme Court in PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL) - 2 VERSUS M/S. MAHAGUN REALTORS (P) LTD - 2022 (4) TMI 347 - SUPREME COURT. This perception stands duly dispelled in light of the aforesaid observations which appear in International Hospital.
• Observed that, the law would have to necessarily be recognised to be that which had come to be enunciated by the Supreme Court in Maruti Suzuki, namely, of all proceedings taken against a company which had come to merge with another being rendered void and a nullity and on a due consideration of the factual position which had obtained in Mahagun Realtors [supra] found that the same turned on its own peculiar facts and where the Assessee had deliberately misled the authorities. It was in those peculiar facts that the Supreme Court had ultimately held against the assessee in Mahagun Realtors. The conclusion rendered by the Hon’ble Supreme Court in the case of Maruti Suzuki and which had on a construction of Section 292B of the Income Tax Act held that a notice or order framed in respect of a non-existent entity would not be rectifiable in terms of that provision which the CGST Act incorporates a provision which is pari materia to Section 292B and which is Section 160 of the CGST Act.
• Opined that, that even the powers conferred by Section 160 of the CGST Act upon the Respondents under the CGST Act would not come to their rescue or enable them to salvage the notice as well as the final order which has come to be passed.
• Observed that, when a company is merged with another company upon the approval of NCLT, the company ceases to exist and is no longer a legal entity. Hence the proceedings, including the issuance of the Impugned SCN and the Impugned Order issued in name of the Amalgamating Company is void ab initio. The court observed such defects not as procedural inaccuracies and hence are not curable under Section 160 of the CGST Act.  
• Noted that, Section 87 of the CGST Act essentially seeks to preserve and identify the transactions which may have occurred between two or more companies which ultimately amalgamate and merge. In order to fix the liabilities that would accrue under the CGST Act and to avoid a contention being raised that the Amalgamating Company and transactions undertaken with it would no longer be subject to tax, the Legislature, ex abundanti cautela, has come to place Section 87 on the statute book and which bids us to bear in mind that notwithstanding an order of amalgamation or a scheme of merger coming to be approved, for the purposes of the CGST Act, the two entities would be treated as a distinct companies for the period up to the date of the order of the competent court or tribunal approving the scheme and the registration certificate of the companies being cancelled.
• Held that, the Court is unable to read Section 87 of the CGST Act as enabling the Respondents to either continue to place a non-existent entity on notice or for that matter to pass an order of assessment referable to Section 73 of the CGST Act against such an entity. In fact, in terms of Section 87 of the CGST Act, the liabilities of the non-existent company would in any case stand transposed to be borne by the amalgamated entity. This is, therefore, not a case where the Revenue would stand to lose or be deprived of their right to subject transactions to tax. Hence, the writ petition was allowed and the and the Impugned Order and the Impugned SCN were quashed.

Our Comments:

Section 87 of CGST Act governs “Liability in case of amalgamation or merger of companies”. It states that when two or more companies are amalgamated or merged in pursuance of an order of court or of Tribunal or otherwise and the order is to take effect from a date earlier to the date of the order and any two or more of such companies have supplied or received any goods or services or both to or from each other during the period commencing on the date from which the order takes effect till the date of the order, then such transactions of supply and receipt shall be included in the turnover of supply or receipt of the respective companies and they shall be liable to pay tax accordingly. The Section further states that, notwithstanding anything contained in the said order, for the purposes of the CGST Act, the said two or more companies shall be treated as distinct companies for the period up to the date of the said order and the registration certificates of the said companies shall be cancelled with effect from the date of the said order

Further, Section 160 of the CGST Act governs “Assessment proceedings, etc., not to be invalid on certain grounds”. No assessment, re-assessment, adjudication, review, revision, appeal, rectification, notice, summons or other proceedings done, accepted, made, issued, initiated, or purported to have been done, accepted, made, issued, initiated in pursuance of any of the provisions of this Act shall be invalid or deemed to be invalid merely by reason of any mistake, defect or omission therein, if such assessment, re-assessment, adjudication, review, revision, appeal, rectification, notice, summons or other proceedings are in substance and effect in conformity with or according to the intents, purposes and requirements of this Act or any existing law. Further, the service of any notice, order or communication shall not be called in question, if the notice, order or communication, as the case may be, has already been acted upon by the person to whom it is issued or where such service has not been called in question at or in the earlier proceedings commenced, continued or finalised pursuant to such notice, order or communication.

In the Maruti Suzuki case (Supra), the court has held that the proceeding against a company post-merger is void ab intio. The court in this case has held that when a defect is substantive it cannot be cured and hence the proceedings must be dropped. This acted as a precedent for the decision in the case being discussed. Also, in the C.I.T NEW DELHI VERSUS M/S SPICE ENFOTAINMENT LTD. [2017 (12) TMI 754 - SC ORDER] it was held that the proceeding against the a merged entity is not just a procedural inaccuracy but a substantive defect.

The Supreme Court in the Case PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL) - 2 VERSUS M/S. MAHAGUN REALTORS (P) LTD - 2022 (4) TMI 347 - SUPREME COURT. has held that when the merger is not deliberately disclosed the proceeding will not be invalidated. In SKY LIGHT HOSPITALITY LLP VERSUS ASSISTANT COMMISSIONER OF INCOME TAX - 2018 (4) TMI 529 - SC ORDER it was held that when a proceeding intent to be issued the amalgamated company but was issued in the name of the amalgamating company is just a procedural inaccuracy and hence can be cured. It will not invalidate the proceeding.

The judgment has held the legal principles and also provided a distinction between the procedural and substantive inaccuracies and in what instances a proceeding will be invalidated. The case is important to protect the amalgamated company actions of the amalgamating company.

 (Author can be reached at [email protected])