Pallava Textiles Private Limited Vs Assessment Unit Income Tax Department (Madras High Court)
Introduction: The Madras High Court recently rendered a judgment on the assessment order dated 31.12.2022 challenged by Pallava Textiles Private Limited. The case revolves around the amalgamation of Pallava Textiles and Cheran Synthetics, raising questions about the validity of the assessment process.
Detailed Analysis: The petitioner contends that, post-amalgamation sanctioned by the NCLT Chennai, the assessment should have solely relied on the modified return. However, the petitioner faced challenges filing through the ITBA portal, leading to manual submission. The court scrutinized the assessment order, noting discrepancies and a hasty conclusion within two days of the petitioner’s response to a show cause notice.
The amended Section 170A of the Income Tax Act, effective from 01.04.2022, mandates a modified return within six months of the court’s order in a business reorganization. In this case, the NCLT Chennai order on 18.04.2022 allowed six months for filing the modified return. The petitioner’s physical submission on 24.08.2022 raised concerns about the ITBA portal’s functionality.
The court emphasized that, considering the effective date of the amalgamation, the consolidated return should be the basis for scrutiny. The assessment order, however, mixed standalone returns and consolidated returns improperly. The swift issuance of the assessment order post-show cause notice, along with discrepancies, further fueled the court’s decision to quash the order.
Conclusion: The Madras High Court quashed the assessment order and remanded the matter, instructing a reassessment based on the consolidated return. The judgment underscores the importance of adhering to statutory provisions in the assessment process and ensuring a thorough and accurate examination.
This case sets a precedent for businesses undergoing amalgamation and reinforces the necessity of a meticulous assessment process in line with relevant tax laws.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
An assessment order dated 31.12.2022 for assessment year 2021- 2022 is challenged by the petitioner. The petitioner states that it is a private limited company engaged in the business of manufacturing and trading of yarn and fabric. During the financial year 2020-2021, it is stated that an application was filed by the petitioner and Sri Cheran Synthetics India Private Limited (Cheran Synthetics) before the National Company Law Tribunal, Chennai (the NCLT Chennai) in CP (CAA) Nos.63 & 66/CHE/2021, seeking approval for a scheme of amalgamation. Under the said scheme of amalgamation, the petitioner states that Cheran Synthetics was merged with the petitioner and dissolved without being wound up. The petitioner also states that the appointed date under the scheme is 01.04.2020. The NCLT Chennai sanctioned the scheme on 18.04.2022 and the scheme became effective from 01.04.2020 upon such sanction. Since the last date for filing return of income was in March 2022, it is stated that the petitioner was constrained to file the standalone return of income on 14.03.2022.
2. By relying on Section 170A of the Income Tax Act, 1961 [the Income Tax Act], the petitioner states that it had six months from the end of the month in which the NCLT Chennai issued the order to file a modified return by giving effect to amalgamation. However, the Income Tax Business Application [ITBA] portal had not been operationalized to enable the filing of such modified return.
3. Meanwhile, the first respondent issued a notice under Section 143(2) of the Income Tax Act and further notices under Section 142(1) thereof. The petitioner replied thereto. In addition, the petitioner states that the modified return was filed manually since the portal was not enabled for filing such return electronically. After issuing a show cause notice on 27.12.2022, it is submitted that the assessment order was issued within two days after the petitioner replied to the show cause notice. The present writ petition was filed in the above facts and circumstances.
4. Learned counsel for the petitioner assails the assessment order primarily on the ground that the consolidated / modified return of the petitioner, after the amalgamation, should have been the sole basis of scrutiny assessment and the assessment order. By pointing out that the appointed date of the scheme is 01.04.2020, he submits that the proceedings culminating in the assessment order were initiated after orders were issued by the NCLT Chennai to sanction the scheme.
5. He next submitted that the assessment proceedings were concluded hastily and this is evident from the dates of the show cause notice, the reply thereto and the impugned assessment By referring to the show cause notice dated 27.12.2022, learned counsel submits that said show cause notice deals with about 53 proposed additions. The petitioner replied thereto on 29.12.2022 and the impugned assessment order came to be issued within 2 days thereafter.
6. By referring to the impugned assessment order, learned counsel submits that the said impugned assessment order refers to the pre- amalgamation standalone financial statement of the petitioner at certain places and also refers to the consolidated return of income at others. He also points out that the impugned assessment order refers to the consolidated return of the petitioner as a non-est return and thereafter, proceeds to examine such consolidated return along with the standalone return and balance sheet. For illustrative purposes, learned counsel pointed out the discrepancies in the impugned assessment order. With reference to the additions under the head of payment of commission to foreign entities, he points out that the order contains a reference to a sum of Rs.1,32,42,378/- while discussing the show cause notice, whereas it records a finding that a payment of Rs.13,24,42,378/- was made. According to learned counsel, these errors crept-in because of the hasty manner in which the impugned assessment order was made. By referring to Page No.648 of Volume II of the paper book, he points out that two separate returns filed by the petitioner and Cheran Synthetics (the transferor company) were examined while recording the conclusion with regard to difference in export sales. He also referred to the findings at Page Nos.420 and 421 with regard to the difference in purchases declared in the original return of income. On the basis of the above illustrations, learned counsel submits that the impugned assessment order is not sustainable and that the same is liable to be quashed.
7. In response to these contentions, learned senior standing counsel for the respondents submits that there is no infirmity in the impugned assessment order because sufficient opportunity was provided to the petitioner. By referring to the series of notices issued to the petitioner, including show cause notice dated 27.12.2022, learned counsel submits that the petitioner received and replied to each of these notices. With reference to the impugned assessment order, he submits that the consolidated financial statement was taken into consideration and that this is evident on examining Page 676 of Volume II of the paper book, which draws reference to the profits and gains from business as per the schedule part B-T1 in the consolidated return of income. By referring to the show cause notice dated 27.12.2022, learned counsel submits that the petitioner was provided with a reasonable opportunity to respond to all the proposed additions. In fact, he submits that out of the proposed additions, the submissions of the petitioner were accepted with regard to several additions and that this is evident from the impugned assessment order.
8. In conclusion, learned senior standing counsel for the respondents submits that a detailed assessment order was issued after considering the replies of the petitioner and that no case is made out for interference in exercise of jurisdiction under Article 226 of the Constitution of India. He also submits that the petitioner has approached this Court instead of availing of the statutory remedy so as to circumvent the requirement of pre-deposit as a condition for interim stay.
9. The question that arises for consideration based on these submissions is whether the impugned assessment order calls for interference because the assessment was not entirely based on the modified return after Section 170A of the Income Tax Act governs the issue. The said provision was inserted by Finance Act 2022 with effect from 01.04.2022. Prior to substitution by the Finance Act, 2023, the said provision was as under:
‘170A. Effect of order of tribunal or court in respect of business reorganisation.- Notwithstanding anything to the contrary contained in Section 139, in a case of business reorganisation, where prior to the date of order of a High Court or tribunal or an Adjudicating Authority as defined in clause (1) of Section 5 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), as the case may be, any return of income has been furnished by the successor under the provisions of Section 139 for any assessment year relevant to the previous year to which such order applies, such successor shall furnish within a period of six months from the end of the month in which the said order was issued, a modified return in such form and manner, as may be prescribed, in accordance with and limited to the said order. Explanation – In this Section, the expressions –
(i) “business reorganisation” means the reorganisation of business involving the amalgamation or demerger or merger of business of one or more persons;
(ii) “successor” means all resulting companies in a business reorganisation, whether or not the company was in existence prior to such business reorganisation.’
10.After amendment, the provision currently reads as under :
‘[Effect of order of tribunal or court in respect of business reorganisation.
170A. (1) Notwithstanding anything to the contrary contained in Section 139, in a case of business reorganisation, where prior to the date of order of a High Court or tribunal or an Adjudicating Authority as defined in clause (1) of Section 5 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) (hereinafter referred to as order in respect of business reorganisation), as the case may be, any return of income has been furnished by an entity to which such order applies under the provisions of section 139 for any assessment year relevant to the previous year to which such order applies, the successor shall furnish, within a period of six months from the end of the month in which the order was issued, a modified return in such form and manner, as may be prescribed, in accordance with and limited to the said order.
(2) Where the assessment or reassessment proceedings for an assessment year relevant to a previous year to which the order in respect of the business reorganisation applies, –
(a) have been completed on the date of furnishing of the modified return in accordance with the provisions of sub-section (1), the Assessing Officer shall pass an order modifying the total income of the relevant assessment year determined in such assessment or reassessment, in accordance with such order and taking into account the modified return so furnished;
(b) are pending on the date of furnishing of the modified return in accordance with the provisions of sub- section (1), the Assessing Officer shall pass an order assessing or reassessing the total income of the relevant assessment year in accordance with the order of the business reorganisation and taking into account the modified return so furnished.
(3) Save as otherwise provided in this section, in an assessment or reassessment made in respect of an assessment year under this section, all other provisions of this Act shall apply and the tax shall be chargeable at the rate or rates as applicable to such assessment year. Explanation – In this Section, the expressions –
(i) “business reorganisation” means the reorganisation of business involving the amalgamation or demerger or merger of business of one or more persons;
(ii) “successor” means all resulting companies in a business reorganisation, whether or not the company was in existence prior to such business reorganisation.’
The amended provision clearly indicates that any assessment after the business reorganization is sanctioned should be on the basis of the modified return.
11. It is evident from the above provision that a successor of a business reorganization is required to furnish the modified return within six months from the end of the month in which the order of the court or tribunal sanctioning such business reorganization is issued. The order of the NCLT Chennai in CP (CAA) Nos.63 & 66/CHE/2021 is on record. This order was issued on 18.04.2022. By virtue of the order, the scheme of amalgamation between Pallava Textiles Private Limited and Sri Cheran Synthetics India Private Limited was sanctioned. The scheme of amalgamation involved the transfer of all properties, rights, interests, liabilities, contracts and the like of the transferor company to the transferee. It also envisaged the dissolution of the transferor company. The appointed date was specified as 01.04.2020. Under the Companies Act, 2013, a scheme of reorganization becomes effective upon sanction from the appointed date. In effect, once the scheme was sanctioned on 18.04.2022, the scheme takes effect from 01.04.2020. Consequently, all the assets, contracts, rights and liability of the transferor shall stand vested with the transferee with effect from the said date. Therefore, Section 170A of the the Income Tax Act enables the transferee or successor to file the modified return within a specified time limit.
12. Since the order of the NCLT Chennai was issued on 18.04.2022, the petitioner had six months from 30.04.2022 to file the modified return. The petitioner has placed on record an email dated 22.06.2022 which indicates that the option to file the modified return under Section 170A of the the Income Tax Act had not been enabled in the portal. In those circumstances, it appears that the petitioner submitted a physical copy of such modified return on 24.08.2022. Since the last date for filing the return was expiring earlier, the petitioner previously submitted the return of the company on standalone basis on 14.03.2022.
13. From the list of dates and events, it is clear that the first notice to the petitioner under Section 143(2) of the the Income Tax Act was issued on 06.2022, which is subsequent to the effective date of merger. All other notices culminating in the impugned assessment order were issued later. In view of the scheme of amalgamation having become effective and thereby operational from 01.04.2020, the petitioner’s consolidated return of income, after its amalgamation, should have been the basis for assessment based on the scrutiny.
14. Learned senior standing counsel for the respondents contended that the assessment order discloses that the consolidated returns were also taken into consideration. On examining the impugned assessment order, it is noticeable that the Assessing Officer has taken into account the standalone returns of the petitioner, the standalone returns of Cheran Synthetics and the consolidated returns of the merged entity for different purposes. Such approach cannot be countenanced. Even without going into any of the other contentions, in my view, the impugned assessment order calls for interference on this sole ground.
15. From the list of dates and events, it is also conspicuous that the show cause notice dated 27.12.2022 was followed by the assessment order in a matter of about 5 or 6 days. Discrepancies in the assessment order were also pointed out. The issuance of an assessment order within about two days from the receipt of the reply to the show cause, in a matter relating to about 59 additions to income, constitutes a further reason to interfere with the impugned order.
16. Therefore, the impugned assessment order dated 12.2022 is quashed and the matter is remanded. Upon consideration of the consolidated return of the petitioner, which has since been uploaded electronically, it is open to the respondents to issue fresh notices and make a reassessment on the basis of such consolidated return of income.
17. P.No.1801 of 2023 is allowed on the above terms. Consequently, connected miscellaneous petition is closed. There shall be no order as to costs.
