The amalgamation of multiple entities into one undertaking is expected to yield business synergies and, at times, identity wars. In PCIT (Central) v. Mahagun Realtors (P) Ltd. [2022 SCC OnLine SC 407], the Supreme Court elaborated on what seemed to be a settled point of law - would an Income Tax notice issued to a transferor company post its amalgamation be valid? While the popular train of thought deemed the transferor entities as non est, having suffered corporate death upon amalgamation, the Supreme Court clarified that an amalgamation would not per se invalidate an assessment order issued in the name of the transferor company. In this article, the authors examine the rationale and thrust of the decision.
Facts of the case
Mahagun Realtors Private Limited (‘MRPL’) was the transferor company which amalgamated with Mahagun India Private Limited (‘MIPL’) by virtue of a High Court’s order dated 10 September 2007, w.e.f. 1 April 2006 whereby MRPL’s liabilities devolved on MIPL. In March 2007, survey proceedings under the Income Tax Act, 1961 (‘Act’) were conducted in respect of MRPL during which discrepancies in its books of account were noticed. In August 2008, search and seizure operations were carried out in the Mahagun group of companies, including at MRPL and MIPL. During those operations, the common directors of MIPL and MRPL had recorded admissions about not reflecting the true income of said entities. In March 2009, the Revenue issued a notice to MRPL to file their Return of Income (ROI) for the AY 2006-2007. On failure by the assessee to file the ROI, the Assessing Officer issued a show cause notice. Later, MIPL filed an ROI describing the assessee as MRPL and furnished the PAN of MRPL. Where Column 27 of the ROI form posed the specific query of ‘Business Reorganization: In case of amalgamated company, write the name of amalgamating company’, the reply given was ‘Not Applicable’.
The AO issued an assessment order to MRPL (“Assessment Order”) which was responded by ‘MRPL, represented by MIPL’. MRPL filed an appeal to the Commissioner of Income Tax (‘CIT’) which was partly allowed. The revenue appealed against this order before the ITAT along with the assessees’ cross objections. At this stage, for the first time, the assessees mooted the point that MRPL had been amalgamated with MIPL. The ITAT dismissed the revenue’s appeal by allowing the assessees’ cross objection on the sole point that MRPL was not in existence when the assessment order was made, as it had amalgamated with MIPL. The revenue-appeal before the Delhi High Court was also dismissed by relying upon a judgment of the Supreme Court in PCIT v. Maruti Suzuki India Limited [2019 SCC Online SC 928].
Findings: Notice issued in name of amalgamated entity not always fatal to proceedings
The principal issue for consideration before the Supreme Court was whether the Assessment Order passed on MRPL (amalgamating company), which was not in existence on the even date due to its amalgamation with MIPL, is sustainable in law. The Supreme Court held that the corporate death of an entity cannot per se invalidate an assessment order issued to the transferor company but will depend upon the terms of the amalgamation and the facts of each case.
The Apex Court considered a plethora of judgments dealing with the impact of amalgamation on the rights and liabilities of the transferor and transferee companies to assimilate the position. In Saraswati Industrial Syndicate v. CIT Haryana, Himachal Pradesh - (1990) Supp (1) SCR 332, it was held that the transferor entity loses its corporate existence upon amalgamation and ceases to exist. It is significant to note that this decision was delivered before ‘amalgamation’ was defined under Section 2(1A) of the Act. In Marshall Sons and Co. (India) Ltd. v. ITO - 1996 Supp (9) SCR 216, it had been held that once the amalgamation becomes effective, the business carried on by the transferor company should be deemed to have been carried on by the transferee company. Basis this understanding, the Supreme Court had held in CIT v. Spice Infotainment ltd - (2020) 18 SCC 353 that assessment of the transferor (or amalgamated company) was impermissible upon the cessation of the transferor company. The underlying logic was that an assessment framed in the name of a non-existing company is no mere procedural irregularity which can be cured under Section 292B of the Act.
At the very outset, in the latest case, the Apex Court found a need to distinguish the above ratio basis the conduct of MRPL and the factual context in which it had been assessed. For starters, the fact of amalgamation was never intimated to the Assessing Officer, either by MRPL or by MIPL at any stage of proceedings. On the other hand, MIPL had continued to transact for and on behalf of MRPL all throughout the proceedings, while such fact of amalgamation was admitted to the department in Spice Infotainment (supra) and in Maruti Suzuki (supra). The assessee’s conduct was also found to be circumspect as information on the amalgamation had been actively suppressed by MIPL insofar as proceedings were continued in the name of ‘MRPL, represented by MIPL’, ROI was filed by MRPL even after the amalgamation by withholding the information required in the Column specifically provided for business reorganization [Col. 27(b)], etc.
Then, the Court reasoned how even a straightforward reading of the Act supported the view that the enterprise and the business of the amalgamated company continues post amalgamation and the transferee (MIPL) is deemed to carry on the business of the transferor (MRPL). In such circumstances, the Supreme Court concluded that MRPL’s business was continued by MIPL and when the amalgamation was never notified to the tax department, a plea that assessment order had been issued to an amalgamated entity would be unfair and even duplicitous. To bolster this textual understanding, the Supreme Court drew sustenance from General Radio and Appliances Co. Ltd. v. M.A. Khader (dead) by Lrs., (1986) 2 SCC 656, where it was observed that while the outer shell of the transferor ceases to exist as such in the case of an amalgamation, its business continues, albeit under a new corporate entity (i.e., transferee) quite unlike a winding up which brings the entire business to an end.
The Hon’ble Court also observed that issuance of order by the department in the name of amalgamating entity cannot nullify it as the authority has the option of making a common order in the name of amalgamated entity which may contain different parts relating to the amalgamating entity.
Conclusion
The prevailing principle was that an assessment order issued to an amalgamated entity would be straightaway struck down. The Supreme Court analyzed mergers as dealt with in the Income Tax Act, 1961 to conclude that, the corporate death of an entity on amalgamation per se cannot invalidate an assessment order. Whether the assessment notice will survive when issued to an amalgamated entity is subject to the terms of the amalgamation and the facts of each case.
[The authors are Executive Partner, Joint Partner and Associate, respectively, in the Commercial Litigation practice at Lakshmikumaran & Sridharan Attorneys, Chennai]
