Direct Tax Alert - SC treats assessment in the name of amalgamating company as valid assessment
29 April 2022
Amalgamation involves merging of two or more entities through Scheme of Arrangement approved by National Company Law Tribunal (‘NCLT’) or High Court (‘HC’). As this is a long-drawn process, generally the said Scheme provides for the date from which the amalgamation will be effective. Filing of the tax return in amalgamating company’s Permanent Account Number (‘PAN’) and then revising it, is a common practise. However, the entity on whom the assessment is to be framed is a contentious issue. In this regard, Hon’ble Supreme Court (‘SC’) did try to settle this issue in case of Maruti Suzuki India Limited1 wherein it had held that assessment in the name of amalgamating company is void- ab -initio. Please [CLICK HERE] to read our tax alert on this decision. However, recently, Hon’ble SC distinguishing its earlier decision, on facts, has taken a divergent view.
We, at BDO in India, have summarized the ruling2 and provided our comments on the impact of this decision hereunder.
FACTS OF THE CASE
The Taxpayer, Mahagun Realtors Pvt. Ltd. (‘Amalgamating Entity’/‘MRPL’) is engaged in the development of real estate. It was amalgamated with other entity (‘Amalgamated Entity’) by virtue of Delhi HC’s order3 dated 10 September 2007. The amalgamation was effective from 1 April 2006. The chain of events is summarised hereunder:
Income Tax Appellate Tribunal (‘ITAT’) and Delhi HC dismissed Tax Authority’s appeal.
SUPREME COURT RULING
Before the Supreme Court while the Tax authority contended that names of the Taxpayer as well as the Amalgamated company were mentioned in the assessment order, the taxpayer contended that assessment in the name of amalgamating company is invalid. Hon’ble SC held the assessment to be valid and since the Tax Authorities’ appeal against CIT(A) was not heard on merits, it restored the matter to the file of ITAT. While pronouncing this, Hon’ble SC made the following observations:
- There are hundreds of instances under the Income tax Act, 1961 (‘IT Act’) where, in the event of amalgamation, the method of treatment of a particular subject matter is expressly indicated. In some instances, amalgamation results in withdrawal of a special benefit (such as an area exemption under Section 80IA of the IT Act etc.) because it is entity or unit - specific. 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 beneficial treatment, in the form of set-off, deductions (in proportion to the period the transferee was in existence, vis-à-vis the transfer to the transferee company); carry forward of loss, depreciation, all bear out that under the Act
- The business including the rights, assets and liabilities of the transferor company do not cease, but continue as that of the transferor company,
- By deeming fiction through several provisions of the IT Act, the treatment of various issues, is such that the transferee is deemed to carry on the enterprise as that of the transferor.
- Section 394(2) of the Companies Act, 1956, Section 2(1A) of the IT Act and various other provisions of the IT 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 earlier SC decision in the case of Maruti Suzuki India Ltd is distinguishable on the following:
- In Maruti’s decision, the taxpayer had duly informed the tax 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 Assessment Year (‘AY’) 2006-07, there was no intimation by the taxpayer regarding amalgamation of the company.
- The tax return for AY 2006-07 was in taxpayer’s name (Amalgamating Entity). Notices under Section 153A of the IT Act and Section 143(2) of the IT Act were issued in taxpayer’s name and the taxpayer’s representative corresponded with the Tax Authority in its own name.
- In the ‘Business Reorganization’ column of the tax return form ‘not applicable’ was mentioned.
- The assessment order dated 11 August 2011 mentions the name of both the amalgamating and amalgamated companies.
- Secondly, 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 an estoppel. However, in the present case, the participation in proceedings was by the taxpayer (Amalgamating Entity) which held out itself as MRPL.
SC has deviated from its earlier ruling as the facts indicated that the taxpayer did not intimate the tax officer about the amalgamation and participation in the proceedings (including the filing of tax return) in its own name. Hence, the earlier SC ruling should continue to be valid even post this decision. It is pertinent to take note of SC’s concluding remark wherein it has held that whether the corporate death of an entity upon amalgamation per se invalidates an assessment order ordinarily cannot be determined on the bare application of corporate law provisions but would depend on the terms of amalgamation and the facts of each case. It is also pertinent to note that in this case, the amalgamated company (i.e. resulting company) was mentioned as representative of the amalgamating entity. This could have given an impression that the amalgamating company is still in existence. Furthermore, the fact of business reorganisation was mentioned as Not Applicable in the tax return form. Hence, for the taxpayers who have been amalgamated, care should be taken that:
- In their tax return, appropriate disclosure is made
- The tax officer is intimated about the amalgamation for each year for which the matters are open
- In the communication with the tax officer, the fact of amalgamation is appropriately disclosed
1 Pr.CIT vs Maruti Suzuki India Limited (Civil Appeal No. 5409 of 2019) (SLP No. 4298 of 2019)
2 Pr.CIT v. Mahagun Realtors (P) Ltd. [SLP(C) No. 4063 of 2020]
3 In Company Petition No. 133/2007 c/w Company Application (M) No. 41/2007