Amalgamating corporation’s income tax assessment when not erroneous
The Supreme Court has ruled that the question of whether the corporate death of an entity during a merger per se invalidates an assessment order, generally cannot be determined on the simple application of section 481 of the Act. on the 1956 corporations, but would depend on the terms of the merger and the facts of each case.
The court held that amalgamation is different from the liquidation of a legal person and noted that an assessment can always be made and is meant to be made on the transferee company taking into account the income of the transferor and the transferee company.
The Supreme Court in its judgment of April 5, 2022 noted that in the event of a merger, the outer envelope of the legal person is undoubtedly destroyed; it ceases to exist. Yet, in every other sense of the word, the business continues – encompassed in the new or existing transferee entity. In other words, the company and the adventure continue but within a new social residence, that is to say the buyer company. The Court is of the opinion that it is therefore essential to go beyond the simple notion of the destruction of a legal person which terminates or puts an end to any assessment procedure.
According to the court, there are analogies in civil law and procedure whereupon the merger, cause of action or complaint does not per se cease – depending of course on the structure and purpose of promulgation. He observed that, generally speaking, the quest of legal systems and courts has been to determine whether there is a successor or representative in relation to the particular cause or action, to whom the assets could have been devolved or to whom the responsibility in the event that it would be judged, would fall.
Noting that from the issuance of the valuation order, and at all stages of the various proceedings, the parties concerned considered it as vis-à-vis the transferee company under the terms of the merger order and Section 394(2), the Court held that the mere election of the AO to issue a separate order against the merging company cannot nullify it.
The division bench cited the case of Bhagwan Dass Chopra against United Bank of India, in which it was held that in all cases of transfer or merger, in which the rights and obligations of a company are transferred to another company, the beneficiary becomes the holder of the obligations and assets of the transferor company subject terms and conditions of the assignment contract. Decisions of the Delhi High Court in the cases of Spice up 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 Corporation Tax Act the income, is that notwithstanding the amalgamation, the business, the business, and the business of the transferee or the company resulting from the amalgamation – which ceases to exist, after the amalgamation, is treated as a continuing business, and any benefit, in the form of carry forward of losses (of the transferring company), depreciation, etc., is authorized to the transferee.
The Supreme Court in this case – Chief 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 borderline assessment order without going into the merits of the case. Additionally, the bench reinstated the case to ITAT for a decision on the merits of the case.