Supreme Court Clarifies Assessment of Amalgamated Companies: PCIT vs. Mahagun Realtors (2022)

Introduction

Date of the Judgment: April 5, 2022

Citation: (2022) INSC 380

Judges: Uday Umesh Lalit, J., S. Ravindra Bhat, J.

Can an income tax assessment order issued in the name of a company that no longer exists due to a merger be considered valid? The Supreme Court of India recently addressed this critical question in a case involving the Principal Commissioner of Income Tax and M/s. Mahagun Realtors (P) Ltd. The core issue revolved around whether an assessment order issued in the name of the amalgamating company, which had ceased to exist after merging with another company, was legally valid. The court’s decision impacts how tax authorities handle assessments of merged entities.

The judgment was delivered by a two-judge bench comprising Justice Uday Umesh Lalit and Justice S. Ravindra Bhat, with the majority opinion authored by Justice S. Ravindra Bhat.

Case Background

M/s. Mahagun Realtors Private Limited (MRPL), a real estate development company, was involved in a residential project named “Mahagun Maestro” in Noida, Uttar Pradesh. On September 10, 2007, the High Court approved MRPL’s amalgamation with Mahagun India Private Limited (MIPL), effective from April 1, 2006. During a survey on March 20, 2007, discrepancies were found in MRPL’s accounts. Subsequently, on August 27, 2008, a search and seizure operation was conducted on the Mahagun group, including MRPL and MIPL. Statements from the directors of these companies indicated that they had not accurately reported their income. On March 2, 2009, the revenue department issued a notice to MRPL to file its income tax return (ITR) for the assessment year 2006-2007. After MRPL failed to file the ITR, a show cause notice was issued on May 18, 2009. MRPL responded on May 23, 2009, requesting that no proceedings be initiated and promising to file the ITR by June 30, 2009. The ITR was eventually filed on May 28, 2010, with MRPL as the assessee. The Assessing Officer (AO) issued an assessment order on August 11, 2011, assessing MRPL’s income at ₹8,62,85,332, including additions of ₹6,47,00,972. The assessment order listed the assessee as “Mahagun Relators Private Ltd, represented by Mahagun India Private Ltd.”

Timeline:

Course of Proceedings

Aggrieved by the assessment order, MRPL appealed to the Commissioner of Income Tax (CIT). The CIT partly allowed the appeal on April 30, 2012, setting aside some of the additions made by the AO. The revenue department then appealed to the Income Tax Appellate Tribunal (ITAT). MRPL also filed a cross-objection. The ITAT dismissed the revenue’s appeal but allowed MRPL’s cross-objection, ruling that the assessment order was unsustainable because MRPL did not exist on the date of the assessment order, having amalgamated with MIPL. The ITAT relied on the decisions of the Delhi High Court in Spice Infotainment Ltd v CIT 247 ITR 500 and CIT v Dimension Apparel Pvt. Ltd 370 ITR 288. The revenue then appealed to the High Court, which dismissed the appeal, citing the Supreme Court’s judgment in Principal Commissioner of Income Tax v. Maruti Suzuki India Limited. The revenue then appealed to the Supreme Court.

Legal Framework

The primary legal provisions at play in this case are:

• Section 170 of the Income Tax Act, 1961: This section deals with succession to business or profession otherwise than on death. It states that when a person carrying on a business is succeeded by another person, the predecessor is assessed for income up to the date of succession, and the successor is assessed for income after that date.
  The relevant part of Section 170 reads as follows:
  
  “170. Succession to business otherwise than on death
  (1) Where a person carrying on any business or profession (such person hereinafter in this section being referred
  to as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as
  the successor) who continues to carry on that business or profession, –
  (a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took
  place up to the date of succession;
  (b) the successor shall be assessed in respect of the income of the previous year after the date of succession.
  (2) Notwithstanding anything contained in sub – section (1), when the predecessor cannot be found, the assessment
  of the income of the pr evious year in which the succession took place up to the date of succession and of the
  previous year preceding that year shall be made on the successor in like manner and to the same extent as it
  would have been made on the predecessor, and all the provisi ons of this Act shall, so far as may be, apply
  accordingly.
  (3) When any sum payable under this section in respect of the income of such business or profession for the
  previous year in which the succession took place up to the date of succession or for the previous year preceding
  that year, assessed on the predecessor, cannot be recovered from him, the 1 Assessing] Officer shall record a
  finding to that effect and the sum payable by the predecessor shall thereafter be payable by and recoverable from
  the suc cessor, and the successor shall be entitled to recover from the predecessor any sum so paid.”
• Section 394 of the Companies Act, 1956: This section allows the court to approve schemes of amalgamation and oversee the transfer of assets and liabilities from the amalgamating company to the amalgamated company.
  
  Section 394 (2) provided as follows:
  
  “(2) Where a n order under this section provides for the transfer of
  any property or liabilities, then, by virtue of the order, that property
  shall be transferred to and vest in, and those liabilities shall be
  transferred to and become the liabilities of, the transfere e company;
  and in the case of any property, if the order so directs, freed from any
  charge which is, by virtue of the compromise or arrangement, to cease
  to have effect.”
  
  Section 394 (4) (a) defined “property” for the purpose of devolution of assets and liabilities:
  
  “394….(4) In this section –
  (a) ” property” includes property, rights and powers of every
  description and” liabilities” includes duties of every description;
  and..”

These provisions establish the legal framework for how companies are treated under tax laws when they undergo mergers or amalgamations. The court had to determine how these provisions apply when an assessment order is issued in the name of a company that has ceased to exist due to amalgamation.

Arguments

Revenue’s Arguments:

• The revenue argued that the assessment order was valid because it mentioned both the amalgamating (MRPL) and amalgamated (MIPL) companies. They contended that any mistakes or omissions were curable under Section 292B of the Income Tax Act, 1961, as the assessment was in line with the intent of the Act.
• The revenue submitted that MRPL was effectively represented by MIPL, and no prejudice was caused by the assessment order. They distinguished this case from Maruti Suzuki, where only the amalgamating company’s name was mentioned in the final assessment order.
• The revenue also argued that, unlike in Maruti Suzuki, the AO was not informed about the amalgamation. They stated that during search and seizure operations, the directors of MIPL (and MRPL) held out that both entities existed, and even surrendered amounts related to MRPL’s past activities.
• The revenue pointed out that notices were issued under Section 153A and Section 143(2) to MRPL, and the assessee responded in the name of MRPL. The return filed on May 28, 2010, was also in the name of MRPL, with no mention of amalgamation.
• The revenue highlighted that during the survey proceedings on March 20, 2007, the director of the companies made statements under oath, and MRPL surrendered amounts for which it could not account. This was before the amalgamation was disclosed to the department.
• The revenue argued that the assessee had resisted the assessment proceedings and never informed the AO of the amalgamation. They also noted that in appeals to the CIT and ITAT, the assessee’s description was “Mahagun Relators Private Ltd, represented by Mahagun India Private Ltd.”

Respondent’s Arguments:

• The respondent argued that upon sanction of the amalgamation scheme, MRPL was dissolved without winding up, as per Section 394 of the Companies Act, 1956. They cited Saraswati Industrial Syndicate v. Commissioner of Income Tax Haryana, Himachal Pradesh to support this point.
• The respondent contended that MRPL could not be considered a ‘person’ under Section 2(31) of the Income Tax Act, 1961, after the amalgamation.
• The respondent argued that the notice under Section 153A issued in the name of MRPL, a non-existent entity, was invalid, and any proceedings against it were void ab initio.
• The respondent submitted that the assessment framed in the name of MRPL was invalid under Section 170(2) of the Income Tax Act, 1961, and that the notice should have been issued in the name of MIPL. They relied on the Delhi High Court’s decision in Spice Infotainment Limited v. Commissioner of Income Tax, which held that an assessment in the name of an amalgamating company is invalid and cannot be cured by Section 292B of the Act.
• The respondent argued that the fact that MIPL participated in the assessment proceedings did not operate as estoppel.
• The respondent contended that their case was similar to Maruti Suzuki, where the assessment order in the name of a non-existing company was held to be invalid.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the assessment order issued in the name of the amalgamating company (MRPL), which had ceased to exist due to amalgamation, was valid in law.

Treatment of the Issue by the Court

Authorities

The following authorities were considered by the Supreme Court:

Cases:

• Saraswati Industrial Syndicate v. Commissioner of Income Tax Haryana, Himachal Pradesh (1990) Supp (1) SCR 332 – The court discussed the effect of amalgamation on the corporate entity. It was held that the transferor company ceases to exist after amalgamation.
• Commissioner of Income Tax, v. Hukamchand Mohanlal 1972 (1) SCR 786 – The court discussed the tax liability of a legal representative in the event of the death of their predecessor.
• Commissioner of Income Tax v. Amarchand Shroff 1963 Supp (1) SCR 699 – This case dealt with the levy of tax on receipts by the legal representative of a deceased person.
• Commissioner of Income Tax v. James Anderson 1964 (6) SCR 590 – The court discussed the assessment of income receivable by the estate of a deceased person.
• Marshall Sons and Co. (India) Ltd. v. Income Tax Officer 1996 Supp (9) SCR 216 – The court discussed the effective date of amalgamation and the treatment of income of transferor and transferee companies. The court held that assessment can be made on the Transferee Company taking into account the income of both the Transferor and Transferee Company.
• Spice Infotainment Limited v. Commissioner of Income Tax [2012] 247 CTR 500 (Del) – The Delhi High Court held that assessment in the name of a non-existent company is invalid and cannot be cured by Section 292B of the Income Tax Act, 1961.
• Commissioner of Income Tax v. Spice Enfotainment Ltd (2020) 18 SCC 353 – The Supreme Court approved the reasoning of various judgments that held that assessment of the transferor company is impermissible after cessation of the company.
• Dalmia Power Limited & Ors v. The Assistant Commissioner of Income Tax, Circle 1, Trichy (2020) 14 SCC 736 – The court held that the revenue had not objected to the amalgamation schemes duly and that Sections 139(5) and 119(2)(b) of the Act and Circular No. 9/2015 issued by the CBDT were inapplicable to a case where a revised ROI was filed pursuant to a Scheme of Arrangement and Amalgamation.
• McDowell and Company Ltd. v. Commissioner of Income Tax, Karnataka Central (2017) 13 SCC 799 – The court considered the effect of amalgamation and the rights and liabilities in relation to claim for depreciation under the Act.
• Bhagwan Dass Chopra v. United Bank of India 1988 (1) SCR 1088 – The court held that in cases of transfer, devolution, merger, or amalgamation, the successor-in-interest becomes entitled to the liabilities and assets of the transferor company.
• Singer India Ltd v. Chander Mohan Chadha [2004] Supp (3) SCR 535 – The court held that when two companies amalgamate and merge, the transferor company loses its identity.
• Principal Commissioner of Income Tax v. Maruti Suzuki India Limited 2019 SCCOnline SC 928 – The Supreme Court held that a notice under Section 143(2) issued to a non-existent company is a substantive illegality and not a procedural violation.
• CIT v Dimension Apparel Pvt. Ltd 370 ITR 288 – The Delhi High Court held that assessment in the name of a non-existent company is invalid.

Legal Provisions:

• Section 2(1A) of the Income Tax Act, 1961: Defines “amalgamation” in relation to companies.
  
  “(1A) “amalgamation”, in relation to companies, means the merger
  of one or more companies with another company or the merger of two
  or more companies to form one company (the company or companies
  which so merge being referred to as the amalgamating company or
  companies and the company with which they merge or which is
  formed as a result of the merger, as the amalgamated company) in
  such a manner that —
  (i) all the property of t he amalgamating company or companies
  immediately before the amalgamation becomes the property of the
  amalgamated company by virtue of the amalgamation;
  (ii) all the liabilities of the amalgamating company of companies
  immediately before the amalgamation, b ecome the liabilities of the
  amalgamated company by virtue of the amalgamation;
  (iii) shareholders holding not less than nine -tenths in value of the
  shares in the amalgamating company or companies (other than shares
  already held therein immediately before the amalgamation by, or by
  a nominee for, the amalgamated company or its subsidiary) become
  shareholders of the amalgamated company by virtue of the
  amalgamation, otherwise than as a result of the acquisition of the
  property of one company by another comp any pursuant to the
  purchase of such property by the other company or as a result of the
  distribution of such property to the other company after the winding
  up of the first mentioned company;”
• Section 132 of the Income Tax Act, 1961: Deals with search and seizure.
• Section 133A of the Income Tax Act, 1961: Deals with survey.
• Section 139(1) of the Income Tax Act, 1961: Deals with filing of original return.
• Section 142 of the Income Tax Act, 1961: Deals with inquiry before assessment.
• Section 143(2) of the Income Tax Act, 1961: Deals with notice for scrutiny assessment.
• Section 153A of the Income Tax Act, 1961: Deals with assessment in case of search.
• Section 170 of the Income Tax Act, 1961: Deals with succession to business otherwise than on death.
• Section 276CC of the Income Tax Act, 1961: Deals with failure to furnish returns of income.
• Section 292B of the Income Tax Act, 1961: Deals with return of income not to be invalid on certain grounds.
• Section 394 of the Companies Act, 1956: Deals with provisions for facilitating reconstruction and amalgamation of companies.
• Section 481 of the Companies Act, 1956: Deals with dissolution of the company.

Authorities Considered by the Court

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court acknowledged the principle in Saraswati Syndicate that the transferor company ceases to exist after amalgamation, but distinguished the facts of the present case.
• The Court relied on Marshall Sons to hold that the assessment can be made on the transferee company taking into account the income of both the transferor and transferee companies.
• The Court distinguished the facts of the present case from Spice Infotainment and Maruti Suzuki, noting that in those cases, the department was duly informed about the amalgamation.
• The Court noted that the legislative change, by way of introduction of Section 2 (1A), defining “amalgamation” was not taken into account in the previous decisions. Further, the tax treatment in the various provisions of the Act were not brought to the notice of the court, in the previous decisions.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the conduct of the assessee, which had suppressed the fact of amalgamation and continued to act as if MRPL was still in existence. The court noted that the assessee had filed returns, participated in proceedings, and even filed appeals in the name of MRPL. The court also emphasized that the assessment order, though in the name of MRPL, was effectively inrelation to MIPL by virtue of the amalgamation order and Section 394(2) of the Companies Act, 1956. The court’s reasoning can be summarized as follows:

• Suppression of Amalgamation: The court found that the assessee had deliberately suppressed the fact of amalgamation from the tax authorities. This was a critical factor in the court’s decision.
• Conduct of the Assessee: The assessee’s continued actions in the name of MRPL, including filing returns and participating in proceedings, were considered significant. The court held that the assessee could not now claim that the assessment order was invalid due to the non-existence of MRPL.
• Substance over Form: The court emphasized that the assessment order was effectively directed towards MIPL, the transferee company, due to the amalgamation and the legal transfer of liabilities. The court focused on the substance of the matter rather than just the form of the assessment order.
• Distinction from Previous Cases: The court distinguished the facts of this case from Maruti Suzuki and Spice Infotainment, where the tax authorities were aware of the amalgamation. In those cases, the court held that the assessment order in the name of a non-existent company was invalid.
• Section 394(2) of the Companies Act, 1956: The court noted that Section 394(2) of the Companies Act, 1956, provides for the transfer of liabilities to the transferee company, which in this case was MIPL. Therefore, the assessment order, though in the name of MRPL, was effectively in relation to MIPL.

Final Order

The Supreme Court set aside the High Court order and restored the matter to the Income Tax Appellate Tribunal (ITAT). The court directed the ITAT to consider the matter on merits, taking into account the observations made by the Supreme Court. The court held that the assessment order was valid in the specific facts of the case.

Key Principles Established by the Judgment

The Supreme Court’s judgment in PCIT vs. Mahagun Realtors (2022) establishes several key principles:

• Suppression of Material Facts: An assessee cannot suppress the fact of amalgamation and then claim that an assessment order is invalid due to the non-existence of the amalgamating company.
• Substance over Form: The court will look at the substance of the matter, rather than just the form of the assessment order. If the assessment order is effectively directed towards the transferee company due to the amalgamation, it can be considered valid.
• Conduct of Assessee: The conduct of the assessee, including filing returns and participating in proceedings in the name of the amalgamating company, can be a significant factor in determining the validity of the assessment order.
• Distinction from Previous Cases: The court distinguished the facts of this case from previous cases where the tax authorities were aware of the amalgamation. The court held that the assessment order in the name of a non-existent company is not necessarily invalid in all cases.
• Section 394(2) of the Companies Act, 1956: The court emphasized that Section 394(2) of the Companies Act, 1956, provides for the transfer of liabilities to the transferee company, which in this case was MIPL. Therefore, the assessment order, though in the name of MRPL, was effectively in relation to MIPL.

Flowchart of the Decision

Conclusion

The Supreme Court’s decision in PCIT vs. Mahagun Realtors (2022) provides important clarity on the assessment of amalgamated companies. The court’s emphasis on the conduct of the assessee, the substance of the matter, and the provisions of the Companies Act, 1956, highlights the need for transparency and adherence to legal requirements. This judgment has significant implications for how tax authorities handle assessments of merged entities and serves as a reminder that the suppression of material facts can have serious consequences. The judgment serves as a crucial reference point for future cases involving similar issues. It underscores the importance of timely disclosure of amalgamation details to the tax authorities and the need for parties to act in good faith.