Implication of amalgamation on assessment proceedings

A company is a juristic personality which not only comes into existence by operation of law but its cessation also takes place by operation of law.  Section 170 of the Income Tax Act, 1961 deals with cases of succession in general and can be applied to succession of companies by way of amalgamation. It provides that in a case where predecessor cannot be found (e.g. transferor company in case of amalgamation cannot be found) the assessment shall be made on the successor (transferee company) for (a) the year of succession till the date of succession and (b) for the year preceding the year of succession. Section 159 deals with assessment and tax recovery after the death of a person but there is no similar provision in the Act dealing specifically with companies if they cease to exist on account of winding up or merger.

Assessment proceedings of companies after amalgamation

Various judicial decisions [see end note 1] have held that once a company (say transferor) has amalgamated with another (say transferee) and this fact has been brought to the notice of the tax officer (Assessing Officer or ‘AO’), tax assessment cannot be framed on the transferor company. These decisions have held that an assessment on transferor despite succession / amalgamation is a nullity.

However, where the taxpayer did not inform the AO about amalgamation and assessment was framed on the transferor, the High Court [see end note 2] and Tribunal [see end note 3] refused to accept the contention of the taxpayer that the assessment on non-existent transferor is invalid. In another case the Tribunal held that the assessment framed on the transferor is only an irregularity as the taxpayer had failed to inform the fact of amalgamation to the AO. In another case, the Tribunal [see end note 4] held that as the assessment on transferor as framed is invalid AO and it is for revenue authorities to initiate appropriate proceedings [see end note 5] against the right person (viz. transferee).

Even without going into the aspect of any failure on the part of the taxpayer to intimate the fact of amalgamation the High Court in the undernoted [see end note 6] case, after declaring the assessment on the transferor company to be invalid, held as under:

“We may, however mention that on the basis of the returns filed by [transferor company] for the [tax period] 2003-04, the department may proceed for making assessment in accordance with law and in terms of the provisions of the Income tax Act, 1961.”

Tax liability arising on account of acts or omission of transferor company have been held to fall on the transferee company by undernoted [see end note 7] decision in following words:

“An order of amalgamation made by the High Court under the provisions of s. 394 of the Companies Act is not an order which is meant to relieve either of the legal entities which are parties to the scheme of amalgamation, from the liability for payment of tax. ….None of the provisions of the Companies Act providing for amalgamation, nor any other provision in the Act, confers immunity from payment of tax to either of the entities which are parties to the order of amalgamation. ..

9. It is not open to the amalgamated company which has taken over all assets and liabilities of the amalgamating company to claim that it is not in any way liable for the tax payable by the amalgamating company, even though the order under Section 104 came to be made after the order of amalgamation ..”

Analysis of legal framework and judicial decisions

1)      If assessment is held to be invalid
If the order of Tribunal or Court concludes that the assessment on the transferor is a nullity and also states that income needs to be assessed in the hands of transferee, then it will become imperative to analyse as to whether and how the assessment on transferee will be framed as the regular time limit for the same might stand expired by the time of such order (say ‘appellate order’).

Explanation 2 to Section 153 provides that where any income is excluded from the total income of one person (here transferor) and held to be the income of another person (here transferee), then, an assessment of such income on such other person (here transferee) shall, for the purposes of Section 150 and this section, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order, if such other person was given an opportunity of being heard before the said order was passed.  Section 150 provides that notwithstanding anything contained in Section 149, the notice under Section 148 may be issued at any time for the purpose of making an assessment or reassessment or re-computation in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under the Income Tax Act by way of appeal, reference or revision or by a court in any proceeding under any other law. Section 153 (2) provides that assessment under Section 147 can be made within nine months from the end of financial year of service of notice under Section 148.

Thus, it appears that the assessment on transferee company can be framed in consequence of the finding or direction in the appellate order without any restriction of time limit. This conclusion is however subject to detailed deliberation on following aspects:

a)      The extended limitation depends on a finding about another person

In the undernoted case [see end note 8] it was held that the reassessment of another person (here transferee) can be framed without time limit restriction if it is intimately connected with the assessments of the person in whose case the finding or direction has been given in appellate order. To illustrate, the assessment of partner / member is connected with the assessment of his firm/HUF. If the scope of ‘another person’ is stretched to cover unconnected persons then the relevant clause will become unconstitutional [see end note 9].  Thus, it needs to be evaluated as to whether the assessment of transferee is intimately connected with the assessment of transferor in the above mentioned sense.

b)      Meaning of expression ‘income of another person’

The availability of extended time limitation depends on finding that ‘income is of another person’ (here transferee).  The issue that requires deliberation is whether the income of the transferor company, earned during the period prior to effective date of amalgamation, can be held to be ‘of transferee company’. The effect of Section 170 is to enable collection of tax from the transferee in case of succession. It does not seem to have the effect of deeming the income earned by predecessor (transferor) as income of the successor (transferee). Therefore, any finding to treat the income of transferor as income of transferee will probably be outside the legislative framework.

Based on above, it appears difficult to apply extended time limit to the assessment on transferee for the income earned by transferor even if a Tribunal or Court gives some finding or direction in this regard.

2)      Scope of Section 170

Sub-section (2) of Section 170 provides that if the predecessor cannot be found then the income shall be assessed on the successor.  It is difficult to conceive as to how the highlighted phrase can be read as ‘income shall be assessed in the name of the successor’.  The purpose of this sub-section is to have the machinery in place for realization of taxes in case predecessor cannot be found. Sub-section (3) complements it by providing for cases where predecessor can be found and has been assessed but tax cannot be realized from him. Mentioning the name of predecessor /transferor in the assessment order does not cause any prejudice to anyone in so far as the successor transferee has been given due opportunity of being heard and the assessment is otherwise in conformity with Section 170.

Further, the expression ‘assessment’ has been judicially expounded to mean not merely the computation of income, but to refer to the computation income as well as the application of the procedure for declaration and imposition of tax liability and the machinery for enforcement thereof.  Thus, the author is of the view that the phrase ‘assessed on the successor’ means that the opportunity of being heard shall be given to successor and machinery for enforcement of tax shall be moved against successor. Viewed in this light, it becomes difficult to appreciate the undernoted [see end note 10] decisions since mention of the name of predecessor (transferor) in the assessment order seems to be of the least consequence when the identity of the taxpayer is not misconceived.

Conclusion

The judgements favoring of annulling the assessment framed in the name of transferor company may not be upheld by higher judicial forums. Further, it will be interesting to evaluate as to what extent the principle enunciated by Madras High Court [see end note 11] can be applied in diverse situations.  In cases where Tribunal or High Court treats the assessment as nullity, it would be difficult for the revenue to collect tax from transferee, in an assessment on transferee framed after annulment of assessment of transferor, even if there is some finding or direction by the Tribunal or Court in the appellate order.

[The author is a Director, Direct Tax Practice, Lakshmikumaran & Sridharan, Bangalore]