Case Law Details

Case Name : M/S Rustagi Engineering Udyog Pvt. Ltd. Vs Dy. Commissioner Of Income Tax (Delhi High Court)
Appeal Number : W.P. (C) 1289/1999 & others
Date of Judgement/Order : 24/02/2016
Related Assessment Year : 1989-90 to 1993-94
Courts : All High Courts (1347) Delhi High Court (463)

Brief of the Case

Delhi High Court held  that It is well settled that the in a case of amalgamation, the amalgamating company would stand dissolved from the date on which the amalgamation/transfer takes effect. In a recent decision dated 3rd August, 2015 in ITA No. 475/2011 SPICE Infotainment Ltd. v. Commissioner of Income Tax, this Court set aside the order passed by the Tribunal in framing an assessment in the name of an amalgamating company after the entity stood dissolved; this court held that the order of the Tribunal was unsustainable and framing an assessment on a dissolved company was not a procedural irregularity but a jurisdictional defect. Hence notices issued under Section 148 were invalid as having been issued to an Assessee that had ceased to exist.

Facts of the Case

The Assessee M/s Rustagi Engineering Udyog Pvt. Ltd. was engaged in the business of manufacturing of sheet metal components. Further, the Assessee was also engaged in the business of transportation under the name and style of M/s Sarvodaya Carriers. In addition, the Assessee also carried on the business of leasing assets during the relevant years. The principal controversy involved in the present petition is whether notices under Section 148 could be issued to the Assessee after the said company stood dissolved in terms of a scheme of amalgamation with the Petitioner approved under Section 391 and 394 of the Companies Act, 1956. The Petitioner has further challenged the re-opening of assessments on the ground that the AO had no reason to believe that any part of the income of the Assessee has escaped assessment. It is also contended that the issuance of the impugned notices have not been approved by the competent authority.

Contention of the Petitioner

The Petitioner submitted that the impugned notices were invalid as the same had been issued in the name of a non-existing entity (the Assessee). He pointed out that the AO had also been duly informed that the Assessee stood dissolved with effect from 1st April, 1995 as it had merged with the Petitioner Company.

He further contended that the AO had no tangible material to form a belief that the income of the Assessee for the relevant assessment years had escaped assessment. He submitted that the AO had sought to reopen the assessment on the basis of the assessment order dated 27th March, 1997 passed under Section 143(3) of the Act in respect of AY 1994-95. In that year, the AO had disallowed the Assessee‟s claim for depreciation to the extent of Rs. 60,62,500/- which was claimed in respect of MS Moulds that were leased by the Assessee. The AO held that the said transaction was a sham transaction and concluded that in fact, MS Moulds were purchased by the Assessee. Mr Krishnan contended that the said return could not give rise to any reason to believe that the depreciation claimed by the Assessee in respect of other assets was also impermissible. He further informed this court that an appeal had been preferred by the Petitioner against the said assessment order dated 27th March 1997 and the Commissioner Income Tax (Appeals) had set it aside by an order dated 16th December 1997.

Held by the Revenue

The ld counsel of the revenue submitted that a survey team had found that the transaction relating to purchase of „MS moulds‟ costing Rs.60,62,500/- in the financial year 1993-94 (relevant to AY1994-95) was a sham transaction and this would also give reason for the AO to believe that other transactions relating to purchase of other assets were also sham transactions. He submitted that the survey conducted in respect of the transaction for the purchase of MS moulds had disclosed the modus operandi of the Assessee and thus, all other transactions, where the Assessee had claimed 100% depreciation, were suspect. He argued that at the stage of issuance of notice, the AO was not required to finally determine whether the income of an Assessee had escaped assessment but was only required to form a prima facie opinion.

Held by High Court

 High Court held that It is well settled that the in a case of amalgamation, the amalgamating company would stand dissolved from the date on which the amalgamation/transfer takes effect.  In Marshall Sons & Co. (India) Ltd. v. Income-tax Officer [1997] 223 ITR 809 (SC), the Supreme Court held that every scheme of amalgamation has to necessarily provide a date with effect from which the amalgamation/transfer shall take place. In this case, the Supreme Court was considering a challenge to the notices issued by the Income Tax Officer to the amalgamating company for the period after the appointed date of amalgamation. After examining the provisions of the Companies Act, 1956, the Supreme Court held that the notices issued by the Income Tax Officer were not warranted in law.

In a recent decision dated 3rd August, 2015 in ITA No. 475/2011 (SPICE Infotainment Ltd. v. Commissioner of Income Tax), this Court set aside the order passed by the Tribunal upholding the action of the assessing officer in framing an assessment in the name of an amalgamating company after the entity stood dissolved; this court held that the order of the Tribunal was unsustainable and framing an assessment on a dissolved company was not a procedural irregularity but a jurisdictional defect. Similarly, by an order dated 19th August, 2015, ITA 582 of 2015 (PCIT v. Images Credit and Portfolio Pvt. Ltd.), this Court held that the proceedings under Section 153C could not be initiated against an entity that had ceased to exist.

In view of the aforesaid, the contention that the impugned notices issued under Section 148 were invalid as having been issued to an Assessee that had ceased to exist, must be accepted.  The impugned notices are, therefore, liable to be set aside on this ground alone.

Further we must also add that in our view, the impugned notices must also be set aside as the AO had no reason to believe that the income of the Assessee for the relevant assessment years had escaped assessment. Concededly, the AO had no tangible material in regard to any of the transactions pertaining to the relevant assessment years. Although the AO may have entertained a suspicion that the Assessee’s income has escaped assessment, such suspicion could not form the basis of initiating proceedings under Section 147 of the Act. A reason to believe – not reason to suspect – is the precondition for exercise of jurisdiction under Section 147 of the Act. In Income Tax Officer, Calcutta & Ors. vs. Lakhmani Mewal Das: [1976] 103 ITR 437 (SC) the Supreme Court held that there must be a “live link” or a “close nexus” between the material available with the AO and his reason to believe that income of an assessee had escaped assessment.

Accordingly, appeal disposed of.

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