Treaties on the law of Assessment of Non-Existent Entities

Treaties on the law of Assessment of Non-Existent Entities

(A paper analysing the recent developments in form of Supreme Court’s orders in case of PCIT vs. Mahagun Realtors (P) Ltd.[1] and PCIT vs. Maruti Suzuki India Ltd.[2] along with impact of amendments brought in by Finance Act, 2022)

By Sunil Maloo, CA

1. There has been lot of controversy throughout the country on the issue of validity of the Assessments made in the name and PAN of Non-Existent Entities. But now this controversy seems to be settled by the Supreme Court on the legal point of view as well as on the factual point of view.

2. The analysis of facts of each case shall be very crucial as to deciding the validity of such proceedings carried out by the Department in the name of the Non-Existent Entities. This statement has been proved to be true by the Supreme Court by delivering two different conclusions in two different cases under same question of law but with different factual matrix.

3. In this newsletter, we have tried to analyse two landmark decisions of the Hon’ble Supreme Court’s in case of PCIT vs. Mahagun Realtors (P) Ltd. and PCIT vs. Maruti Suzuki India Limited as well as amendments made via Finance Act, 2022 in this connection.

4. Before starting the discussion, it would be relevant to highlight the major instances of the Non-Existent of the entities would be –

- Amalgamation / merger of one or more entities into another entity

- Conversion of partnership firm (including LLP) into company or vice versa

- Various types of corporate restructuring where existence of entity is put into end

5. The provisions related to amalgamation of two or more entities with an existing company or with a company created anew is statutorily provided u/s 230 of the Companies Act, 2013 (Section 394 of the Companies Act, 1956) and the term “Amalgamation” has been defined under Income Tax in Section 2(19AA) of the Act.

6. Halsbury's Laws of England, 4th Edition Vol. 7 Para 1539 – (referred by SC and many courts in various judgements) - Two companies may join to form a new company, but there may be absorption or blending of one by the other, both amount to amalgamation. When two companies are merged and are so joined, as to form a third company or one is absorbed into one or blended with another, the amalgamating company loses its entity.

7. Amalgamation, thus, is unlike the winding up of a corporate entity. In the case of amalgamation, the outer shell of the corporate entity is undoubtedly destroyed; it ceases to exist. Yet, the corporate venture continues – enfolded within the new or the existing transferee entity. In other words, the business and the adventure lives on but within a new corporate residence, i.e., the transferee company. It is, therefore, essential to look beyond the mere concept of destruction of corporate entity which brings to an end or terminates any assessment proceedings.

8. The true effect and character of the amalgamation largely depends on the terms of the scheme of amalgamation. But there cannot be any doubt that when two companies amalgamate and merge into one, the transferor company loses its entity as it ceases to have its business.

9. Every scheme of amalgamation has to necessarily provide a date with effect from which the amalgamation/transfer shall take place - legally termed as ‘transfer date or appointed date’.

10. Let’s first analyse the Hon’ble Supreme Court’s judgement in case of PCIT vs. Maruti Suzuki India Ltd dated 25/07/2019 -

10.1 Basic facts of the Case:

10.2 Department’s contentions Before the Supreme Court -

10.2.1 Name of both entities mentioned in the Assessment Order - The High Court was not justified in quashing the final assessment order only on the ground that the assessment was framed in the name of the amalgamating company, which was not in existence, ignoring the fact that the names of both the amalgamated company and the amalgamating company were mentioned in the assessment order

10.2.2 Mistake curable u/s 292B - Even on the hypothesis that the assessment order was framed incorrectly in the name of the amalgamating company, it would amount to a “mistake, defect or omission” which is curable under Section 292B of the Act when the assessment is, in substance and effect, in conformity with or according to the intent and purpose of the Act

10.2.3 Support from decision of Skylight Hospitality LLP - The decision of the Delhi High Court in Skylight Hospitality LLP v ACIT[3], which was confirmed by this Court on 06/04/201813 dealt with a situation where a notice u/s 148 was issued in the name of a non-existent private limited company. The Court held that the defect in recording the name of a non-existent company in a notice under Section 148 was a procedural defect or mistake curable under Section 292B, since no prejudice was caused to the assessee.

10.2.4 Assessee duly participated - There was effective participation of the assessee in the assessment proceedings and there was no doubt in the minds of those who participated about the entity in relation to which the assessment proceedings took place.

10.3 Assessee’s contentions Before the Supreme Court -

10.3.1 Impact of sanctioned scheme - Upon a scheme of amalgamation being sanctioned, the amalgamating company ceases to exist in the eyes of law Saraswati Industrial Syndicate Ltd. v CIT[4]

10.3.2 Notice to Non-Existent Entities – Invalid - It has been held in the following decisions that, if a statutory notice is issued in the name of a non-existent entity, the entire assessment would be a nullity in the eyes of law -

a) CIT v Intel Technology India (P) Ltd.[5]

b) PCIT v Nokia Solutions & Network India (P) Ltd.[6]

c) Spice Entertainment[7]

10.3.3 Notices to Non-Exist entities - Despite AO was intimated – Invalid - A notice to the amalgamating company, subsequent to the amalgamation becoming effective and despite the fact of the amalgamation having been brought to the notice of the assessing officer, is void ab initio as held in the following decisions: -

a) BDR Builders and Developers Pvt. Ltd. v ACIT[8]

b) Rustagi Engineering Udyog (P.) Ltd. v DCIT[9]

c) Khurana Engineering Ltd. v DCIT[10]

d) Takshashila Realties (P) Ltd. v DCIT[11]

e) Alamelu Veerappan v ITO[12]

10.3.4 Support from Section 170(2) - In terms of Section 170(2) of the Act, once the amalgamation is effective, assessment in respect of the income of the amalgamating company upto the appointed date has to be in the name of the amalgamated company as successor in interest of the amalgamating company.

10.3.5 Participation in assessment not a bar in challenging jurisdiction - The Delhi High Court has held in Spice Entertainment that an assessment framed in the name of the amalgamating company, which ceased to exist in the eyes of law, was invalid and untenable in law. Such a defect would not be cured in terms of Section 292B of the Act. Further, the fact that the amalgamated company participated in the assessment proceedings would not operate as estoppel.

10.3.6 Covered matter - The Respondent's case is squarely covered by the decision of this Court in its own case - The Delhi High Court by its judgment reported in Maruti Suzuki for the immediately preceding year held in favour of the Respondent by following the judgment in the case of Spice Entertainment.

10.3.7 Contrary judgment of Skylight Hospitality LLP distinguished - The judgment of the Delhi High Court in Skylight Hospitality LLP is distinguishable and is not applicable to the facts of the present case as the judgment was rendered on its own peculiar facts. In that case, the tax evasion petition mentioned the factum of conversion of the company into a Limited Liability Partnership, which was also noticed in the reasons to believe and approval of the Principal Commissioner (before issuance of a notice under Section 148 of the Act). However, only because of a clerical mistake, the notice was wrongly issued in the name of Skylight Hospitality Pvt. Ltd. instead of Skylight Hospitality LLP. Only that wrong name given in the notice was merely a clerical error which could be corrected under Section 292B of Act 1961

10.4 Final Conclusion by the Supreme Court:

10.4.1 Assessment by the AO in Non-Exist PAN - despite Intimation from the Assessee - In the present case, despite the fact that the assessing officer was informed of the amalgamating company having ceased to exist as a result of the approved scheme of amalgamation, the jurisdictional notice was issued only in its name. The basis on which jurisdiction was invoked was fundamentally at odds with the legal principle that the amalgamating entity ceases to exist upon the approved scheme of amalgamation.

10.4.2 Participation in the proceedings cannot operate as an estoppel against law – SC dismissed the argument of the revenue by holding that that participation in the proceedings by the appellant in the circumstances cannot operate as an estoppel against law.

10.4.3 Consistency, uniformity, and certainty in Judiciary - There is a value which the court must abide by in promoting the interest of certainty in tax litigation. The view which has been taken by this Court in relation to the respondent for AY 2011-12 must, in our view be adopted in respect of the present appeal which relates to AY 2012-13. Not doing so will only result in uncertainty and displacement of settled expectations. There is a significant value which must attach to observing the requirement of consistency and certainty. Individual affairs are conducted and business decisions are made in the expectation of consistency, uniformity and certainty. To detract from those principles is neither expedient nor desirable. This Court has relied on the decision in Spice Entertainment. We find no reason to take a different view.

11. Now let’s analyse the judgement of Hon’ble Supreme Court in case of PCIT vs. Mahagun Realtors (P) Ltd. dated 05/04/2022 –

11.1 Basic facts of the Case:

11.2 Department’s contentions before the Supreme Court -

11.2.1 Mistake Curable u/s 292B - Mistakes, defects or omissions are curable under Section 292B when the assessment is in substance and effect, in conformity with or according to the intent and purpose of the Act.

11.2.2 Case is distinguishable on facts of Maruti Suzuki as here AO was not intimated of Amalgamation – In the facts of the Maruti Suzuki the revenue was duly informed about the merger and change in name of the company, and yet the assessing officer passed the order in name of the transferor or amalgamating company. However, in the present case, the AO or even the revenue was not informed about the amalgamation.

11.2.3 In Search statements also directors disclosed additional income in name of both Companies separately - Even when the search and seizure operations were carried out, the directors of MIPL (and MRPL, which had ceased to exist) clearly held out that both entities existed; what is more, surrender of specific amounts relatable to MRPL’s activities, for a past period, were made.

11.2.4 Return filing also continued for non-exist entity - On 28/05/2010, the assessee filed ROI u/s 153A for AY 2006-07 in the name of MRPL.

11.3 Assessee’s contentions Before the Supreme Court -

11.3.1 Impact of sanctioned scheme - Upon sanction of amalgamation scheme, the amalgamated company stood dissolved without winding up, in terms of section 394 of the Companies Act, 1956. Reliance was placed on the decision of this court in Saraswati Industrial Syndicate. It was argued that the amalgamating company (MRPL) cannot be regarded as a ‘person’ in terms of Section 2(31) of the Act.

11.3.2 Support from Section 170(2) - Counsel urged that the assessment framed in the name of amalgamating company is invalid in terms of Section 170(2) of the Act. Once the amalgamation is effective, the notice had to be issued in the name of amalgamated company.

11.3.3 Covered matter - the respondent’s case is covered by Maruti Suzuki The facts of both cases are similar.

11.4 Final Conclusion by the Supreme Court:

11.4.1 The facts of present case, however, can be distinguished from the facts in Spice Entertainment and Maruti Suzuki on following bases.

a) The original return of income was not revised even though the assessment proceedings were pending. The last date for filing the revised returns was 31/03/2008, after the amalgamation order.

b) When search and seizure of the Mahagun group took place, no indication was given about the amalgamation

c) On 28/05/2010, the assessee filed its ROI in the name of MRPL (containing PAN number), and the ROI did not disclose the fact of amalgamation (with MIPL) – as the response to query 27(b) was “NA”

d) A statement made on 20/03/2007 by MRPL’s managing director, during statutory survey proceedings under Section 133A, unearthed discrepancies in the books of account, in relation to amounts of money in MRPL’s account.

e) In both the relied upon cases, the assessee had duly informed the authorities about the merger of companies and yet the assessment order was passed in the name of amalgamating/non-existent company. However, in the present case, for AY 2006-07, there was no intimation by the assessee regarding amalgamation of the company.

f) In the cases relied upon, the amalgamated companies had participated in the proceedings before the department and the courts held that the participation by the amalgamated company will not be regarded as estoppel. However, in the present case, the participation in proceedings was by MRPL which held out itself as MRPL

g) In the cross-objection before the ITAT, for the first time (in the appeal preferred by the Revenue), an additional ground was urged that the assessment order was a nullity because MRPL was not in existence.

h) Assessment order was issued – undoubtedly in relation to MRPL (shown as the assessee but represented by the transferee company MIPL).

i) Appeals were filed to the CIT (and a cross-objection, to ITAT) – by MRPL “represented by MIPL”.

j) The counter affidavit filed before this court – (dated 07/11/2020) has been affirmed by Director of M/S Mahagun Realtors(P) Ltd., R/o…”

11.4.2 Before concluding, this Court notes and holds that whether corporate death of an entity upon amalgamation per se invalidates an assessment order ordinarily cannot be determined on a bare application of Section 481 of the Companies Act, 1956 (and its equivalent in the 2013 Act) but would depend on the terms of the amalgamation and the facts of each case.

11.4.3 In view of the foregoing discussion and having regard to the facts of this case, this court is of the considered view, that the impugned order of the High Court cannot be sustained; it is set aside….

12. Amendment in Finance Act, 2022 in relation to Section 170(2A) and Section 170A

12.1 Amendment to Section 170 of the Act –

a) Section 170, inter-alia, governs the procedure of taxation in case of succession to business in the event of reorganization or restructuring of the business.

b) Section 170(1) provides for the assessment in the name of the predecessor for incomes till the date of succession and in the name of the successor in respect of the incomes after the date of succession.

c) However, the reorganization often is from a preceding date, which is generally terms as Appointed Date and the period of time involved in coming to a conclusion with respect to such reorganization is generally found to be a long-drawn process and is not time-bound.

d) The existing Section 170 fails to cover up cases, which are falling in between the appointed date and the of the final order. During the pendency of the court proceedings the income tax proceedings and assessments are carried on and often completed on the predecessor entities only. Courts have held such proceedings and consequent assessments illegal as the predecessor assessee ceases to exist in the midst of a perfectly valid and legal proceeding.

e) Accordingly, to overcome such genuine cases and to protect the interest of the revenue in such type of cases, Section 170(2A) is proposed to be inserted, which reads under -

170(2A) Notwithstanding anything contained in sub-sections (1) and (2), where there is succession, the assessment or reassessment or any other proceedings, made or initiated on the predecessor during the course of pendency of such succession, shall be deemed to have been made or initiated on the successor and all the provisions of this Act shall, so far as may be, apply accordingly.

Explanation.—For the purposes of this sub-section, the term "pendency" means the period commencing from the date of filing of application for such succession of business before the High Court or tribunal or the date of admission of an application for corporate insolvency resolution by the Adjudicating Authority as defined in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) and ending with the date on which the order of such High Court or tribunal or such Adjudicating Authority, as the case may be, is received by the Principal Commissioner or the Commissioner.]

f) This section now covers up the lacuna which existed under the earlier laws and covers up the validity of the assessment or other proceedings pending or completed on the predecessor in the event of a business reorganization. All such proceedings shall now be deemed to be in the name of the successor entity.

g) However, one need to keep in mind the requirements of the newly inserted Section 170(2A) that the pendency of the proceedings would continue till the date of receipt of the final order by the PCIT or the CIT. Accordingly, the assessee should intimate the final order to the office of the PCIT, CIT and AO at an earliest, so that any subsequent lapse from the department would invalidate the proceedings after the period of pendency.

12.2 Insertion of New Section 170A of the Act –

a) Business reorganization is not new to the Corporate World and is unavoidable in the recent times. Here the “business reorganisation” means the reorganisation of business involving the amalgamation or de-merger or merger of business of one or more persons. This may happen through NCLT, High Court or under the IBC as well.

b) After such Business reorganization, the affairs of the successor entity go through a complete change with effect from the date from which such reorganization takes place. Entire effect of the scheme and the final order relates back to the Appointed Date. However, due to the indefinite timeline involved in issuing such orders, there is a gap between the effectivity of such order and the date on which such order is issued by the competent authority.

c) This gap has resulted into practical difficulties to the taxpayer as well as the Department to properly administer the taxation for that particular year to which the appointed date related back to.

d) Most of the time the final order for the Business Restructuring is received long after even the date for filing revised return is also lapsed. In such cases the Assessee as well as Department was unable to give effect of the scheme as per the order of the competent authorities properly, which has resulted into lot of disputes and uncertainty between the taxpayer and the Department.

e) To avoid such unintended disputed and uncertainty, new section 170A has been inserted for the same which reads as under –

170A - Notwithstanding anything to the contrary contained in section 139, in a case of business reorganisation, where prior to the date of order of a High Court or tribunal or an Adjudicating Authority as defined in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), as the case may be, any return of income has been furnished by the successor under the provisions of section 139 for any assessment year relevant to the previous year to which such order applies, such successor shall furnish, within a period of six months from the end of the month in which the said order was issued, a modified return in such form and manner, as may be prescribed, in accordance with and limited to the said order.

Explanation.—In this section, the expressions—

(i) "business reorganisation" means the reorganisation of business involving the amalgamation or demerger or merger of business of one or more persons;

(ii) "successor" means all resulting companies in a business reorganisation, whether or not the company was in existence prior to such business reorganisation.]

f) This section now enables the entities going through such business reorganization (i.e. the successor entity), for filing of modified returns for the period between the date of effectivity of the order and the date of issuance of final order of the competent authority.

g) Filing of such modified return would be a time bound obligation of the successor entity, i.e. within six months from end of the month in which order of restructuring is issued by the competent authority.

h) Such modified return has to be filed in accordance with and shall be limited only to the changes which are in accordance with the final order of restructuring by the competent authority.

Concluding Remarks: -

13. To sum up the entire discussion hereinabove, on the topic of the Assessment of the Non-Existent Entities, it can be said that –

a) Validity of the Assessment in the name / PAN of Non-Existent entity would purely depend on particular facts of each and every case;

b) Both the decisions of the Supreme Courts are good law and delivered in the context of the specific factual matrix of each case, though the question of law was same under both the decisions;

c) Insertion by the Finance Act 2022 of Section 170(2A) and Section 170A is also basically on the same principles that there can not be any proceedings in name / PAN of non-exist entity once the order of the concerned authority is received by PCIT / CIT.

d) Relevant points to be considered by assessee as well as department in connection with the cases of the Assessments of Non Exist entities – (a) Intimation of the Non Existence of the entity to the PCIT / AO, (b) filing of modified returns by successor u/s 170A, (c) Register to act on behalf of another person by the Successor on the e-filing portal (Authorize / Register as Representative User Manual | Income Tax Department), (d) surrender / cancellation of the PAN request, (e) Continuity of the litigation / legal proceedings by the successor on behalf of the predecessor

14. Accordingly, after Assessee favour as well as revenue favour two binding decisions of the SC, it would be very interesting as well as tricky for the department, assessee as well as the judicial forums to evaluate the validity of such assessments in the name of the predecessor entity having regard to peculiar facts of each case.

Sunil Maloo, CA

www.sunilmaloo.com

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Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. All views are personal views of the author.

[1] PCIT vs. Mahagun Realtors (P) Ltd. - SLP (C) No. 4063 of 2020 dated April 05, 2022

[2] PCIT vs. Maruti Suzuki India Ltd. - Civil Appeal No 5409 of 2019 dated July 25, 2019

[3] Skylight Hospitality LLP - (2018) 13 SCC 147

[4] Saraswati Industrial Syndicate Ltd. v CIT - (1990) 186 ITR 278 (SC)

[5] CIT v Intel Technology India (P) Ltd - [2016] 380 ITR 272 (Kar.)

[6] PCIT v Nokia Solutions & Network India (P) Ltd - [2018] 402 ITR 21 (Del)

[7] Spice Entertainment - 2012 (280) ELT 43 (Del.)

[8] BDR Builders and Developers Pvt. Ltd. v ACIT - [2017] 397 ITR 529 (Del)

[9] Rustagi Engineering Udyog (P.) Ltd. v DCIT - [2016] 382 ITR 443 (Del)

[10] Khurana Engineering Ltd. v DCIT - [2014] 364 ITR 600 (Guj)

[11] Takshashila Realties (P) Ltd. v DCIT - [2017] 77 taxmann.com 160 (Guj.)

[12] Alamelu Veerappan v ITO - [2018] 257 Taxman 72 (Madras)