Delve into the court’s detailed legal analysis regarding the impact of amalgamation on tax assessment proceedings and corporate identities. The recent judgment highlights the importance of correctly identifying the successor entity in tax litigation post-amalgamation. Stay informed about the legal implications and principles governing assessment procedures in corporate mergers.
Facts
- During survey proceedings on 20.03.2007 discrepancies were noticed in MRPL’s books of account.
- Directors of MIPL and MRPL confirmed the existence of both entities during search and seizure operations.
- Surrender of specific amounts related to MRPL’s activities was made during search and seizure operations.
- Assessment order mentioned names of both amalgamating and amalgamated companies.
- Assessee continued proceedings in the name of MRPL even after amalgamation with MIPL.
- Assessment order assessed income of the assessee after various additions.
- AO conducted assessment under section 143(2) and issued notice on 13.08.2010.
- Appeal against assessment order was dismissed by the Delhi High Court.
- MRPL merged with MIPL according to High Court order dated 10.09.2007.
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Arguments
- MRPL cannot be regarded as a ‘person’ in terms of Section 2(31) of the Act.
- Amalgamating company ceased to exist in law.
- Assessment framed in the name of the amalgamating company was held invalid and untenable.
- Defect not cured by Section 292B of the Act.
- The assessment order in the name of a non-existing company was highlighted to follow the decision in Maruti Suzuki and reject the revenue’s appeal.
- Amalgamated company’s participation in assessment proceedings does not operate as estoppel.
- Assessment order was in relation to the new or transferee company, MIPL.
- Reliance placed on the decision in Saraswati Industrial Syndicate v. Commissioner of Income Tax Haryana, Himachal Pradesh.
- Issues arise if Court refuses to sanction the scheme of amalgamation.
- Amalgamated company stood dissolved without winding up after sanction of amalgamation scheme.
- Notice issued in the name of the non-existing entity, MRPL, was deemed invalid and void ab initio.
- Assessment framed in the name of the amalgamating company is invalid as per Section 170(2) of the Act.
- Notice had to be issued in the name of the amalgamated company once the amalgamation is effective.
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Analysis
- Section 394 of the Companies Act, 1956 allowed for the amalgamation of entities with an existing company or a newly created one.
- The court had the power to approve schemes of amalgamation and oversee the necessary steps and procedures.
- Under Section 394(2), property and liabilities would be transferred to the transferee company as directed by the court order.
- Section 394(4)(a) defined ‘property’ and ‘liabilities’ for the purpose of devolution of assets and liabilities.
- Section 170 of the Act states that when a person is succeeded in a business by another person, the predecessor will be assessed for income accruing in the previous year up to the date of succession, while the successor will be assessed for income after the date of succession.
- The court observed that the notice issued in the name of the amalgamating company was void and illegal as per the cases of Spice and Maruti Suzuki.
- The court highlighted that the assessment order must be made on the transferee company, taking into account the income of both the transferor and transferee companies.
- The court emphasized that under the scheme of amalgamation, the business, rights, assets, and liabilities of the transferor company continue in the transferee company.
- Detailed analysis of the surrender of additional income and unaccounted receipts found during survey and search operations was provided.
- The court pointed out the importance of disclosing amalgamation during assessment proceedings to ensure clarity and compliance with tax laws.
- Consideration was given to the legal implications of amalgamation on assessment proceedings, corporate identity, and tax liabilities.
- The court noted the need for consistency, certainty, and adherence to the terms of the amalgamation scheme in tax litigation and assessment procedures.
- Once a company is dissolved, it becomes a non-existent party, and no action can be brought in its name.
- The insurance company, as a subrogated party, was not entitled to maintain an action in the name of a dissolved company.
- After a scheme of amalgamation, where one company ceases to exist, it is incumbent upon tax authorities to substitute the successor in place of the dissolved entity.
- Court decisions have addressed issues related to amalgamation, succession, and taxation of entities post-amalgamation.
- The corporate identity of a transferor company ceases to exist after amalgamation is effective as per the scheme.
- Assessment and tax liability of a deceased person’s estate or legal representative are outlined in tax laws.
- Provisions like Section 159 of the Income Tax Act deal with tax liability of legal representatives in case of a deceased person.
- In amalgamation, the amalgamated company may be liable for tax payments and adjustments based on the scheme of amalgamation.
- The dissolution of a company does not automatically end all liabilities or rights; it depends on the structure of the law and the specifics of the case.
- The importance of correctly identifying the successor or representative concerning liabilities and rights post-amalgamation has been highlighted in various court judgments.
Decision
- Total sale proceeds of Rs. 16,95,88,000/- not declared in the P&L A/c of MDL, MIPL, and MRPL for F.Y. 06-07 as admitted by the respondent.
- Confirmation that the amount mentioned is part of net profit corresponding to advance taxes paid by MDL, MIPL, and MRPL for the same period.
- Sale figures denote month-wise sale proceeds for projects under construction in F.Y. 2006-07 at various sites which are not reflected in the books of accounts.
- Specific sale proceeds mentioned for MRPL, MDL, and MIPL are Rs. 507.2 lacs, Rs. 495.2 lacs, and (mention the third amount once available) respectively.
Case Title: PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL) 2 Vs. M/S MAHAGUN REALTORS (P) LTD (2022 INSC 389)
Case Number: C.A. No.-002716-002716 / 2022
