HCL Infosystems Ltd. v. Commissioner of State Tax & Anr.

33. In this context, it is necessary to advert to the provisions of Section 170 which deal with succession to business otherwise than on death. Section 170 provides as follows:

19. The Supreme Court in Maruti Suzuki ultimately held:

interest of certainty in tax litigation. The view which has been taken by this Court in relation to the respondent for AY 2011- 2012 must, in our view be adopted in respect of the present appeal which relates to AY 20122013. Not doing so will only result in uncertainty and displacement of settled expectations. There is a significant value which must attach to observing the requirement of consistency and certainty. Individual affairs are conducted and business decisions are made in the expectation of consistency, uniformity and certainty. To detract from those principles is neither expedient nor desirable.”

20. As is evident from the above, Maruti Suzuki came to affirm the view which was expressed by this Court in Spice Entertainment. The Court in Spice Entertainment had identified the principal question to be whether the provisions of Section 292B could be invoked to salvage a situation where an assessment comes to be framed in the name of the transferor company. The Court was called upon to examine whether such an order of assessment would be a nullity or one which could be viewed as suffering from a procedural defect which could be validated by invoking Section 292B. Dealing with this aspect, the Court in Spice Entertainment had observed as follows:—

Section 391 read with Section 394 of the Companies Act. The Saraswati Industrial Syndicate, the trans free Company was a subsidiary of the Indian Sugar Company, namely, the transferor Company. Under the scheme of amalgamation the Indian Sugar Company stood dissolved on 29th October, 1962 and it ceased to be in existence thereafter. Though the scheme provided that the transferee Company the Saraswati Industrial Syndicate Ltd. undertook to meet any liability of the Indian Sugar Company which that Company incurred or it could incur, any liaiblity, before the dissolution or not thereafter. Generally, where only one Company is involved in change and the rights of the share holders and creditors are varied, it amounts to reconstruction or reorganisation or scheme of arrangement. In amalgamation two or more companies are fused into one by merger or by taking over by another. Reconstruction or amalgamation has no precise legal meaning. The amalgamation is a blending of two or more existing undertakings into one undertaking, the share holders of each blending Company become substantially the share holders in the Company which is to carry on the blended undertakings. There may be amalgamation either by the transfer of two or more undertakings to a new Company, or by the transfer of one or more undertakings to an existing Company. Strictly amalgamation does not cover the mere acquisition by a Company of the share capital of other Company which remains in existence and continues its undertaking but the context in which the term is used may show that it is intended to include such an acquisition. See Halsburys Laws of England 4th Edition Vol. 7 Para 1539. Two companies may join to form a new Company, but there may be absorption or blending of one by the other, both amount to amalgamation. When two companies are merged and are so joined, as to form a third Company or one is absorbed into one or blended with another, the amalgamating Company loses its entity.”

21. A few years after Spice Entertainment, a similar question arose yet again in Sky Light Hospitality. Our Court on that occasion came to the conclusion that the mistake in that particular case was a technical error which could be attended to and saved by virtue of Section 292B of the Act. However, and as the Supreme Court itself had an occasion to note in Maruti Suzuki, the Court while coming to hold that Section 292B would apply, had pertinently observed that the material on record was indicative of the Revenue having always intended the notice to be addressed to the successor entity. It becomes pertinent to note that the Court in Sky Light Hospitality had alluded to “substantial and affirmative material and evidence on record” which indicated that the issuance of the notice in the name of the dissolved entity was a mistake. In arriving at that conclusion, it had not only borne in consideration the material which existed on the record as also the tax evasion report which had duly taken note of the conversion of the Private Limited Company into an LLP. It is thus apparent that Sky Light Hospitality came to be rendered in its own peculiar facts. It was in the aforesaid factual backdrop that the Supreme Court in Maruti Suzuki ultimately came to hold that there was no apparent conflict between Spice Entertainment and Sky Light Hospitality with the latter turning upon its individual facts.

22. However, the sheet anchor of the submission of the respondents was, as noticed in the prefatory parts of this decision, the judgment in Mahagun Realtors. However, and as was noticed by a Division Bench of our Court in Commissioner of Income Tax v. Sony Mobile Communications India Pvt. Ltd., and which decision we shall advert to a little later, that decision of the Supreme Court itself turned upon the facts of that particular case.

23. In Mahagun Realtors, while expounding upon the effect of merger of two corporate entities consequent to a Scheme of Arrangement being sanctioned, the Supreme Court pertinently observed:—

law and procedure where upon amalgamation, the cause of action or the complaint does not per se cease-depending of course, upon the structure and objective of enactment. 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.”

27. After copiously taking note of the disclosures which were made in the course of assessment, it found that the following salient facts emerged in the case of Mahagun Realtors:—

(iv) A total of Rs. 30 crores cash, which was seized - was surrendered in relation to MRPL and other transferor companies, as well as MIPL, on August 27, 2008 in the course of the admission, when a statement was recorded under section 132(4) of the Act, by Mr. Amit Jain.

5. Upon being issued with a notice to file returns, a return was filed in the name of MRPL on May 28, 2010. Before that, on two dates, i.e., July 22/27, 2010, letters were written on behalf of MRPL, intimating about the amalgamation, but this was for the assessment year 2007- 2008 (for which separate proceedings had been initiated under section 153A) and not for the assessment year 2006-

2007.

6. The return specifically suppressed - and did not disclose the amalgamation (with MIPL) - as the response to query 27(b) was „N.A.‟.

7. The return - apart from specifically being furnished in the name of MRPL, also contained its permanent account number.

8. During the assessment proceedings, there was full participation-on behalf of all transferor companies, and MIPL. A special audit was directed (which is possible only after issuing notice under section 142). Objections to the special audit were filed in respect of portions relatable to MRPL.

9. After fully participating in the proceedings which were specifically in respect of the business of the erstwhile MRPL for the year ending March 31, 2006, in the cross objection before the Income-tax Appellate Tribunal, for the first time (in the appeal preferred by the Revenue), an additional ground was urged that the assessment order was a nullity because MRPL was not in existence.

10. Assessment order was issued - undoubtedly in relation to MRPL (shown as the assessee, but represented by the transferee company MIPL).

11. Appeals were filed to the Commissioner of Income-tax (and a cross-objection, to the Income-tax Appellate Tribunal) - by MRPL „represented by MIPL‟.

12. At no point in time - the earliest being at the time of search, and subsequently, on receipt of notice, was it plainly stated that MRPL was not in existence, and its business assets and liabilities, taken over by MIPL.

13. The counter-affidavit filed before this court - (dated November 7, 2020) has been affirmed by Shri. Amit Jain S/o Shri. P. K. Jain, who-is described in the affidavit as „Director of M/s. Mahagun Realtors (P.) Ltd., R/o…‟.“”

28. It was on the aforesaid set of facts that it ultimately came to hold as under:

anybody's guess, if any refund were due, as to whether MIPL would then say that it is not entitled to it, because the refund order would be issued in favour of a nonexisting company (MRPL). Having regard to all these reasons, this court is of the opinion that in the facts of this case, the conduct of the assessee, commencing from the date the search took place, and before all forums, reflects that it consistently held itself out as the assessee. The approach and order of the Assessing Officer is, in this court's opinion in consonance with the decision in Marshall and Sons (supra), which had held 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.”

42. Before concluding, this court notes and holds that whether 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 (and its equivalent in the 2013 Act), but would depend on the terms of the amalgamation and the facts of each case.

43. In view of the foregoing discussion and having regard to the facts of this case, this court is of the considered view, that the impugned order of the High Court cannot be sustained; it is set aside. Since the appeal of the Revenue against the order of the Commissioner of Income-tax was not heard on the merits, the matter is restored to the file of the Income-tax Appellate Tribunal, which shall proceed to hear the parties on the merits of the appeal - as well as the cross objections, on issues, other than the nullity of the assessment order, on merits. The appeal is allowed, in the above terms, without order on costs.”

29. As is apparent from the aforesaid extracts, what appears to have weighed upon the Supreme Court in Mahagun Realtors was a deliberate attempt on the part of the successor assessee to misrepresent and perhaps an evident failure to make a candid and full disclosure of material facts. The Court in Mahagun Realtors noticed that even though the factum of amalgamation was known to the assessee, it failed to make appropriate disclosures either at the time of search or in the statements which came to be recorded in connection therewith. Even the Return of Income which came to be filed had suppressed the factum of amalgamation. It also bore in consideration that the Return itself was submitted in the name of the amalgamating entity. It was that very entity in whose name further appeals came to be instituted. It was in the aforesaid backdrop that the Supreme Court was constrained to observe that the conduct of the assessee was evidence of it having held itself out to be the entity which had ceased to exist in the eyes of law coupled with an abject failure on its part to have made a complete disclosure.

30. These distinguishing features which imbue Mahagun Realtors were succinctly noticed in Sony Mobile Communications with the Court observing as under:—

25. Thus, for the foregoing reasons, we are unable to persuade ourselves with the contention advanced on behalf of the appellant Revenue, that this is a mistake which can be corrected, by taking recourse to the powers available with the Revenue under section 292B of the Act.”

31. We thus find ourselves unable to read Mahagun Realtors as a decision which may have either diluted or struck a discordant chord with the principles which came to be enunciated in Maruti Suzuki. We also bear in mind the indisputable position of both judgments having been rendered by co-equal Benches of the Supreme Court. Mahagun Realtors is ultimately liable to be appreciated bearing in mind the peculiar facts of that case including the conduct of the assessee therein. It was those facets which appear to have weighed upon the Supreme Court to hold against the assessee.

32. In view of the aforesaid, the position in law appears to be wellsettled that a notice or proceedings drawn against a dissolved company or one which no longer exists in law would invalidate proceedings beyond repair. Maruti Suzuki conclusively answers this aspect and leaves us in no doubt that the initiation or continuance of proceedings after a company has merged pursuant to a Scheme of Arrangement and ultimately comes to be dissolved, would not sustain.”

10. In International Hospital, we also had an occasion to deal with the canvassed and perceived distinction between the principles which had been enunciated by the Supreme Court in Principal Commissioner of Income Tax, New Delhi v. Maruti Suzuki (India) Limited[9] and the stand of the respondents there that the dictum in Maruti Suzuki stood diluted by virtue of the subsequent judgment handed down by the Supreme Court in Principal Commissioner of Income Tax (Central)-2 v. Mahagun Realtors (P) Ltd10. This perception stands duly dispelled in light of the aforesaid observations which appear in International Hospital.

11. The law would thus have to necessarily be recognised to be that which had come to be enunciated by the Supreme Court in Maruti Suzuki, namely, of all proceedings taken against a company which had come to merge with another being rendered void and a nullity. We had also and on a due consideration of the factual position which had obtained in Mahagun Realtors found that the same turned on its own peculiar facts and where the assessee had deliberately misled the authorities. It was in those peculiar facts that the Supreme Court had ultimately held against the assessee in Mahagun Realtors.

12. We also bear in mind the conclusion rendered by the Supreme Court in the case of Maruti Suzuki and which had on a construction of Section 292B of the IT Act held that a notice or order framed in respect of a non-existent entity would not be rectifiable in terms of that provision. We find that the CGST Act incorporates a provision which is pari materia to Section 292B and which is Section 160.

13. Learned counsel for the petitioner has placed for our consideration a comparative table from which it becomes apparent that Section 160 proceeds on lines identical and similar to Section 292B of the IT Act. That table is extracted hereinbelow:-

┌─────────────────────────────────────┬──────────────────────────────────────────┐
│ Income Tax Act, 1961                │ Goods and Services Tax Act, 2017         │
├─────────────────────────────────────┼──────────────────────────────────────────┤
│ 292B. – Return of income, etc.,   │ 160. – Assessment proceedings, etc.,   │
│ not to be n invalid on certain      │ ot to be invalid on certain grounds.-    │
│ grounds. ( No return of income, a   │                                          │
│ assessment, notice, r summons or    │ 1) No assessment, re-assessment,         │
│ other p proceeding, furnished or i  │ djudication, review, revision, appeal,   │
│ W.P.(C) 7391/2024                   │ ectification, notice, summons or other   │
│                                     │ roceedings done, accepted, made, ssued,  │
│                                     │ initiated, or purported to have Page 17  │
│                                     │ of 20                                    │
└─────────────────────────────────────┴──────────────────────────────────────────┘

14. We are, thus, of the firm opinion that even the powers conferred by Section 160 upon the respondents under the CGST Act would not come to their rescue or enable them to salvage the notice as well as the final order which has come to be passed.

15. That only leaves us to examine a submission addressed by Mr. Aggarwal, learned counsel appearing for the respondents, who had invited our attention to Section 87 of the CGST Act. That provision reads as follows-

other during the period commencing on the date from which the order takes effect till the date of the order, then such transactions of supply and receipt shall be included in the turnover of supply or receipt of the respective companies and they shall be liable to pay tax accordingly. (2) Notwithstanding anything contained in the said order, for the purposes of this Act, the said two or more companies shall be treated as distinct companies for the period up to the date of the said order and the registration certificates of the said companies shall be cancelled with effect from the date of the said order.”

16. As is manifest from the above, Section 87 essentially seeks to preserve and identify the transactions which may have occurred between two or more companies which ultimately amalgamate and merge. In order to fix the liabilities that would accrue under the CGST Act and to avoid a contention being raised that the Amalgamating Company and transactions undertaken with it would no longer be subject to tax, the Legislature, ex abundanti cautela, has come to place Section 87 on the statute book and which bids us to bear in mind that notwithstanding an order of amalgamation or a scheme of merger coming to be approved, for the purposes of the CGST Act, the two entities would be treated as a distinct companies for the period up to the date of the order of the competent court or tribunal approving the scheme and the registration certificate of the companies being cancelled.

17. We thus find ourselves unable to read Section 87 as enabling the respondents to either continue to place a non-existent entity on notice or for that matter to pass an order of assessment referable to Section 73 against such an entity. In fact, in terms of Section 87, the liabilities of the non-existent company would in any case stand transposed to be borne by the amalgamated entity. This is, therefore, not a case where the Revenue would stand to lose or be deprived of their right to subject transactions to tax.

18. In our considered opinion, the principles that we had identified in International Hospital albeit in the context of the IT Act would equally apply to the CGST Act.

19. Accordingly, and for all the aforesaid reasons, we allow the instant writ petition and quash the impugned SCN dated 3 December 2023 as well as the impugned order dated 27 April 2024.

20. We leave it open to the respondents to draw such proceedings as may be otherwise permissible in law.

YASHWANT VARMA, J. DHARMESH SHARMA, J. NOVEMBER 21, 2024