Tax Alert: Assessment in the name of amalgamating company is void-ab-initio

Background 

In case of amalgamation of two or more entities, the amalgamating entity ceases to exist post the appointed date. As the amalgamation process generally takes time to complete, the scheme document contains appointed date – i.e. date from which the scheme shall be effective. Hence, once the scheme is approved, the same is effective retrospectively.

As a result, there are instances where the tax return is filed by the amalgamating company in its own name. Further, the assessment for earlier year(s) (i.e. tax years prior to the year in which amalgamation took place), could be underway and would get concluded post the amalgamation. In such cases, it is a contentious issue as to whether the assessment should be done in the name of amalgamating company or resulting / amalgamated company. Recently, Hon’ble Supreme Court^[1] had an occasion to delve into this issue.

We, at BDO, have summarized this latest ruling and provided our comments on the same.

Facts of the Case 

Suzuki Powertrain India Limited (SPIL or amalgamating company) had amalgamated with Maruti Suzuki India Limited (MSIL or amalgamated company) by a scheme of amalgamation approved by the High Court (HC) on January 29, 2013, with effect from fiscal year commencing on April 1, 2012. The scheme provided that all the assets, liabilities and duties of the amalgamating company be transferred to the MSIL and that the SPIL would stand dissolved without winding up. Subsequent chain of events is summarised hereunder:

• April 2, 2013 - the taxpayer intimates the Tax Officer (TO) about the amalgamation
• September 26, 2013 – TO issues notice for scrutiny under section 143(2) of the Income-tax Act, 1961 (the IT Act) for fiscal year 2011-12
• September 4, 2015 - the TO calls for various information. The TO’s communication was addressed to:

  The Principal Officer

  M/s Suzuki Powertrain India Limited

  (Now known as M/s Maruti Suzuki India Limited)

• March 11, 2016 – TO passes draft assessment order in the name of SPIL
• April 12, 2016 – Objections are filed before the Dispute Resolution Panel (DRP). The objections were filed by MSIL as successor in interest of erstwhile SPIL.
• October 14, 2016 - DRP passes its order
• October 31, 2016 – TO passes final order in the name of SPIL (amalgamated with MSIL).
• April 6, 2017 – Tax Tribunal set asides the assessment order on the ground that it was void ab initio having been passed in the name of a non-existent entity by the TO
• January 9, 2018 – Delhi HC affirms Tribunal’s order. While approving Tribunal’s order, Delhi HC followed its own decision rendered in MSIL’s case for fiscal year 2010-11.

The TO has filed a Special Leave Petition (SLP) before Supreme Court against the decision of HC.

Supreme Court Ruling 

While upholding HC’s decision, SC has held that the assessment done in the name of amalgamating company was void ab initio. For coming to this conclusion, SC observed that:

• Under the approved scheme of amalgamation, the amalgamated company had assumed the liabilities of the transferor company including the tax liabilities.
• Upon scheme of amalgamation getting approved, the amalgamating company ceases to exist. This principle has been formulated by SC in case of Saraswati Industrial Syndicate Ltd^[2].
• Once amalgamating company ceases to exist, it cannot be termed as a “person” under section 2(31) of the IT Act against whom assessment proceedings can be initiated or an order can be passed.
• The TO assumed jurisdiction to make an assessment in pursuance to the notice under section 143(2) of the IT Act. Prior to the date on which the jurisdictional notice under section 143(2) of the IT Act was issued, the scheme of amalgamation had been approved and this fact was already communicated to the TO.
• The jurisdictional notice issued under section 143(2) of the IT Act in the name of amalgamating company, a non-existent entity, was invalid and thereby the initiation of assessment proceedings was void ab initio. The mere fact that the amalgamated company participated in the assessment proceedings would not operate as estoppel.

BDO Comments 

Post amalgamation, the entity on whom the assessment should be done is not free from litigation. Generally, tax authorities initiate proceedings in the name of amalgamating entity which is not in existence. This is a welcome decision as it puts to rest this issue by holding that the proceedings should be done in the name of the amalgamated company and not amalgamating company. The taxpayers (who have undergone amalgamation) having ongoing proceedings or litigation could consider examining its factual matrix and evaluate the impact of this decision.