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TMI Blog2024 (4) TMI 492X X X X Extracts X X X X X X X X Extracts X X X X ..... assed by the Ld. PCIT on the ground of jurisdictional error to this effect that once the company, namely, Simens Healthcare Diagnostics Ltd. is merged with Simens Ltd. having PAN No. AAACS0764L w.e.f. 1st October, 2009, the order issued in the name of M/s. Simens Healthcare Diagnostics Ltd. is not sustainable in the eye of law since the said company is not in existence at all. On this count, he has relied upon certain judgments including the judgment passed by the ITAT Mumbai in the case of Westlife Development Ltd. vs. PCIT-5, Mumbai, reported in [2017] 88 taxmann.com 439 (Mumbai-Trib.), wherein the assessment framed in hands of non-existing company which had got amalgamated with other company at time of framing assessment held to be non-est in the eyes of law. In that particular case, the appellant in the 263 proceeding only challenged the order passed by the Ld. AO issued in the name of non-existing entities which got amalgamated during the assessment proceeding. The Ld. Tribunal in the appeal arising out of 263 proceeding itself quashed the original assessment order passed under Section 143(3) of the Act holding it null and void in the eyes of law as the same was based upon a n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in which rights and liabilities of one company are transferred or devolved upon another company, the successor-ininterest becomes entitled to the liabilities and assets of the transferor company subject to the terms and conditions of contract of transfer or merger as it were. When two companies amalgamate and merge into one the transferor company loses its entity as it ceases to have its business. However, their respective rights and liabilities are determined under the scheme of amalgamation but the corporate identity of the transferor company ceases to exist w.e.f. the date of amalgamation is made effective. Though, such concept is absolutely correct but merely because the issuance of notice in the name of erstwhile company by the PCIT cannot be said to be without jurisdiction or nullity, particularly, when the said fact of amalgamation is mentioned in the cause title itself as in the case before us. We have considered the judgment passed by the Hon'ble Supreme Court on this aspect carefully and we find that the Hon'ble Apex Court was pleased to explain the status of both the entities in the following manner as a result of amalgamation: "18. Amalgamation, thus, is unlike the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd to take some time because several steps provided by Sections 391 to 394 and the relevant Rules have to be followed and complied with. During the period the proceedings are pending before the Court, both the amalgamation units, i.e., the Transferor Company and the Transferee Company may carry on business, as has happened in this case but normally provision is made for this aspect also in the scheme of amalgamation. In the present scheme, Clause 6(b) does expressly provide that with effect from the transfer date, the Transferor Company (Subsidiary Company) shall be deemed to have carried on the business for and on behalf of the Transferee Company (Holding Company) with all attendant consequences. It is equally relevant to notice that the Courts have not only sanctioned the scheme in this case but have also not specified any other date as the date of transfer/amalgamation. In such a situation, it would not be reasonable to say that the scheme of amalgamation takes effect on and from the date of the order sanctioning the scheme. We are, therefore, of the opinion that the notices issued by the Income Tax Officer (impugned in the writ petition) were not warranted in law. The business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in Spice (supra), after discussing the decision in Saraswati Syndicate, went on to explain why assessing an amalgamating company, without framing the order in the name of the transferee company is fatal: "10. Section 481 of the Companies Act provides for dissolution of the company. The Company Judge in the High Court can order dissolution of a company on the grounds stated therein. The effect of the dissolution is that the company no more survives. The dissolution puts an end to the existence of the company. It is held in M.H. Smith (Plant Hire) Ltd. v. D.L. Mainwaring (T/A Inshore), 1986 BCLC 342 (CA) that "once a company is dissolved it becomes a non-existent party and therefore no action can be brought in its name. Thus an insurance company which was subrogated to the rights of another insured company was held not to be entitled to maintain an action in the name of the company after the latter had been dissolved". 11. After the sanction of the scheme on 11th April, 2004, the Spice ceases to exit w.e.f. 1st July, 2003. Even if Spice had filed the returns, it became incumbent upon the Income tax authorities to substitute the successor in place of the said 'dead person'. When ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income of 8,74,99,792/-. The case was selected for scrutiny through CASS. The assessment u/s 143(3) r.w.s. 92CA r.w.s.144C was finalized on 23.10.2012 determining the total income at 11,96,93,093/-. However it is observed that the assessee had claimed wrongful expenditure. i. On going through the records, it was noticed that the assessee paid SAP Implementation charges of Rs. 3,95,45,894/- and Accounting & Reporting Support charges of Rs. 7,22,247/-, totaling to Rs. 4,02,68,141/- to non residents without deducting TDS thereon. Failure to deduct TDS, attracts the provisions of Sec. 40a(i) of I.T. Act under which, any sum payable to a non-resident on which tax is deductible at source under Chapter XVIIB and where tax has not been deducted, the amount on which such tax was not deducted, was required to be disallowed. Accordingly, Rs. 4,02,68,141/- has escaped assessment. ii. It is also observed that the assessee earned exempt income i.e. dividend of Rs. 93,70,986/- and profit on sale of investment of Rs. 34,70,580/- u/s. 10(38), which did not form part of the total Income. As per provisions of Sec, 14A of the IT Act r.w.s. Rule 8D, the expenditure incurred on a/c of earning ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de u/s 40a(i) of the Act in respect of payments made to non-residents." 8. So far as the issue raised by the Ld. PCIT escaping assessment of Rs. 13,23,376/- under Section 14A r.w. Rule 8D is concerned, the appellant contended as follows: "3.00 In respect of proposed disallowance u/s 14A of the Act r.w.r. 8D of the Income-tax Rules, first of all we wish to submit that we have not claimed profit on sale of investment of Rs. 34,70,580/- as exempt u/s 10(38) of the Act as observed by your Honour. In fact, total gain of Rs 3,470,580/- was first reduced while computing Business Income and then Rs. 24,92,289/- was offered as Short Term Capital Gain under normal tax and Rs. 9,78,291/- was offered as Long Term Capital Gain chargeable to tax u/s 112 of the Act. Please find enclosed herewith Computation of Total Income and Tax for your Honour's ready reference as Annexure-2. We further submit that this fact was also submitted to AO. vide point no. 7 of our submission dated 25th November, 2011. 3.01 We further submit that during the year under review, we earned exempt dividend income of Rs. 93,70,086/- in respect of investments in units of mutual funds except investment in units of Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enario, interest paid to borrow funds and invested in earning exempt income was also allowed as expenditure, In order to mitigate this situation, the legislature introduced Section 14A in Finance Act 2001. The intention of the legislature was that no deduction for expenditure incurred in respect of exempt income against taxable income. If we reiterate, the intention of the legislature is that no deduction is allowable against the income from taxable business, in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income. In the above context it is very much clear that the legislature wants to tax expenditure incurred in relation to income which is exempt from tax. In the case of your assessee, no such expenditure has been incurred for earning exempt income, 3.04 As can be seen that Section 14A was inserted with a view to clarify the intention of making disallowance in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income Under this section, Sub-Section (2) provides the procedure for determining the amount of expenditure incurred by the assessee in relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contention is that we have to view the items of expenditure first. If these have resulted in exempt income, only then disallowance is to be considered. In other words, starting point for applying Section 14A is to consider the amount of expenditure and then moving forward for examining if it has resulted in the exempt income or not. Unless there is a direct and proximate connection between the exempt income and expenditure, Section 14A will not apply. It is very much clear from the foregoing discussion that unless there is a direct and proximate connection between the expenditure and the exempt income, there cannot be any disallowance of the expenditure under this section. This view point is based on the expression in relation to used in section as having only direct and proximate connection between the expenditure and exempt income. Be that as it may, we would also deal with the contention that there should be a dominant and immediate connection between the expenditure incurred and the exempt income so as to make disallowance u/s 14A. A great deal of emphasis has been laid on establishing of dominant and immediate connection between the expenditure incurred and the exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting Support charges), However it is observed that during the course of assessment proceeding no such details was furnished and neither the AO has examined the aforesaid Issue. It is also not ascertainable from the records as to whether the amount of Rs. 13,59,327/- disallowed by the assesses u/s 40(a) includes the aforesaid Accounting & Reporting Support charges of Rs. 7,22,247/-. Thus the order of the AO is erroneous on this issue as non. 5.3 With regard to the expenditure attributable to the exempt dividend income of Rs. 93,70,986/-, claim of the assessee that no new investments was made during the year, no expenditure incurred & that the assessee .company is a cash rich company is not acceptable, Section 14A has been brought into the statute to disallow the expenditure attributable to the exempt income so as to workout correct taxable income by excluding the expenditure that was not attributable to such income. The decision as to whether to invest or not and whether to retain the investments or to liquidate the same are very strategic decisions which management is called upon to take and which is only possible by the direct involvement of top management and hence part of admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead of income or section and thus the order had considered rightly the invocation of power u/s 263 of the IT Act. (f) (201 1)46 SOT 487 (AHD) (2006) 152 Taxman 125 (All) There is duty cast upon the AO to enquire / assess revenue disclosed and in failing that duty i.e. to compute correct income and setoff and carry forward without any application of mind is an order that is erroneous and prejudicial to interest of revenue, and that is the case right in here. 6. Given the facts of the case as said herein above and circumstances and having called for and examined the record of proceedings u/s 143(3) of the Assessment Year 2008-09 (i.e. the order sought to be revised), having regard to the fact narrated and having considered the above said, the undersigned set aside the assessment order dated 23/10/2012 to that extent as it is erroneous in. so far as prejudicial to the interest of revenue and direct the Assessing Officer to reframe the assessment afresh on the above said issues as it may require having regard to the observation made in the foregoing paras and after giving due opportunity of being heard to the assesses." 10. It was specifically pointed out by the Ld. PCIT that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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