New Delhi, April 6, 2022: The Supreme Court has held that when a company ceases to exist upon its amalgamation, whether this event 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.
The Apex Court thereby set aside an order of the High Court that had reaffirmed an order of the Income Tax Appellate Tribunal (ITAT) which had held as unsustainable an assessment order passed by the Assessing Officer (AO) on the ground that the assessee company (respondent in this case) did not exist, as a consequence of amalgamation, on the date of the assessment order.
“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, in every other sense of the term, 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,” held a Bench of Justices U U Lalit and S Ravindra Bhat.
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, the Bench said, adding that there are analogies in civil law and procedure where upon amalgamation, the cause of action or the complaint does not per se cease – depending of course, upon the structure and objective of enactment.
“Broadly, the quest of legal systems and courts has been to locate if a successor or representative exists in relation to the particular cause or action, upon whom the assets might have devolved or upon whom the liability in the event it is adjudicated, would fall,” it further said.
The brief facts of the case are that the respondent-assessee company, Mahagun Realtors Private Limited (MRPL), engaged in the development of real estate, amalgamated with Mahagun India Private Limited (MIPL). In terms of the order and provisions of the Companies Act, 1956, the amalgamation was with effect from April 1, 2006.
Discrepancies were noticed in the books of accounts of MRPL in the year 2007 and a search and seizure operation was carried out in the Mahagun group of companies, including MRPL and MIPL, in 2008. The statements of the common directors of these companies, duly recorded under provisions of the Income Tax Act, 1961, comprised admissions about not reflecting the true income of the said entities. In 2009, MAPL was subsequently served with notice by the Revenue Department for filing of Return on Income, followed by Show Cause Notice.
The Assessing Officer (AO), issued the assessment order on August 11, 2011, assessing the income of Rs. 8,62,85,332/- after making several additions of Rs. 6,47,00,972/- under various heads. The assessment order showed the assessee as Mahagun Relators Private Ltd, represented by Mahagun India Private Ltd.
An appeal was preferred to the Commissioner of Income Tax (CIT) by the appellants: M/s Mahagun Realtors (Represented by Mahagun India Pvt Ltd, after amalgamation)
The appeal was partly allowed by the CIT on April 30, 2012. The CIT set aside some amounts brought to tax by the AO. The revenue department appealed against this order before the ITAT; simultaneously, the assessee too filed a cross objection to the ITAT. The revenues appeal was dismissed; the assessees cross objection was allowed only on a single point, i.e., that MRPL was not in existence when the assessment order was made, as it had amalgamated with MIPL.
The revenue department appealed to the High Court. The High Court, relying upon a judgment of the Supreme Court, in Principal Commissioner of Income Tax v. Maruti Suzuki India Limited, dismissed the appeal. The revenue department, therefore, appealed against that judgment.
The appellant in this case urged that the facts of Maruti Suzuki (supra) are distinguishable from the present case, among other contentions.
The respondent’s counsel contended that 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 the Supreme Court in Saraswati Industrial Syndicate v. Commissioner of Income Tax Haryana, Himachal Pradesh. It was argued that the amalgamating company (MRPL) cannot be regarded as a person in terms of Section 2(31) of the Act.
The respondent’s counsel urged that the notice under Section 153A by the AO (despite the intimation by Respondent about the amalgamation on May 30, 2008 and the statement of the director at the time of search) issued in the name of MRPL, a non-existing entity, was invalid and initiation of proceedings against non- existent entity was void-ab-initio. It was contended that the respondents case is covered by Maruti Suzuki (supra). The facts of both cases are similar.
The Top Court, while delving into various precedents in similar matter, said: “This court, without elaborate discussion, approved the reasoning in various judgments which held that upon the cessation of the transferor company, assessment of the transferor (or amalgamated company) was impermissible.”
The Bench, however, said, “… 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.”
The Supreme Court also held that the combined effect of Section 394 (2) of the Companies Act, 1956, Section 2 (1A) and various other provisions of the Income Tax Act, is that despite amalgamation, the business, enterprise and undertaking of the transferee or amalgamated company, which ceases to exist, after amalgamation, is treated as a continuing one, and any benefits, by way of carry forward of losses (of the transferor company), depreciation, etc., are allowed to the transferee. Therefore, unlike a winding up, there is no end to the enterprise, with the entity. The enterprise in the case of amalgamation, continues.
The Top Court also held that the facts of the present case are distinct from those of the Maruti Suzuki (supra) and others cited by the respondents.
“In the light of the facts, what is overwhelmingly evident- is that the amalgamation was known to the assessee, even at the stage when the search and seizure operations took place, as well as statements were recorded by the revenue of the directors and managing director of the group. A return was filed, pursuant to notice, which suppressed the fact of amalgamation; on the contrary, the return was of MRPL. Though that entity ceased to be in existence, in law, yet, appeals were filed on its behalf before the CIT, and a cross appeal was filed before ITAT. Even the affidavit before this court is on behalf of the director of MRPL,” the Bench noted.
The Top Court, thus, set aside the High Court order.
“Since the appeal of the revenue against the order of the CIT was not heard on merits, the matter is restored to the file of ITAT, which shall proceed to hear the parties on the merits of the appeal- as well as the cross objections, on issues, other than the nullity of the assessment order, on merits,” the Supreme Court held.