No End To Company During Amalgamation, Income Tax Notice Not Invalid When Issued To Amalgamating Company – SC
A two-judge Bench of Justice UU Lalit and Justice S. Ravindra Bhat has held that unlike winding up, in case of amalgamation there is no end to enterprise, with the entity. The enterprise in the case of amalgamation continues. Hence, an income tax notice is not invalid merely because it was issued to the amalgamating company.
ASG Mr. N. Venkataraman appeared for the Appellant – Revenue, while Counsel Ms. Kavita Jha appeared for the Respondent – Assessee before the Apex Court.
An appeal was preferred before the Supreme Court assailing the judgment of the Delhi High Court which had rejected the appeal of the Appellant – Revenue and affirmed the order of the Income Tax Appellate Tribunal (ITAT) which had quashed the assessment order against the Respondent – Assessee.
In this case, the Mahagun Realtors Pvt. Ltd. (MRPL) – Transferor – Amalgamating Company had amalgamated with Mahagun India Pvt. Ltd. (MIPL) in terms of the order of the High Court. Later, survey proceedings were conducted in respect of MRPL when certain discrepancies in its books of account were noticed. Thereafter, a search and seizure operation was carried out in the Mahagun group of companies including MRPL and MIPL, after which the statements of the directors were recorded under Income Tax Act.
A revenue notice was then issued to MRPL to file a Return of Income for the AY 2006-07, the ROI had described the assessee as MRPL. Under Col. 27 of the form (of ROI) to the specific query of "Business Reorganization (a)….(b) In case of amalgamated company, write the name of amalgamating company" the reply was "NOT APPLICABLE"
Aggrieved, an appeal was filed before the CIT which was partly allowed. An appeal was then preferred before the ITAT by both the Appellant and Respondent. The Appellant's appeal was dismissed and the Respondent's cross objection was allowed, holding that MRPL was not in existence when the assessment order was made, as it had amalgamated with MIPL. Aggrieved, the Revenue approached the High Court.
The Apex Court noted that amalgamation is unlike the winding up of a company, wherein the outer shell of the corporate entity is destroyed and 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 this context, the Bench added –
"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."
The Court further referred to various precedents and observed that upon the cessation of the transferor company, assessment of the transferor (or amalgamated company) is impermissible.
"In the case of carry forward of losses and profits, a nuanced approach has been indicated. All these provisions support the idea that the enterprise or the undertaking, and the business of the amalgamated company continues," the Bench opined.
Further, the Court also held, "The combined effect, therefore, 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 Bench also noted that the amalgamation was known to the assessee, even at the stage of search and seizure operations took place, as well as statements recorded by the revenue of the directors and MD of the group. Thereafter, a return was also filed which suppressed the fact of amalgamation as the return was of MRPL.
The Court also noted that the mere choice of the AO in issuing a separate order in respect of MRPL cannot nullify it.
In this context, the Court added –
"Having regard to all these reasons, this court is of the opinion that in the facts of this case, the conduct of the assessee, commencing from the date the search took place, and before all forums, reflects that it consistently held itself out as the assessee."
The Court also held that whether the corporate death of an entity upon the amalgamation per se invalidates an assessment order ordinarily cannot be determined on a bare application of Section 481 of the Companies Act but would depend on the terms of the amalgamation and facts of each case.
In the light of these observations, the Court allowed the appeal and set aside the impugned order of the High Court, and restored the matter to the file of ITAT to be heard on merits.