Post-Amalgamation Income Tax Assessments

Post-Amalgamation Income Tax Assessments

Amalgamations often create complexities in tax assessments, especially when transitioning from the predecessor to the successor company. Section 170 of the Income Tax Act, 1961, outlines the framework for such transitions, but its practical application often leads to disputes, particularly around revised returns and the effective date of amalgamation. This article explores key judicial decisions that provide clarity on how tax authorities should approach assessments post-amalgamation and the obligations of the successor company in such scenarios.

Analysis – 

At the outset, reference is drawn to the provisions of Sec. 170 relating to succession to business otherwise on death. On bare perusal of Sec. 170(1), it is seen that upto the date of succession, income shall be assessed in the hands of predecessor and for the period after the date of succession, income shall be assessed in the hands of successor. However, where the predecessor cannot be found, the provisions of Sec. 170(2) shall come into play and the assessment of income upto the date of succession shall also be made in the hands of the successor.

The revised return of income filed pursuant to court approved scheme of amalgamation shall be given cognizance by the IT authorities and all subsequent proceedings shall be made as per the said return of income. It is essential that assessment order shall be passed by AO after considering the effects of amalgamation which is approved by the NCLT. Once the scheme of amalgamation had been sanctioned with effect from a particular date, it is binding on every one including the statutory authorities and the only course open to the Revenue would be to act as per the scheme sanctioned. Reliance in this regard can be placed on the following judicial pronouncement:-

Pentamedia Graphics Ltd. -vs.- ITO (2010) 236 CTR 204 (Mad)

Facts of case

The assessee filed its original return of income for AY 2004-05 on 30-10-2004 declaring loss. Order u/s 143(3) was passed on 28-12-2006. The scheme of amalgamation, arrangement and compromise was approved by Hon’ble Madras High Court vide order dated 29-11-2007 with appointed date being 01-01-2004. Pursuant to said order, the assessee filed its revised return of income on 27-12-2007. The AO rejected the revised return since it was time barred as per Sec. 139(5).An application under the Companies Act was filed by the assessee before the Hon’ble Madras High Court seeking for completion of assessment based on revised return.

Held

The Hon’ble Madras High Court held that Revenue is bound to take note of the state of affairs as on the appointed date and a return reflecting such state of affairs cannot be ignored on the basis of a statutory limitation placed on filing of revised returns. It further held that AO cannot ignore the order of High Court and thus, assessment has to follow the scheme sanctioned by High Court.

Bharti Airtel Ltd. –vs.- Addl. CIT (ITA No. 3907/Del/2010)(Dtd. 11-02-2011)

Facts of case

The assessee-company amalgamated with M/s Satcom Broadband Equipments Ltd. in terms of the scheme of amalgamation approved by Hon’ble Delhi High Court vide order dated 17-04-2007 with appointed date being 01-10-2005. Pursuant to said scheme, revised return for AY 2006-07 was filed on 01-04-2008. The AO did not take cognisance of the said order of Hon’ble Delhi High Court and rejected the revised return since it was time barred as per Sec. 139(5).The AO passed order u/s 143(3) on the basis of original return of income filed by the assessee. Thus, assessee was aggrieved by the action of AO and was in appeal before Tribunal for not processing revised return of income.

Held

Hon’ble Delhi Tribunal placing reliance on the decision of Hon’ble Madras High Court in Pentamedia Graphics (supra) held that AO has to take on record and consider the revised return since it was filed in consequence to scheme of amalgamation sanctioned by High Court. Thereafter, Hon’ble Delhi Tribunal set aside present assessment order and directed AO to frame a de novo assessment after considering the revised return.

It is relevant to note that in case of Marshall Sons & Co. (India) Ltd. – vs. – ITO (1997) 223 ITR 809 (SC), the counsel for the revenue took an argument that if the amalgamation is deemed to be effective from the appointed date then it may lead to several complication in case the court refuses to sanction the scheme of amalgamation. In response to the same, the Apex Court held as under:

“Firstly, an assessment can always be made and is supposed to be made on the transferee company taking into account the income of both the transferor and transferee companies. Secondly, and probably the more advisable course from the point of view of the Revenue would be to make one assessment on the transferee company taking into account the income of both the transferor or transferee companies and also to make separate protective assessments on both the transferor and transferee companies separately.”

Similar view was also taken in following cases –

• Pampasar Distillery Ltd. –vs.- ACIT (2007) 15 SOT 331 (Kol)
• Champagne Vineyards Ltd –vs.- DCIT (ITA No. 4255/Mum/2011)(Dtd. 07-12-2012)
• CIT –vs.- Intel Technology India Pvt Ltd. (2016) 380 ITR 272 (Kar)
• CIT –vs.- Dimension Apparels Pvt. Ltd. (2015) 370 ITR 288 (Del)

Conclusion –

In light of the judicial precedents discussed, it is clear that tax assessments following amalgamations require careful consideration of the provisions outlined in Section 170 of the Income Tax Act, 1961. Courts have affirmed that once a scheme of amalgamation is sanctioned, tax authorities must respect the appointed date and consider revised returns accordingly. This binding nature of court approvals emphasizes the need for a seamless transition of tax liabilities from the predecessor to the successor entity. Assessing officers must ensure that their evaluations align with sanctioned amalgamation schemes, promoting fairness and legal compliance in tax matters and facilitating a smoother regulatory environment for businesses in transition.