PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL) 2 vs. M/S MAHAGUN REALTORS (P) LTD
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REPORTABLE
IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURI ICTION
CIVIL APPEAL NO. OF 2022 (ARISING OUT OF SPECIAL LEAVE PETITION (C) NO. 4063 OF 2020)
PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL) - 2
...PETITIONER(S) VERSUS M/S. MAHAGUN REALTORS (P) LTD.
...RESPONDENT(S)
J U D G M E N T
S. RAVINDRA BHAT, J.
Special leave to appeal granted. With consent of counsels, this appeal was heard finally. This appeal arises from an order1 of the Delhi High Court rejecting the appeal, by the present appellant (hereafter “the revenue”) and affirming the order of the Income Tax Appellate Tribunal (ITAT) which quashed the assessment order against the assessee (i.e., the respondent in this case).
The respondent-assessee company, Mahagun Realtors Private Limited (hereafter variously referred to as “MRPL”, “the amalgamating company” or the “transferor company”), was engaged in development of real estate and had 1 Dated 21.08.2019 in Income Tax Appeal No. 73/2019. Digitally signed by Indu Marwah Date: 2022.04.05 17:28:16 IST Reason: Signature Not Verified
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executed one residential project under the name “Mahagun Maestro” located in Noida, Uttar Pradesh. MRPL amalgamated with Mahagun India Private Limited (herein after ‘MIPL’) by virtue of an order2 of the High Court (dated 10.09.2007). In terms of the order and provisions of the Companies Act, 1956, the amalgamation was with effect from 01.04.2006. 3. On 20.03.2007 survey proceedings were conducted in respect of MRPL during the course of which, some discrepancies in its books of account were noticed. On 27.08.2008, a search and seizure operation was carried out in the Mahagun group of companies, including MRPL and MIPL. During those operations, the statements of common directors of these companies were recorded, in the course of which admissions about not reflecting the true income of the said entities was made; these statements were duly recorded under provisions of the Income Tax Act, 1961 (hereafter “the Act”). On 02.03.2009, the revenue issued notice to MAPL to file Return of Income (ROI) for the assessment year (hereafter “AY”) 2006-2007 under Section 153A of the Act, within 16 days. On failure by the assessee to file the ROI, the Assessing Officer (hereafter “AO”) issued show cause notice on 18.05.2009 under Section 276CC of the Act. On 23.05.2009, a reply was issued to the show cause notice stating that no proceedings be initiated and that a return would be filed by 30.06.2009. A ROI on 28.05.2010, describing the assessee as MRPL was filed. On 13.08.2010, the revenue issued notice under Section 143(2) of the Act. To this, adjournment was 2 In Company Petition No. 133/2007 c/w Company Application (M) No. 41/2007. 3
sought by letter dated 27.08.2010. In the ROI, the PAN3 disclosed was “AAECM1286B” (concededly of MRPL); the information given about the assessee was that its date of incorporation was 29.09.2004 (the date of incorporation of MRPL). Under Col. 27 of the form (of ROI) to the specific query of “Business Reorganization (a)….(b) In case of amalgamated company, write the name of amalgamating company” the reply was “NOT APPLICABLE”.
The Assessing Officer (AO), issued the assessment order on 11.08.2011, assessing the income of ₹ 8,62,85,332/- after making several additions of ₹ 6,47,00,972/- under various heads. The assessment order showed the assessee as “Mahagun Relators Private Ltd, represented by Mahagun India Private Ltd”.
Being aggrieved, an appeal was preferred to the Commissioner of Income Tax (hereafter “CIT”). The appellant’s name and particulars were as follows: M/s Mahagun Realtors (Represented by Mahagun India Pvt Ltd, after amalgamation) B-66, Vivek Vihar, Delhi-110095. The appeal was partly allowed by the CIT on 30.04.2012. The CIT set aside some amounts brought to tax by the AO. The revenue appealed against this order before the ITAT; simultaneously, the assessee too filed a cross objection4 to the ITAT. The revenue’s appeal was dismissed; the assessee’s cross objection was allowed only on a single point, i.e., that MRPL was not in existence when the 3 Permanent Account Number 4 CO No. 300/Del/2012
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assessment order was made, as it had amalgamated with MIPL. The ITAT held inter alia, that: “The above assessee company did not exist on the date of the assessment order, we find that the assessment order passed by the ld AO is not sustainable in law in view of the· decision of the Hon'ble Delhi High Court in case of Spice Infotainment Ltd v CIT 247 ITR 500 as well as the decision of the Hon'ble Delhi High· Court in the case of CIT v Dimension Apparel Pvt. Ltd 370 ITR 288. On the last decision Hon'ble Delhi High Court has considered the whole issue from all the angles and therefore, respectfully following the decision of Hon'ble ·Delhi High Court, we are of the view that the order of the Id AO is unsustainable.”
The revenue appealed to the High Court. The High Court, relying upon a judgment of this court, in Principal Commissioner of Income Tax v. Maruti Suzuki India Limited5 (hereafter ‘Maruti Suzuki’), dismissed the appeal. The revenue has, therefore, appealed against that judgment. Submissions
The revenue, represented by the Additional Solicitor General, Mr. N. Venkataraman, urged that the name of both the amalgamating and amalgamated companies were mentioned in the assessment order. According to him such mistakes, defects or omissions are curable under Section 292B when the assessment is in substance and effect, in conformity with or according to the intent and purpose of the Act.
It was contended that the amalgamating or transferor company was duly represented by the amalgamated company and no prejudice was caused to any of the parties by the assessment order. It is further urged by the revenue that in 5 2019 SCCOnline SC 928
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Maruti Suzuki, this court rejected the revenue’s appeal on the ground that the final assessment order referred only to the name of the amalgamating company and there was no mention of the resulting company, whereas in this case, in both the draft and the final assessment orders, the names of both the amalgamating and amalgamated company were mentioned.
It was also urged that the facts of the Maruti Suzuki are distinguishable from the present case, as in that case the revenue was duly informed about the merger and change in name of the company, and yet the assessing officer passed the order in name of the transferor or amalgamating company. However, in the present case, the AO or even the revenue was not informed about the amalgamation. Even when the search and seizure operations were carried out, the directors of MIPL (and MRPL, which had ceased to exist) clearly held out that both entities existed; what is more, surrender of specific amounts relatable to MRPL’s activities, for a past period, were made. A notice was issued under Section 153A on 02.03.2009 asking the assessee to file ROI. As ROI was not filed, the revenue issued show cause notice as per Section 276CC. In response of the same, the representative of the assessee filed a letter dated 23.05.2009 clearly mentioning the name of the transferor/ amalgamating company, i.e., MRPL and stated that no proceedings be initiated, and that the return would be filed by 30.06.2009. On 28.05.2010, the assessee filed ROI for AY 2006-07 in the name of MRPL. The AO assumed scrutiny juri iction under section 143(2) of the Act and issued notice on 13.08.2010. This notice was duly accepted by the authorized
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representative on 16.09.2010. Further, on 27.08.2010 adjournment was sought on behalf of the assessee, and the letter mentioned the name of MRPL. In addition to this, the submissions dated 28.06.2011 filed by the assessee in response to the notice of the AO clearly mentioned the share holding pattern in the assessee company (MRPL) which indicated that even as of 28.06.2011, the assessee continued the proceedings in the name of MRPL.
It was urged that in the survey proceedings carried out on 20.03.2007, the director of the companies, made statements under oath. At this time, the application for merger was already filed in the High Court. The assessee MRPL surrendered amounts for which it was unable to account. Other entities which merged with MIPL too likewise surrendered amounts. Throughout the proceedings, the assessee never revised its offer of surrender of additional income nor brought it to the notice of the AO. Further, on 20.03.2007, the assessee issued postdated cheques in the name of MRPL. After merger, they were neither taken back nor fresh cheques were submitted from the amalgamated company MIPL.
It was submitted that in these circumstances, when assessment proceedings were effectively resisted, during which the AO was appraised of the amalgamation, which was duly given effect to in the assessee’s description, the question of the assessment and further proceedings being a nullity cannot arise. It was pointed out that in the appeal to CIT, as well as the cross objections to ITAT, the assessee’s description was as Mahagun Relators Private Ltd, represented by Mahagun India Private Ltd., In these circumstances, the
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assessment order, in reality and substance, was in relation to the new or transferee company, i.e., MIPL.
On behalf of the respondent, it was contended by Ms. Kavita Jha, learned counsel, that upon sanction of amalgamation scheme, the amalgamated company stood dissolved without winding up, in terms of section 394 of the Companies Act, 1956. Reliance was placed on the decision of this court in Saraswati Industrial Syndicate v. Commissioner of Income Tax Haryana, Himachal Pradesh.6 It was argued that the amalgamating company (MRPL) cannot be regarded as a ‘person’ in terms of Section 2(31) of the Act.
Learned counsel urged that the notice under Section 153A by the AO (despite the intimation by Respondent about the amalgamation on 30.05.2008 and the statement of the director at the time of search) issued in the name of MRPL, a non-existing entity, was invalid and initiation of proceedings against non- existent entity was void-ab-initio.
Counsel urged that the assessment framed in the name of amalgamating company is invalid in terms of Section 170(2) of the Act. Once the amalgamation is effective, the notice had to be issued in the name of amalgamated company. The Delhi High Court in Spice Infotainment Limited v. Commissioner of Income Tax,7 (hereafter ‘Spice’) held that assessment framed in the name of the amalgamating company which was ceased to exist in law, was invalid and 6 (1990) Supp (1) SCR 332 7 [2012] 247 CTR 500 (Del). This judgement has also been referred to as Spice Entertainment v. Commissioner of Income Tax in 2012 (280) ELT 43 (Del.).
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untenable and such defect would not be cured in terms of section 292B of the Act. Further, the fact that amalgamated company participated in the assessment proceedings would not operate as estoppel.
It was contended that the respondent’s case is covered by Maruti Suzuki The facts of both cases are similar. In Maruti Suzuki, the fact of amalgamation was known to the AO and in the assessment order he tried to cure the defect by amending the cause title by including the name of both the existing and non- existing entity; the assessment order being in the name of a non-existing company, was highlighted to urge that as a result, this court should follow the ratio in that decision, and reject the revenue’s appeal.
Analysis and Conclusions
The relevant provision of the Act is Section 1708. It inter alia, provides that where a person carries on any business or profession and is succeeded (to such business) by some other person (i.e., the successor), the predecessor shall be 8 The relevant part of Section 170 reads as follows: “170. Succession to business otherwise than on death (1) Where a person carrying on any business or profession (such person hereinafter in this section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as the successor) who continues to carry on that business or profession,- (a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession; (b) the successor shall be assessed in respect of the income of the previous year after the date of succession. (2) Notwithstanding anything contained in sub- section (1), when the predecessor cannot be found, the assessment of the income of the previous year in which the succession took place up to the date of succession and of the previous year preceding that year shall be made on the successor in like manner and to the same extent as it would have been made on the predecessor, and all the provisions of this Act shall, so far as may be, apply accordingly. (3) When any sum payable under this section in respect of the income of such business or profession for the previous year in which the succession took place up to the date of succession or for the previous year preceding that year, assessed on the predecessor, cannot be recovered from him, the 1 Assessing] Officer shall record a finding to that effect and the sum payable by the predecessor shall thereafter be payable by and recoverable from the successor, and the successor shall be entitled to recover from the predecessor any sum so paid.”
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assessed to the extent of income accruing in the previous year in which the succession took place, and the successor shall be assessed in respect of income of the previous year in respect of the income of the previous year after the date of succession.
The amalgamation of two or more entities with an existing company or with a company created anew was provided for, statutorily, under the old Companies Act, 19569, under Section 394 (1) (a). Section 394 empowered the court to approve schemes proposing amalgamation, and oversee the various steps and procedures that had to be undertaken for that purpose, including the apportionment of and devolution of assets and liabilities, etc. Section 394 (2) provided as follows: “(2) Where an order under this section provides for the transfer of any property or liabilities, then, by virtue of the order, that property shall be transferred to and vest in, and those liabilities shall be transferred to and become the liabilities of, the transferee company; and in the case of any property, if the order so directs, freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect.”
Section 394 (4) (a) defined “property” for the purpose of devolution of assets and liabilities: “394….(4) In this section- (a) " property" includes property, rights and powers of every description and" liabilities" includes duties of every description; and..”
9 Under the present Companies Act, 2013, the corresponding provisions are Sections 230-234. 10
Amalgamation, thus, is unlike the winding up of a corporate entity. 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. It is, therefore, essential to look beyond the mere concept of destruction of corporate entity which brings to an end or terminates any assessment proceedings. There are analogies in civil 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.
This court, in Commissioner of Income Tax, v. Hukamchand Mohanlal10 noticed that Section 159 of the Act related to a legal representative’s tax liability. It casts liability upon a legal representative in the event of death of her or his predecessor, to pay tax, in effect saying that where a person dies his legal representative shall be liable to pay any sum which the deceased would have been liable to pay if he had not died. The corresponding provision in the old Income Tax Act (of 1922) was Section 24B. The court in Commissioner of Income Tax v.
10 1972 (1) SCR 786
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Amarchand Shroff11 held that the provision did not authorise levy of tax on receipts by the legal representative of a deceased person in the year of assessment succeeding the year of account, being the previous year in which such person died. The assessee ordinarily had to be a living person and could not be a dead person. By Section 24B the legal personality of the deceased assessee was extended for the duration of the entire previous year in the course of which he died. The income received by him before his death and that received by his legal representative after his death (but in that previous year) became assessable to income tax in the relevant assessment year. Any income received in the year subsequent to the previous year or the accounting year could not be called income received by the deceased person. This reasoning was adopted later, in the judgment reported as Commissioner of Income Tax v. James Anderson12 where, in the context of dividend income accruing to the estate of a deceased, this court held that as Parliament did not make “any provision generally for assessment of income receivable by the estate of the deceased person, the expression "any tax which would have been payable by him under this Act if he had not died" cannot be deemed to have supplied the machinery for taxation of income received by a legal representative to the estate after the expiry of the year in the course of which such person died.”
In Saraswati Syndicate (supra), the facts were that after amalgamation, the transferee company claimed exemption from tax, of a sum which had been allowed as a trading liability- on accrual basis, in the hands of the transferee
11 1963 Supp (1) SCR 699 12 1964 (6) SCR 590
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company which had ceased to exist. The revenue disallowed that claim; that view was upheld. This court stated that: “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: Halsbury's Laws of England, 4th Edition Vol. 7 Para 1539. Two companies may join to form a new company, but there may be absorption or blend- ing 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. In M/s General Radio and Appliances Co Ltd v M.A.. Khader (dead) by Lrs., [1986] 2 S.C.C. 656, the effect of amalgamation of two companies was considered. M/s. General Radio and Appliances Co. Ltd. was tenant of a premises under an agreement providing that the tenant shall not sub-let the premises or any portion thereof to anyone without the consent of the landlord. M/s. General Radio and Appliances Co. Ltd. was amalgamated with M/s. National Ekco Radio and Engineering Co. Ltd. under a scheme of amalgamation and order of the High Court under Sections 391 and 394 of Companies Act, 1956. Under the amalgamation scheme, the transferee company, namely, M/s. National Ekco Radio and Engineering Company had acquired all the interest, rights including leasehold and tenancy rights of the transferor company and the same vested in the transferee company. Pursuant to the amalgamation scheme the transferee company continued to occupy the premises which had been let out to the transferor company. The landlord initiated proceedings for the eviction on the ground of unauthorised sub-letting of the premises by the transferor company. The transferee company set up a defence that by amalgamation of the two companies under the order of the Bombay High Court all interest, rights including lease- hold and tenancy rights held by the transferor company blended with the transferee company, therefore the transferee company was legal tenant and
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there was no question of any sub-letting. The Rent Controller and the High Court both decreed the landlord's suit. This Court in appeal held that under the order of amalgamation made on the basis of the High Court's order, the transferor company ceased to be in existence in the eye of law and it effaced itself for all practical purposes. This decision lays down that after the amalgamation of the two companies the transferor company ceased to have any entity and the amalgamated company ac- quired a new status and it was not possible to treat the two companies as partners or jointly liable in respect of their liabilities and assets. In the instant case the Tribunal rightly held that the appellant company was a separate entity and a different assessee, therefore, the allowance made to Indian Sugar Company, which was a different assessee, could not be held to be the income of the amalgamated company for purposes of Section 41 (1) of the Act. The High Court was in error in holding that even after amalgamation of two companies, the transferor company did not become non-existent instead it continued its entity in a blended form with the appellant company. The High Court's view that on amalgamation 'there is no complete destruction of corpo- rate personality of the transferor company instead there is a blending of the corporate personality of one with another corporate body and it continues as such with the other is not sustainable in law. The true effect and character of the amalgamation largely depends on the terms of the scheme of merger. But there cannot be any doubt that when two companies amalgamate and merge into one the transferor company loses its entity as it ceases to have its business. However, their respective rights of liabilities are determined under scheme of amalgamation but the corporate entity of the transferor company ceases to exist with effect from the date the amalgamation is made effective.”
Saraswati Syndicate (supra) noticeably was decided in relation to assessment issues when amalgamation was not separately defined under the Income Tax Act. By an amendment of 1967, this term was for the first time defined in the form of Section 2(1A). That provision reads as follows: “(1A) “amalgamation”, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that—
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(i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation; (ii) all the liabilities of the amalgamating company of companies immediately before the amalgamation, become the liabilities of the amalgamated company by virtue of the amalgamation; (iii) shareholders holding not less than nine-tenths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first mentioned company;”
The effect of amalgamation in the context of income tax, was again considered in another earlier decision, i.e., Marshall Sons and Co. (India) Ltd. v. Income Tax Officer13. There, the court held that:
“14. Every scheme of amalgamation has to necessarily provide a date with effect from which the amalgamation/transfer shall take place. The scheme concerned herein does so provide viz., January 1, 1982. It is true that while sanctioning the scheme, it is open to the Court to modify the said date and prescribe such date of amalgamation/transfer as it thinks appropriate in the facts and circumstances of the case. If the Court so specifies a date, there is little doubt that such date would be date of amalgamation/date of transfer. But where the Court does not prescribed any specific date but merely sanctions the scheme presented to it - as has happened in this case - it should follow that the rate of amalgamation/date of transfer is the date specified in the scheme as "the transfer date". It cannot be otherwise. It must be remembered that before applying to the Court under Section 391(1), a scheme has to be framed and such scheme has to contain a date of amalgamation/transfer. The proceedings before the court may take some time; indeed, they are bound to take some time because several steps provided by Sections 391 to 394 and the relevant Rules have to be followed and complied with. During the period the proceedings are pending before the Court, both the amalgamation units, i.e., the Transferor Company and the Transferee Company may carry on business, as has happened in this 13 1996 Supp (9) SCR 216
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case but normally provision is made for this aspect also in the scheme of amalgamation. In the present scheme, Clause 6(b) does expressly provide that with effect from the transfer date, the Transferor Company (Subsidiary Company) shall be deemed to have carried on the business for and on behalf of the Transferee Company (Holding Company) with all attendant consequences. It is equally relevant to notice that the Courts have not only sanctioned the scheme in this case but have also not specified any other date as the date of transfer/amalgamation. In such a situation, it would not be reasonable to say that the scheme of amalgamation takes effect on and from the date of the order sanctioning the scheme. We are, therefore, of the opinion that the notices issued by the Income Tax Officer (impugned in the writ petition) were not warranted in law. The business carried on by the Transferor Company (Subsidiary Company) should be deemed to have been carried on for and on behalf of the Transferee Company. This is the necessary and the logical consequence of the court sanctioning the scheme of amalgamation as presented to it. The order of the Court sanctioning the scheme, the filing of the certified copies of the orders of the court before the
