2024 (9) TMI 1631 - HC - Income Tax

Validity of reassessment proceedings against non-existent entities/ amalgamanting compnaies - Reassessment action initiated by the respondents on the ground of the amalgamated entity having never been placed on notice - as argued no notices were served upon the amalgamated entity and orders of assessment as well as notices of reassessment were maintained in the name of the amalgamating entity - HELD THAT - Position in law appears to be well- settled that a notice or proceedings drawn against a dissolved company or one which no longer exists in law would invalidate proceedings beyond repair. Maruti Suzuki conclusively answers this aspect and leaves us in no doubt that the initiation or continuance of proceedings after a company has merged pursuant to a Scheme of Arrangement and ultimately comes to be dissolved, would not sustain. We note that in this batch of writ petitions and in light of the disclosures which have been made, the assessees clearly appear to have apprised their respective AOs of the factum of amalgamation and merger at the first available instance. If the respondents chose to ignore or acknowledge those fundamental changes, they would have to bear the consequences which would follow. Once the Scheme came to be approved, the transferor companies came to be dissolved by operation of law. They, thus, ceased to exist in the eyes of law. Proceedings thus drawn in their name would be a nullity and cannot be validated by resort to Section 292B of the Act. The submission of the respondents based on Sections 159 and 170 of the Act is equally misconceived. It becomes relevant to note that Section 159 places the liability of a deceased assessee on its legal representatives. It thus creates a right of recourse for the Revenue to pursue and recover outstanding demands. We fail to appreciate how that provision could have any bearing on the question that stood posited. The proceedings impugned herein are not in relation to any right of recovery that may have been asserted or proposed. The challenge is to orders of assessment and initiation of reassessment made or commenced against a non-existent entity. While the respondents sought to draw sustenance from the phrase when the predecessor cannot be found as appearing in sub-section (2) thereof, we find ourselves unable to read that expression as being akin to a dissolution of a corporate entity or its merger with another. The expression cannot be found cannot be construed as having been intended to cover situations where an entity ceases to exist in law by virtue of an amalgamation or merger. Regard must also be had to the heading of Section 170 and which speaks of succession to a business otherwise than on death . It is thus concerned with a specific contingency pertaining to succession to a business and how the predecessor and successor are liable to be taxed. It has no concern with the question of whether a notice or order in the name of a non-existent entity could be treated as valid in law. AO invoked Section 154 asserting that the assessment order had inadvertently come to be framed in the name of EHSSIL - Admittedly, the factum of merger had been duly brought to the attention of the AO. The merger was taken into consideration at more than one place in the order of assessment that came to be framed. Despite the above, the AO proceeded to draw the order in the name of an entity which had ceased to exist. We also bear in consideration the indubitable fact that the rectification order came to be passed three years after the framing of the original order of assessment, and that too, during the pendency of the appeal of the assessee and where a specific ground of challenge was raised in this regard. This was therefore not a case of discovery of an inadvertent error or mistake immediately after the passing of an order. We also bear in consideration Maruti Suzuki 2019 (7) TMI 1449 - SUPREME COURT having clearly held that such a mistake would not fall within the ken of Section 292B of the Act. An exercise of rectification as undertaken in the present case, if accorded a judicial imprimatur, would in effect amount to recognising a power to amend, modify or correct in an attempt to overcome a fundamental and jurisdictional error contrary to the principles enunciated in Maruti Suzuki. We also cannot lose sight of the fact that this was not a case where the assessee had attempted to mislead or suppress material facts and which may have warranted the case of the assessee being placed in the genre which was considered in Mahagun Realtors. The mere submission of replies on the letter head of EHSSIL also fails to convince us to hold in favour of the Revenue. In any event, none of the authorities below have held that the appellant was guilty of suppression. We would thus be inclined to allow the instant appeal and answer the question as posed in favour of the appellant and against the Revenue. Notices issued u/s 142 (1) on the ground that although they have been drawn in the name of the resultant entity which came into existence consequent to a Scheme being approved, they bear the PAN of the erstwhile entity and which had since then ceased to exist - We find ourselves unable to place that mistake in the category of a fundamental flaw or incurable illegality as explained in Maruti Suzuki 2019 (7) TMI 1449 - SUPREME COURT Although in the writ petition it is averred that the original Section 148 notice was never served upon the petitioner, we find that the order of 15 March 2022 speaks of various subsequent notices which had been issued and remained unanswered. In any event, the present writ petitions merely impugn the notice under Section 142 (1) with no challenge having been mounted in respect of the original notice of reassessment. These petitions would consequently merit dismissal. Whether disclosures with respect to the sanction of the Scheme were made in the course of the assessment proceedings? - The respondents categorically assert that no information with respect to a Scheme that may have been approved was provided during the course of assessment. The petitioners on the other hand aver that the respondents had been duly placed on notice of the proceedings pending before the NCLT and which had preceded the ultimate approval of the Scheme. In W.P. above petitioners allude to a communication issued by the Regional Director while the Scheme was pending approval. As is manifest from the aforesaid recordal of facts, there was an abject and evident failure on the part of the petitioners to apprise the respondents of a Scheme which stood duly approved. Even if the concerned AO were assumed to have derived knowledge of the pendency of proceedings before the NCLT or called upon to furnish a consent to the proposed Scheme, the same would not absolve the assessee from the obligation of duly apprising the respondents once a Scheme of Arrangement came to be approved. These writ petitions would thus merit dismissal.

Summary

Issues Involved:

1. Validity of assessment and reassessment orders issued to non-existent entities due to amalgamation.
2. Applicability of Section 292B of the Income Tax Act, 1961.
3. Impact of Supreme Court decisions in Maruti Suzuki and Mahagun Realtors on the current cases.
4. Obligations of the amalgamated entity to inform the tax authorities.
5. Consequences of issuing notices to non-existent entities.

Issue-wise Detailed Analysis:

1. Validity of Assessment and Reassessment Orders:

The writ petitions and connected Income Tax Appeal impugn orders of assessment and reassessment initiated by the respondents on the ground that notices were not served upon the amalgamated entity. The petitioners argue that despite informing the respondents about the amalgamation, notices and orders were issued in the name of the amalgamating entity, rendering them null and void. This argument is supported by the Supreme Court's decision in Principal Commissioner of Income Tax, New Delhi vs. Maruti Suzuki (India) Limited, where it was held that assessment orders issued to a non-existent entity due to amalgamation are invalid.

2. Applicability of Section 292B of the Income Tax Act, 1961:

The respondents contend that the failure to notify the amalgamated entity is curable under Section 292B of the Act, which deals with procedural defects. However, the Supreme Court in Maruti Suzuki held that issuing a notice to a non-existent entity is a substantive illegality and not a procedural defect that can be cured under Section 292B. This was further supported by earlier decisions in Spice Entertainment Ltd. and other cases, which held that assessments made in the name of a dissolved or non-existent entity are void and cannot be cured by Section 292B.

3. Impact of Supreme Court Decisions in Maruti Suzuki and Mahagun Realtors:

The respondents also rely on the Supreme Court's decision in Principal Commissioner of Income Tax (Central)-2 vs. Mahagun Realtors (P) Ltd., arguing that the mistake of issuing notices to a non-existent entity is curable. However, the court in Maruti Suzuki clarified that the decision in Mahagun Realtors was based on its peculiar facts, where the amalgamated entity had failed to inform the tax authorities about the amalgamation in a timely manner. In contrast, in the present cases, the petitioners had duly informed the authorities about the amalgamation, making Maruti Suzuki applicable.

4. Obligations of the Amalgamated Entity to Inform the Tax Authorities:

The court noted that the petitioners had provided timely information regarding the amalgamation to the tax authorities. For instance, in the case of Religare Securities Ltd., the factum of merger was intimated to the Assessing Officer on 29 December 2017, and merged financial statements were submitted along with a revised Return of Income on 29 March 2019. The court emphasized that once the amalgamation is approved by the National Company Law Tribunal or the High Court, the amalgamating entity ceases to exist, and any notices issued in its name are invalid.

5. Consequences of Issuing Notices to Non-Existent Entities:

The court held that proceedings initiated against a non-existent entity are a nullity and cannot be validated by Section 292B of the Act. The court quashed the notices and orders issued in the name of the amalgamating entities, emphasizing that the respondents must bear the consequences of ignoring the fundamental changes due to amalgamation. The court also dismissed the respondents' arguments based on Sections 159 and 170 of the Act, stating that these provisions do not apply to cases where an entity ceases to exist due to amalgamation.

Separate Judgment:

The court allowed the appeal in ITA 116/2023 (International Hospital Ltd. Vs. DCIT Circle 12(2)), setting aside the order of the Tribunal dated 23 September 2022 and granting consequential relief to the appellant. The court found that the Assessing Officer had acknowledged the merger but still framed the order in the name of the non-existent entity, which could not be rectified under Section 292B.

Dismissal of Certain Writ Petitions:

The court dismissed W.P.(C) 5021/2022, W.P.(C) 5022/2022, and W.P.(C) 5118/2022, where the only mistake was the mentioning of a wrong PAN, not considered a fundamental flaw. The court also dismissed W.P.(C) 5475/2022 and W.P.(C) 4558/2023 due to the petitioners' failure to inform the tax authorities about the approved Scheme of Arrangement.

Operative Directions:

The court quashed the notices and orders listed in the table provided in the judgment, allowing the relevant writ petitions and granting relief to the petitioners. The court emphasized that the respondents must adhere to the legal principles established in Maruti Suzuki and cannot issue notices to non-existent entities.