Amendment to Section 170 of the Income Tax Act, 1961 proposed by the Finance Bill, 2022, following the Apex Court’s decision in the case of Maruti Suzuki India Ltd., 2019

It is common that, certain companies get merged with another company. Former company which is merging is known as transferor/ amalgamating company and the latter, which is formed after such merger, is known as transferee/ amalgamated company.

There is so much litigation on the issue of income tax department passing assessment orders on amalgamating companies after they got merged. Question which needs to be considered is: Whether an assessment order issued in the name of a amalgamating company is valid or not? This question was answered by the Apex Court in PCIT v. Maruti Suzuki India Ltd, (hereinafter referred as “Maruti Suzuki Case”) which resulted in the proposing of an amendment in the Finance Bill, 2022.

Here, it is pertinent to deal with this case, before knowing what the amendment is.

Background of the Case:

In Maruti Suzuki case, the High Court authorised a scheme to merge SPIL and MSIL. MSIL informed the Assessing Officer (AO) about the merger. Notices under Section 143(2) and under Section 142(1)  of the Income Tax Act, 1961 (hereinafter referred as “the Act”) were issued to the amalgamating business, SPIL. The AO asked to disclose the material during process of assessment proceedings, and the request was sent to “SPIL (Now known as MSIL)”. The AO issued the final Assessment Order in the title of SPIL, which ceased to exist at the time the issuance of order. The assesse argued that it is invalid on the part of Revenue to conduct proceedings of assessments and pass final assessment order in the name of non-existent entity. Tribunal and the High Court of Delhi rendered decision supporting assesse, which gave rise to the present appeal before the Supreme Court by the Revenue.

Questions of Law:

• Whether assessment order passed in the name of non-existent company is a jurisdictional/ procedural error?
• Whether the passing of such assessment order on non-existent company be cured by Section 292B of the Act?

Analysis by the Supreme Court

The court cited Spice Entertainment Ltd. v. Commissioner of Service Tax, where the High Court held that the assessment order issued by the AO on a non existing company, despite having prior information provided by the assessee, suffers from jurisdictional defect. So, it is not a procedural deformity, which can be cured under Section 292B of the Act.

In CIT v. Dimension Apparels Pvt. Ltd, Revenue’s contention that the omission on is a procedural defect that can be cured under Section 292B of the Act was dismissed, by stating that “the framing of assessment against a non-existing entity/person” is a jurisdictional defect. In CIT v. Micra India (P) Ltd., the Revenue sent a notice to the company which is non-existent, even though the revenue is aware about such amalgamation. The evaluation was found to be illegal because it was made against a non-existing company.

Court observed that the order passed on a non-existing entity is null& void, and the passing of such assessment order on the name of amalgamating / transferor company is a jurisdictional defect and not a procedural defect of the sort mentioned under Section 292B of the Act.

Decision of the Supreme Court

Finally, regardless of the fact that the AO had been notified that the amalgamating corporation had ceased to exist, the notice was issued in its identity in this case. The legal premise that the amalgamating company doesn’t exist once the amalgamation scheme is accepted was substantially at conflict with the grounds on which jurisdiction was exercised. So, court ruled in the favour of assessee.

Subsequent Developments after the decision of the Supreme Court in Maruti Suzuki India Ltd., [2019] 416 ITR 613 (SC)

In all the subsequent cases mentioned here, ITAT and Courts referred the Maruthi Suzuki Case.

In the cases of Gayatri Microns Ltd. v. ACIT and Siemens Technology & Services (P.) Ltd v. DCIT, Mumbai ITAT, it was observed that as a consequence of the authorized scheme of amalgamation, the transferor firm ceased to exist, and any notice delivered in its name would be essentially invalid and without jurisdiction.

In Centum Electronics Ltd. v. DCIT (ITAT Bangalore), the Hon’ble Supreme Court held that assessment order issued by the AO on a non-existent company, despite having prior information provided by the assessee, suffers from jurisdictional defect and, therefore, same deserves to be quashed. In the case of United Spirits Limited v. The Asst. Commissioner of Income-Tax, Central ITAT Bengaluru has declared assessment order as not valid by basing the same reasoning. Also, in PCIT v. Sony Mobile Communications India Pvt. Ltd., the Delhi High Court declared assessment order as not valid by basing the same reasoning.

Amendment proposed by the Finance Bill, 2022 following the Apex Court’s judgement in Maruti Suzuki case

Even though the court in Maruthi Suzuki Case, made it clear that assessment orders on non existing company is void ab initio, there have been continuous cases before ITAT and before courts on the same issue. To avoid any more ambiguity and to make law much more clear, an amendment was proposed to Section 170 of the Act.

In the Finance Bill, 2022, there are some budgetary amendments put forward. One among them is the amendment related to the assessment/ other proceedings, initiated on predecessor non-existent entity, pursuant to business re-organization.

As we have seen above, the Hon’ble Supreme Court in the Maruthi Suzuki Case has held that passing of an assessment order on amalgamating entity that ceases to exist after amalgamation is void-ab-initio.

So, with the sole objective of nullifying this well-settled legal position, the Finance Bill 2022, has proposed to add a sub-section (2A) to section 170 of the Act to establish that, in the event of a business reorganization, any assessment or other procedures pending or completed on the amalgamating entity shall be regarded to have been made on the amalgamated entity. This change will be in effect from and after April 1, 2022.

Conclusion

In conclusion, an assessment order on non-existing company is not valid, and in the present case, the assessment order on non-existing company suffers from a jurisdictional defect which cannot be governed and curable by Section 292B and is not a procedural defect, where even the subsequent case laws in the aspect of assessment order on non existing company have followed the Maruti Suzuki Case. Amendment made to Section 170 of the Act by Finance Bill, 2022 is great, which would eliminate/ reduce further litigation on the same question of law.

Author: Chidige Sai Varnitha, a  Law student from Damodaram Sanjivayya National Law University, (Visakhapatnam), in case of any queries please contact/write back to us at support@ipandlegalfilings.com or   IP & Legal Filing.