Whether a notice/order issued under Income Tax Act in name of a non-existing entity a curable defect?
Brief:
The Hon’ble Supreme Court in PCIT v Maruti Suzuki India Limited has held that a notice/order issued in the name of a non-existing entity is a jurisdictional error, since a non-existing entity cannot be considered as a ‘person’ under the Income Tax Act, 1961, to whom a notice can be issued. Since this defect is jurisdictional goes into the very root of the matter, it cannot be considered as a curable defect.
Introduction:
Putting all controversies to rest, the Hon’ble Supreme Court in PCIT v Maruti Suzuki India Limited[1] (Maruti Suzuki) has finally answered a longstanding question on the curability of a defect in the notice/order issued in the name of a Non-Existing Entity. Answering in tune with prior High Court Judgements, the Hon’ble Supreme Court found that such orders/notice shall be deemed to be void since the defect in such cases goes into the very root of the jurisdiction itself.
It is pertinent to be aware of a provision of The Income Tax Act, 1961 (hereinafter ‘The Act’) which states that a mere mistake, defect or omission in issuing such a notice/order will not make the notice/order invalid if it is in substance and effect in conformity with the intent and purpose of The Act (Section 292B). Therefore, in simpler terms, unintentional mistakes such as clerical, typographical errors, et cetera which do not affect the substantive part of the notice/order can be considered as a curable procedural defect and can be remedied by issuance of a corrigendum.
Section 147 read with Section 148 of The Act provides for reassessment proceedings to be initiated by the assessing officer provided that he has reason to believe that any income chargeable to tax has escaped assessment for any assessment year and if such proceeding is not barred by limitation. It might be a scenario that before or during such reassessment proceedings, the natural person may not be alive or the legal entity may become non-existent. In such a scenario, Section 159 enables the Legal Representatives of the deceased to continue or take part in the proceedings in the deceased’s stead, and Section 170 of The Act, makes the successors of the legal entity liable to take part in such proceedings on behalf of the predecessor entity. Even though the above proposition in actuality might be highly unlikely in an assessment notice issued under Section 143, however, it still remains equally applicable in that scenario as well.
With this backdrop, the analysis of the ratio laid down in the Maruti Suzuki becomes much simpler. The question, which the Apex Court, answered was: whether a defect which stemmed from the issuance of notice/order addressed to a non-existing entity be considered as a curable defect under Section 292B or be considered as a substantive error which would make such order/notice invalid in terms of the provisions of The Act.
Even though the judgement discusses this proposition in the context of amalgamating firms, however, its ratio shall be equally applicable to cases that involve death of a natural person or change in the character of the legal entity.
The Hon’ble Supreme Court observed and agreed to the ratio laid down in Saraswati Industrial Syndicate Ltd. v CIT[2], wherein the apex court observed that once the amalgamation is sanctioned, the amalgamating company is dissolved without winding up, in terms of Section 394 of the Companies Act, 1956. The amalgamating company ceases to exist in the eyes of law, thus becoming non-existent. Since it does not exist in the eyes of law, it cannot be regarded as a ‘person’ (under Section 2(31) of The Act ) against whom assessment proceedings can be initiated or an order passed. Therefore, the assessing officer does not have jurisdiction to issue such notice or pass any order against a non-existent entity. The rationale can also be applied to a dead individual. Since a deceased would not be considered as a ‘person’ under The Act, thus any such notice/order issued in that name will be invalid or void.
The court was influenced by a series of judgements to reach the said conclusion, the primary one being that of Spice Entertainment Ltd. v Commissioner of Service Tax[3] (Spice Entertainment). Hon’ble Delhi Court had similar views on this issue, the division bench of Hon’ble Justice A.K. Sikri and Hon’ble Mr. Justice M.L. Mehta, held that framing an assessment order or issuing a notice against a non-existing entity or a deceased individual is not a curable defect since it goes to the root of the matter. It is not merely a procedural irregularity but a jurisdictional defect, as there cannot be any assessment against a dead person.
The aforementioned judgement was appealed against in the Supreme Court, however, the Apex Court dismissed the appeal. Since the order was a speaking one (with reasons) the doctrine of merger should be applicable in view of the judgement of Kunhayammed v State of Kerala[4], and thus the judgement of the Hon’ble Delhi High Court would have to be deemed to have been affirmed by the Supreme Court and becomes the law of the land under Article 141 of the Constitution of India.
The Spice Entertainment judgement was a major consideration before the Hon’ble Supreme Court while deciding the matter in the Maruti Suzuki case. A number of cases, where the primary contention was related to assessment notice/order passed against a non-existing entity, were decided on the basis of the judgement given by the Hon’ble Delhi High Court. Relief in cases such as CIT v Dimension Apparels Pvt.[5], CIT v Micron Steels P. Ltd[6] and CIT v Micra India[7] was given in tune with principles enunciated in the Spice Entertainment judgement and it became the cardinal precedent for setting aside the assessment in all such cases.
The aforementioned judgement would have ended the entire controversy, had the Hon’ble Delhi High Court not deviated from this principle in Skylight Hospitality LLP v Assistant Commissioner of Income Tax, New Delhi[8], (Skylight Hospitality). The Hon’ble Delhi High Court further caused confusion and uncertainty when they decided that an assessment notice issued to a non-existing entity is not invalid but a curable defect under Section 292B of The Act.
This seemingly blatant departure from the principles laid down before was also brought up before the Hon’ble Supreme Court, and it was astutely pointed out that the judgement in the Skylight Hospitality suit was given on peculiar facts of the case. The notice was not intended to be issued to a non-existing authority, there was a mere error in addressing it to old private limited company instead of the now converted Limited Liability Partnership (LLP), which was apparent from the PAN number of the LLP attached to the notice and the tax evasion report which clearly mentioned the name of the LLP. Thus, the assessing authority had not gone beyond the scope of his jurisdiction by issuing a notice to a non-existing entity but committed an error that was curable. Even the approval was sought from the Principal Commissioner for issuing the notice to LLP. Based on these peculiar facts, the Hon’ble Supreme Court observed that there was no doubt that the Skylight Hospitality judgement was decided considering the peculiar facts and circumstances of the case and should not be considered as a deviation from the standard principle governing this matter.
Reading the dictum of the Hon’ble Supreme Court, someone may reasonably assume that since a notice/order issued to a non-existing entity is invalid, the onus would be cast on the assessing officer to ascertain before issuing any order/notice, that the person or entity to whom it is addressed is existing. This proposition, if accepted, would cause a slew of delay and procedural difficulties, and would cast additional onerous responsibility upon the assessing officer before issuing any notice, which does not appear to be practical.
The Hon’ble Calcutta High Court in CIT v M/s Shaw Wallace Distilleries[9] addressed this issue. The court held that since the amalgamated company shied away from informing the assessing officer about the amalgamation, and never brought up this fact before the assessing officer during the proceedings, they should not be allowed to challenge the assessment on the ground that the order was addressed to a non-existing entity and is thus invalid. Hon’ble Calcutta High Court categorically stated that the amalgamated company cannot use their silence to avoid tax liabilities.
This judgement is in conformity with the legal maxim Commodum Ex Injuria Sua Nemo Habere Debet, a wrongdoer should not be enabled by law to take any advantage from his wrongful act or omission. Thus, the Hon’ble High Court imposed an implicit responsibility on the successor or legal representative to ensure that they inform the assessing authority about the dissolution of the entity or death of the natural person, once the notice is received by them or at the most during the assessment proceedings. If they choose not to do so, this inaction will be deemed as a waiver and they will not be able to challenge the order on this ground.
Even though the Hon’ble Calcutta High Court gave its decision on sound principles of law, it still did not answer another pertinent question. If it is not the responsibility of the assessing officer to enquire about the death or dissolution of the natural person or legal entity respectively, would it mean that any notice issued by him to a non-existing entity (being bereft of the knowledge of its non-existence) a curable defect? The Hon’ble Gujrat High Court in Chandreshbhai Jayantibhai Patel vs The Income Tax Officer[10], answered this in the negative. The division bench held that being a jurisdictional issue, this shall not be covered under Section 292B of The Act and unless the successor or legal representative waives this requirement of notice and submits to the jurisdiction of the assessing officer, the notice issued to the non-existing person shall remain invalid. Hon’ble Gujrat High Court observed that this being a jurisdictional error, it goes into the root of the matter and thus becomes a substantive issue. This judgement is in consonance with the ratio laid down in the Maruti Suzuki case. However, the Hon’ble Gujrat High Court further clarified that the possible remedy to save the situation is to issue a fresh notice in the name of the successor or legal representative, if it is not barred by limitation.
The same rationale can also be applied to assessment orders, the assessment orders may remain invalid for want of jurisdiction if it is addressed to a non-existing entity. However, nothing stops the assessing officer to issue a notice for a fresh assessment in the correct name, if it is not barred by limitation.
Recently, the Supreme Court in its order dated 13th August 2019 in CIT v. Laxmandas Khadelwal[11] has further reiterated this position, stating that even Section 292BB of The Act does not save the absence of notice. The Apex court held that though Section 292BB of The Act by way of legal fiction, makes the notice deemed to be valid if the assessee had participated in the proceedings and not raised any objections, however, it still does not condone absence of notice. Accordingly, it can be safely presumed that the absence of notice to the proper party makes it invalid and hence it does not remain a mere curable defect.
Thus, in conclusion, what can be said to be a congruent proposition, keeping all the judicial precedents in mind is the following :
- Any notice/order issued to a non-existing ‘person’ under The Act shall be invalid and is not a curable defect.
- Even if the assessing authority was not aware of the non-existence of the person, and became aware of it only after the issuance of the notice, that particular notice will still remain void or invalid for want of jurisdiction. However, fresh notice to the legal representatives or the successors may be issued, if it is within limitation.
- If any successor or legal representative remained silent or shied away from disclosing the information related to the non-existence of the person after the notice was received or before or during the proceedings, it shall not make the order/notice invalid, as his inaction will be considered as a deemed waiver.
Note:
[1] Civil Appeal No 5409 of 2019.
[2] (1990) 186 ITR 278 (SC).
[3] 2012 (280) ELT 43 (Del.).
[4] (2000) 6 SCC 359.
[5] [2015] 370 ITR 288 (Del).
[6] [2015] 372 ITR 386 (Del.) (MAG.).
[7] [2015] 231 Taxman 809 (Del.).
[8] (2018) 405 ITR 296 (Delhi).
[9] ITA No. 32/2008.
[10] [2019] 101 Taxman 362 (Guj.).
[11] Civil Appeal No. 6261-6262 of 2019.
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