ASSESSMENT ORDER PASSED ON THE NON EXISTING COMPANY

[Mr. M. GOVINDARAJAN]

Amalgamation

An amalgamation is a combination of two or more companies into a new entity. Amalgamation is distinct from a merger because neither company involved survives as a legal entity. Instead, a completely new entity is formed to house the combined assets and liabilities of both companies.  Generally, Amalgamation is done between two or more companies engaged in the same line of activity or has some synergy in their operations. Again the companies may also combine for diversification of activities or for expansion of services Transfer or Company means the company which is amalgamated into another company; while Transfer Company means the company into which the transfer or company is amalgamated.

Sections 230 to 240 of the Companies Act, 2013 read with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 are dealing with the procedure of amalgamating two or more companies to form a new company.

Section 2(1B) of Income-tax Act, 1961 defines the term ‘amalgamation’ as merger of either one or more companies with another company or merger of two or more companies to form one company in such a manner that-

• All the property/liability of the amalgamating company/companies becomes the property/liability of amalgamated company.
• Share holders holding minimum 75% of the value of shares in the amalgamating company (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become share holders of the amalgamated company.

The capital gains arising on transfer of a capital asset in a scheme of amalgamation/demerger to the amalgamated/resulting company being an Indian Company, is exempt.  The accumulated loss and unabsorbed depreciation of an amalgamating company can be carried forward by the amalgamated company for set off against its profits.

Case laws

In Spice Enfotainment Ltd. Versus Commissioner of Income Tax [Printed as: SPICE ENTERTAINMENT LTD. Versus COMMISSIONER OF SERVICE TAX] - 2011 (8) TMI 544 - DELHI HIGH COURT, the High Court held that after the sanction of the scheme on 11th April, 2004, the Spice ceases to exist w.e.f. 1st July, 2003. Even if Spice had filed the returns, it became incumbent upon the Income tax authorities to substitute the successor in place of the said ‘dead person’. When notice under Section 143(2) was sent, the appellant/amalgamated company appeared and brought this fact to the knowledge of the AO. He, however, did not substitute the name of the appellant on record. Instead, the Assessing Officer made the assessment in the name of M/s Spice which was non existing entity on that day. In such proceedings and assessment order passed in the name of M/s Spice would clearly be void. Such a defect cannot be treated as procedural defect. Mere participation by the appellant would be of no effect as there is no estoppel against law.  On appeal by the Department before the Supreme Court C.I.T NEW DELHI VERSUS M/S SPICE ENFOTAINMENT LTD.  [2017 (12) TMI 754 - SC ORDER], the Supreme Court held that the framing of assessment against a non-existing entity/person goes to the root of the matter which is not a procedural irregularity but a jurisdictional defect as there cannot be any assessment against a dead person.

In ‘Principal Commissioner of Income Tax, New Delhi v. Maruti Suzuki India Limited’ ‘ – 2019 (7) TMI 1449 – Supreme Court, the Supreme Court observed that in the present case, despite the fact that the assessing officer was informed of the amalgamating company having ceased to exist as a result of the approved scheme of amalgamation, the jurisdictional notice was issued only in its name.  The basis on which jurisdiction was invoked was fundamentally at odds with the legal principle that the amalgamating entity ceases to exist upon the approved scheme of amalgamation.   Participation in the proceedings by the appellant in the circumstances cannot operate as an estoppel against law.

In ‘Teleperformance Global Services Private Limited v. Assistant Commissioner of Income Tax, Circle 25(1), New Delhi and others’ – 2021 (4) TMI 550 – Bombay High Court, Tecnovate Esolutions Private Limited  was a registered company engaged in business of providing back office support services/ remote data entry services for customers in and outside India. A scheme of amalgamation of aforesaid company with Intelenet Global Services Private Limited was approved vide order dated 11.02.2021.  The scheme came into effect from 01.04.2010.  Therefore Tecnovate Esolutions Private Limited ceased to exist.  Thereafter the Intelenet Global services Private Limited amalgamated with Serco BPO Private Limited.  The name change of Serco BPO Private Limited to Intelenet Global Service Private Limited took effect from 11.01.2016.  The name has been further changed to Teleperformance Global Services Private Limited. 

The Income Tax Department issued a notice dated 30.03.2019 under section 148 of the Income Tax Act, 1961 directing the petitioner to file income tax return for the AY 2012-13 in the name of Tecnovate Esolutions Private Limited within 30 days stating there is reason to believe that income chargeable to tax had escaped assessment.  The petitioner had filed a letter dated 18.09.2019 stating that Tecnovate Esolutions Private Limited has been amalgamated with effect from 01.04.2010 and since then said company has ceased to exist, and as such, there is no question of filing returns of income for assessment year 2012-13 by said company.

While contacting the Officers over phone to clarify the original position, it was advised by them to file their reply through online.  Despite several attempts made by the petitioner, the reply could not be filed online because of technical glitches.  Therefore the petitioner set a email to the Department 29.11.2019 and also sent the original letter to the Department.  The Department passed an order on 31.12.2019 for the assessment year 2012-13, under section 144 read with section 147 of the Act, in the name of Tecnovate Esolutions Private Limited  computing total income at ₹ 14,50, 95,452/-.  Therefore the petitioner is constrained to file writ petition, challenging notice dated 30.03.2019 and assessment order dated 31.12.2019.

The petitioner contended the following before the High Court-

• Post amalgamation, for assessment year 2012-13 Intelenet Global Services Private Limited filed its income tax returns on 30.11.2012 and revised its return on 31.03.2014 for the period 01.04.2011 to 16.07.2011.
• Its assessment was completed under section 143(3) of the Act vide order dated 23.09.2016.
• Since Tecnovate Esolutions Private Limited has ceased to exist there is no question of filing returns of income for assessment year 2012-13 by said company.
• Even after merger, sometimes the payers made payments to the petitioner. However, erroneously, continue to mention the PAN of erstwhile company and accordingly said deduction is reflected in the 26 AS of erstwhile company and not Petitioner Company, and petitioner in its return considered all such payments and claimed all such deduction. As such, there is no question of escaping assessment for the assessment year 2012-13.
• Without considering the reply or even referring to the telephonic conservation of petitioner with the Department the assessment order on 31.12.2019. 
• While the facts are indisputable, impugned notice dated 30.03.2019 and impugned order dated 31.12.2019 for assessment year 2012-13 in the name of Technovate Esolutions Private Limited are clearly without jurisdiction.
• Impugned notice issued for the period viz. assessment year 2012-13 after the amalgamation is clearly outside the scope of jurisdiction of respondent No. 1.
• The petitioner sent letters dated 18.09.2019 and 29.11.2019 as well as e-mails dated 16.10.2019 and the same have not been responded to.
• No assessment or re-assessment proceedings can be initiated against a person not in existence during the relevant period.
•  There is no question of assessment being reopened or the assessment order being passed in the name of erstwhile company.
• The petitioner was not afforded any opportunity of hearing. Notice dated 04.12.2019 was not served on the petitioner, even the same was not uploaded on the e-portal. The impugned notice and the impugned order of assessment are in breach of principles of natural justice.

Therefore the petitioner prayed the High Court to allow the petition, quashing and setting aside impugned notice date 30.03.2019 and the impugned order dated 31.12.2019.

The Department submitted the following before the High Court-

• The petitioner as successor entity had been responsible to reply the notices including show-cause notice issued on 4th December, 2019 through ITBA system of the department and the notices.
• The orders were dispatched to the concerned assessee on its email id which is registered with the department for receiving such communications. It had been realized that the PAN of the entity Tecnovate Esolutions Private Limited  had been apparently active in the database of the department.
• The petitioner has appellate forum to approach against the order passed. 
• The jurisdiction over the company Tecnovate Esolutions Private Limited  is with the Circle 25(1), Delhi and therefore the  petitioner is not entitled to any of the relief claimed, as such, petition is liable to be dismissed.

The Department further questioned the jurisdiction of Mumbai High Court to entertain this writ petition even though it is liable to be dismissed since alternative remedy is available to the petitioner. 

The petitioner objected the contention in regard to the jurisdiction.  The petitioner further submitted that-

• appeals to high court are governed by chapter XX of the Act. Section 260A provides appeals to high court from every order passed in appeal by tribunal. Section 269 of the Act, defines the high court of the State;
• Section 127 of the Act deals with the jurisdiction of the authorities and would not control / decide and/or determine which high court will be the appellate forum.

The High Court considered the submissions of both the parties to the petition.  The High Court held that income, which was subject to be charged to tax for the assessment year 2012-13 was the income of erstwhile entity prior to amalgamation. Transferee had assumed liabilities of Transferor Company, including that of tax. The consequence of approved scheme of amalgamation was that amalgamating company had ceased to exist and on its ceasing to exist, it cannot be regarded as a person against whom assessment proceeding can be initiated. In said case before notice under Section 143(2) of the Act was issued on 30.03.2019, the scheme of amalgamation had been approved by the high court with effect from 1.4.2010. It has been observed that assessment order passed for the assessment year 2012-13 in the name of non-existing entity is a substantive illegality.

Conclusion

In the case of amalgamation the amalgamating company ceases to exist once it is approved by the Court and the effective date is declared.  The transferee company transfers all of the liabilities of the amalgamating company.  In such a case the income tax department should be informed about such amalgamation.  The Department is to substitute the transferee name for the amalgamating company.  It is paramount importance.  Otherwise unnecessary litigations would arise.