07 四月 2022

Income-tax assessment of amalgamating company when not wrong

The Supreme Court has held that the question as to whether the corporate death of an entity upon amalgamation per se invalidates an assessment order, ordinarily cannot be determined on a bare application of Section 481 of the Companies Act, 1956, but would depend on the terms of the amalgamation and the facts of each case.

The court was of the view that the amalgamation is unlike the winding up of a corporate entity and noted that an assessment can always be made and is supposed to be made on the Transferee Company taking into account the income of both the Transferor and Transferee Company.

The Apex Court in its judgement dated 5 April 2022 noted that in the case of amalgamation, the outer shell of the corporate entity is undoubtedly destroyed; it ceases to exist. Yet, in every other sense of the term, the corporate venture continues – enfolded within the new or the existing transferee entity. In other words, the business, and the adventure lives on but within a new corporate residence, i.e., the transferee company. The Court was of the view that therefore it is essential to look beyond the mere concept of the destruction of a corporate entity that brings to an end or terminates any assessment proceedings.

According to the court, there are analogies in civil law and procedure whereupon amalgamation, the cause of action or the complaint does not per se cease – depending of course, upon the structure and objective of enactment. It observed that broadly, the quest of legal systems and courts has been to locate if a successor or representative exists in relation to the particular cause or action, upon whom the assets might have devolved or upon whom the liability in the event it is adjudicated, would fall.

Noting that right from the time the assessment order was issued, and at all stages of various proceedings, the parties concerned treated it to be in respect of the transferee company by virtue of the amalgamation order and Section 394(2), the Court held that mere choice of the AO in issuing a separate order in respect of the amalgamating company cannot nullify it.

The division bench cited the case of Bhagwan Dass Chopra v. United Bank of India, wherein it was held that in every case of transfer or scheme of amalgamation, in which rights and liabilities of one company are transferred upon another company, the successor-in-interest becomes entitled to the liabilities and assets of the transferor company subject to the terms and conditions of the contract of transfer. Delhi High Court decisions in the cases of Spice and Maruti Suzuki were distinguished.

The Court, in this regard, said that the combined effect of Section 394(2) of the Companies Act, 1956, Section 2 (1A), and various other provisions of the Income Tax Act, is that despite amalgamation, the business, enterprise, and undertaking of the transferee or amalgamated company- which ceases to exist, after amalgamation, is treated as a continuing one, and any benefits, by way of carrying forward of losses (of the transferor company), depreciation, etc., are allowed to the transferee.

The Supreme Court in this case - Principal Commissioner v. Mahagun Realtors (P) Ltd. allowed the plea against the order of the Delhi High Court holding the order of the Income Tax Tribunal, which quashed the assessment order at the verge without going into the merits of the matter. Further, the Bench restored the matter before the ITAT for determination on the merits of the case.


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