No assessment can be made in the hands of non-existing company

Brief of the case:

In the case of M/s PVP Ventures Ltd. Vs. DCIT Chennai Bench of ITAT have held that assessment could not be made in the hands of non-existing company. ITAT observed that the company, assessed at Hyderabad, has amalgamated into assessee. In the case of Predecessor Company Hyderabad bench of ITAT have held that after amalgamation assessment can be made at Chennai where the successor company was assessed.

After going through the provisions of section 170 ITAT held that the provisions of Section 170(2) will override the provisions of Section 170(1) of the Act. Therefore, the assessment has to be made only in the hands of the present assessee in view of the provisions of Section 170(2) of the Act. Hon’ble ITAT has also adjudicated other issues relating to administrative and other expenses, short term capital gain etc.

Facts of the case:

• Assessee-company is engaged in the business of infrastructure development.
• Assessee had claimed Rs. 3,70,36,474/- under the head “Administrative and Other expenses”. Assessee made investment in the capital asset. The assessee claims the same under the head “Administrative and Other expenses”.
• The tax deducted at source receivable amounting to Rs. 1,76,13,603/- was also part of the sales already offered in the earlier year.
• Assessee write off the amount u/s 36(1)(vii) read with Section 36(2) of the Income-tax Act, 1961.
• The work-in-progress to the extent of Rs. 1,94,12,871/- was also written off in the books of account.
• Assessee purchased a property in the AY 2008-09 and sold the same in the very same assessment year.
• The assessee offered the profit on sale of the land under the head “short term capital gains” in the return of income.
• Since the property was purchased and sold in the very same assessment year, it was not reflected in the fixed asset schedule and in depreciation statement.
• Further AO made addition of Rs. 31,07,20,000/- u/s 69A.
• In the course of assessment proceedings, the Assessing Officer found that the assessee has received a sum of Rs.377,71,78,316/- from M/s Platex Limited incorporated in Mauritius.
• The assessee claimed before the Assessing Officer that the Mauritius company M/s Platex Limited invested the above sum of Rs. 377,71,78,316/- by way of foreign direct investment for subscription towards convertible debentures.
• The assessee was asked to produce the creditworthiness of M/s Platex Limited and genuineness of transaction. The assessee-company has produced only provisional accounts of M/s Platex Ltd., for the financial year 2007-08.
• M/s PVP Ventures Pvt. Ltd. was a private limited company assessed in Hyderabad. Deutsche Bank, Singapore, sanctioned Rs. 508.72 Crores to M/s Platex Ltd., Mauritius. M/s Platex Ltd., Mauritius, in turn, invested the entire amount of Rs. 508.72 Crores in M/s PVP Ventures Pvt. Ltd. in Hyderabad.
• The assessee-company was earlier known as SSI Limited. M/s PVP Ventures Pvt. Ltd. merged with SSI Ltd. by order of amalgamation approved by Madras High Court.
• The SSI Ltd. subsequently changed its name as M/s PVP Ventures Ltd., the present assessee.
• AO Further observed that assessment has also made with regard to interest income of Platex Ltd., Mauritius in the hands of the present assessee and also made protective assessment in the hands of M/s Platex Ltd., Mauritius.

Contention of the assessee:

• Since the project could not be completed as contemplated by the company, the project was abandoned, therefore, the expenditure incurred by the assessee, namely, the work-in-progress for the project abandoned has to be allowed as revenue expenditure either under Section 28 or under Section 37 of the Act.
• Authorities below are not correct in treating the profit on sale of the land as undisclosed income under Section 69A of the Act.
• Both the authorities below failed to appreciate the fact that once the property was sold in the very same year in which it was purchased, it will not be reflected in the fixed asset statement and depreciation schedule.
• The provisional accounts produced by the assessee does not support the claim of the assessee that it has received Rs. 377,71,78,316/- from M/s Platex Ltd., Mauritius.
• On the date of merger, M/s PVP Enterprises Pvt. Ltd. looses its identity and it is no longer in existence. Once the predecessor is not in existence, in the eye of law, no assessment could be made in the hands of the predecessor-company.
• Once M/s PVP Ventures Pvt. Ltd. merged with SSI Ltd., till the date of merger, the assessment if any, has to be made only in the hands of M/s PVP Ventures Pvt. Ltd. and not in the hands of M/s SSI Ltd.
• In view of Section 170 of the Act, the predecessor-company, namely, M/s PVP Ventures Pvt. Ltd. has to be assessed in respect of its receipts till the date of amalgamation. Therefore, the CIT(A) has rightly found that no addition can be made in the hands of the present assessee.

Contention of the revenue:

• CIT(A) called for remand report from the AO. The AO clarified that in respect of receivable to the extent of Rs. 1,76,13,603/-, the assessee has not furnished any evidence either before the Assessing Officer or before the CIT(A).
• In absence of any details CIT (A) confirmed the additions made by AO.
• Referring to bank balance to the extent of Rs. 10,000/- in the inoperative bank account and work-in-progress to the extent of Rs. 1,94,12,871/-, revenue submitted that these are capital in nature. Therefore, it cannot be allowed as revenue expenditure.
• The agreement dated 04.02.2008 shows that the assessee agreed to purchase the property. It is not known whether this agreement was available before the Assessing Officer or not.
• There was no reference of agreement in the assessment order.
• AO found that in the fixed asset schedule of the company for the relevant assessment year, no land was shown as disposed of. If the land was purchased during the year under consideration and disposed of in the very same year, the same should be reflected in the fixed asset schedule.
• Once the land was purchased by the assessee, it should form part of the fixed asset of the assessee and when it was sold, it has to be shown as dispose of.
• It is not the case of the assessee that the property was purchased and sold on the same day. In fact, there was a considerable time gap between the date of agreement for purchase of property and the date on which the sale was executed.
• The details of advance received and the balance amount received were not reflected in the books of the assessee. Hence CIT (A) rightly confirmed the order of AO.
• M/s Platex Ltd., was carrying on its business on the borrowed funds from Deutsche Bank. M/s Platex Ltd., did not have any surplus fund to make investment in assessee-company.
• Since the M/s Platex Ltd., had no source in making investment, the AO found that the said company had no financial capacity to investment in assessee-company.
• Therefore, the Assessing Officer came to a conclusion that the so-called creditor has no creditworthiness to make investment in the assessee-company and the transaction was also not genuine.
• One Shri Prasad V. Potluri is a common Director in M/s Platex Ltd., Mauritius and in the assessee-company.
• The financial statement of M/s Platex Ltd., Mauritius clearly indicates that there was no generation of income other than the so-called investment said to be made in the assessee-company.
• There is a merger of one company into another company, namely, M/s PVP Enterprises Pvt. Ltd. merged with assessee-company by way of amalgamation. Therefore, there is no transfer of business involved in this case.
• The Hyderabad Bench of this Tribunal in I.T.A. No.1159/Hyd/2010 dated 31.07.02013 found that when M/s PVP Enterprises Pvt. Ltd. merged with the assessee-company by way of amalgamation, from the date of amalgamation, the assessment has to be made in the hands of the assessee-company at Chennai.
• In view of the above, according to the Ld. D.R., the CIT(A) is not justified in observing that the assessment has to be made in the hands of M/s PVP Enterprises Pvt. Ltd. and not in the hands of the assessee-company.

Held by CIT (A):

• The assessee has not filed any details before the lower authorities.
• The date on which the advance was received as well as the balance amount was received were not reflected in the books of the assessee-company.
• Unless and until the assessee furnishes the details of the transaction of sale made to M/s Arihant Hospitality (Chennai) Private Limited for a consideration of Rs. 31,07,20,000/-, it cannot be decided with regard to the actual amount received by the assessee at the end of the transaction.
• The loan was sanctioned by Deutsche Bank which was invested in M/s PVP Enterprises Pvt. Ltd., which was subsequently merged with the assessee-company.
• Therefore, under Section 170 of the Act, if at all any addition was to be made, it has to be made in the hands of M/s PVP Enterprises Pvt. Ltd. and not in the hands of the assessee.

Held by ITAT:

• No details were filed by the assessee regarding sum of Rs. 1,76,13,603/- either before the lower authorities or before this Tribunal.
• So in these circumstances and in the absence of any particulars with regard to inclusion of income in the earlier assessment year as claimed by the assessee, this tribunal do not find any reason to interfere with the order of the lower authority.
• Since the expenditure relates to capital asset, hence CIT(A) has rightly confirmed the addition made by the AO.
• ITAT confirmed the addition of Rs. 3,70,36,474/- being the unrecoverable advance under the head “Administrative and Other expenses”.
• This registered sale deed does not show that the assessee became the owner at any point of time. The agreement for sale of the property discloses the sale consideration at Rs. 16,26,00,084/-. It is not known how the very same property was sold for Rs. 31,07,20,000/-.
• That means, the assessee is not willing to disclose all the material facts relating to the above said transaction.
• The sale deed dated 28.03.2008 was executed within two months from the date of the agreement, i.e. on 04.02.2008. Within two months period from the date of agreement, the value of the property will not go to the extent of Rs. 31,07,20,000/-.
• The assessee obviously invested undisclosed money in the transaction and on sale of the property, now bringing the same as short term capital gains.
• Tribunal is of the considered opinion that the CIT(A) has rightly confirmed the addition made by the Assessing Officer under Section 69A of the Act.
• A bare reading of Section 170 of the Act shows that this provision is not applicable in respect of succession which takes place on death of a person.
• When the business or profession was succeeded by other person, the predecessor shall be assessed in respect of previous year in which the succession took place, upto the date of succession.
• In view of the express language in Section 170(2) of the Act, whenever the predecessor-company was not found or not in existence, then the assessment has to be made only in the hands of the successor-company.
• The question arises for consideration is when a company is not in existence due to amalgamation with effect from 01.10.02007, whether still the assessment can be made in the hands of the predecessor-company.
• This issue was considered by the Kolkata Bench of this Tribunal in Pampasar Distillery Ltd. v. ACIT (2007) 15 SOT 331. After referring to Section 170 of the Act, more particularly, Section 170(2) of the Act, found that in the case of amalgamation, when one entity takes over the business of another entity, the same may be the case of succession of business.
• The Tribunal found that if at all any assessment can be made, it should be made in the hands of the amalgamated company, namely, the successor company.
• In view of Section 170(2) of the Act, the income of M/s PVP Ventures Pvt. Ltd. has to be assessed only in the hands of the present assessee upto the date of amalgamation and also subsequent to the date of amalgamation.
• In other words, there cannot be any assessment order in favour of the company which is not in existence on and after 01.10.2007. Therefore, this Tribunal is of the considered opinion that the CIT(A) is not correct in holding that the assessment, if any, has to be made in the hands of M/s PVP Ventures Pvt. Ltd. and in the hands of the present assessee.
• In view of financial statement of M/s Platex Ltd., Mauritius and the fact that Shri Prasad V. Potluri is a common Director in all the three companies, namely, M/s Platex Ltd., Mauritius, M/s PVP Ventures Pvt. Ltd. and M/s PVP Ventures Ltd., Chennai, creates a doubt that the money might have been flown from the assessee-company to M/s Platex Ltd., Mauritius and by way of investment would have come back to Chennai through banking channel.
• Unfortunately, this fact was not examined by the lower authorities.
• Accordingly, the orders of the lower authorities are set aside and the entire issue is remitted back to the file of the Assessing Officer.