eMudhra Ltd. Vs ACIT (Karnataka High Court)
Summary: The Karnataka High Court, in eMudhra Ltd. v. Assistant Commissioner of Income Tax, Writ Petition No. 56004/2018, decided on 10 December 2019 for Assessment Year 2011-12, allowed the assessee’s writ petition and quashed a reassessment notice issued under Section 148 of the Income-tax Act, 1961, to a company that had already ceased to exist following amalgamation. The Court held that initiating reassessment proceedings against a non-existent entity constituted a substantive jurisdictional illegality, rather than a mere procedural defect capable of being cured under Section 292B of the Act. Applying the Supreme Court’s judgment in Principal Commissioner of Income Tax v. Maruti Suzuki India Ltd., the High Court rejected the Revenue’s contention that reassessment proceedings should remain valid because the assessee had not specifically informed the Assessing Officer about the amalgamation while objecting to the reopening.
The petitioner, eMudhra Ltd., was the successor in interest of Taxsmile.com India Pvt. Ltd., which had been engaged in software development. For Assessment Year 2011-12, the predecessor company filed its return of income on 21 September 2011 declaring total income of ₹1,52,73,876. The return was selected for scrutiny, and assessment under Section 143(3) was completed on 31 January 2014. Subsequently, Taxsmile.com India Pvt. Ltd. was amalgamated with eMudhra Ltd. pursuant to the Karnataka High Court’s order dated 23 April 2015 in Company Petition No. 23/2015 and connected matters, with an appointed date of 1 April 2014. Despite the amalgamation, the Income Tax Department issued a reopening notice dated 28 March 2018 under Section 148 in the name of the erstwhile company.
The petitioner requested reasons for reopening the assessment and filed written objections on 22 November 2018. Those objections were rejected by an order dated 29 November 2018. The department thereafter issued a notice dated 11 December 2018 under Section 142(1), again in the name of Taxsmile.com India Pvt. Ltd., seeking details of selling costs. The assessee challenged the reassessment notice, rejection of objections and consequential notice before the High Court. It contended that the notice was without jurisdiction because the addressee no longer legally existed. Additional objections included the alleged absence of tangible material, reopening on a mere change of opinion and expiry of the limitation period prescribed under the first proviso to Section 147.
The Revenue argued that the department was unaware of the amalgamation when the notice under Section 148 was issued. According to the Revenue, the assessee had not disclosed the merger in its objections and had raised the non-existence argument for the first time in the writ proceedings. It also sought to distinguish the Supreme Court decision in Maruti Suzuki India Ltd. on the ground that the tax authorities in that case had received specific communication about the amalgamation before initiating proceedings.
The High Court rejected that distinction after examining the departmental records. It noted that a transfer memorandum dated 24 October 2018 expressly recorded that jurisdiction lay with the Bengaluru tax authorities because Taxsmile.com India Pvt. Ltd. had amalgamated with eMudhra Ltd. The Compliance Response Sheet also recorded the merger and acknowledgment of the merged entity’s return for Assessment Year 2015-16. Moreover, the Registrar of Companies had issued notice to the Income Tax Department during the amalgamation proceedings and received its response. These materials established departmental knowledge of the merger, making it impermissible for the Revenue to disclaim awareness merely because the amalgamated company had not repeated the objection in its response to the reopening reasons.
Following PCIT v. Maruti Suzuki India Ltd., (2019) 107 taxmann.com 375 (Supreme Court), the High Court held that a jurisdictional notice issued to an amalgamating company after its legal existence had ended could not validly initiate proceedings. Such a defect went to the assumption of jurisdiction itself and was not a technical irregularity saved by Section 292B. The Court also observed that the reopening notice had been issued shortly before the limitation period expired on 31 March 2018, so remanding the matter would serve no purpose because the defective notice could not be cured at that stage.
Accordingly, the High Court quashed the Section 148 notice dated 28 March 2018, the order dated 29 November 2018 overruling the petitioner’s objections and the Section 142(1) notice dated 11 December 2018. The Court expressly refrained from deciding the remaining grounds concerning limitation, change of opinion, absence of tangible material and the assessee’s alleged failure to disclose material facts fully and truly. The writ petition was allowed on the fundamental jurisdictional ground that the reassessment had been initiated against a non-existent company.
Cases Discussed
1. Principal Commissioner of Income Tax v. Maruti Suzuki India Ltd., (2019) 107 taxmann.com 375 (Supreme Court), also reported at 416 ITR 613 — Followed as the principal authority. The Supreme Court held that proceedings initiated through a jurisdictional notice issued in the name of an amalgamating entity that had ceased to exist were fundamentally invalid. Participation by the successor entity could not validate jurisdiction contrary to law. The Karnataka High Court applied this principle to quash the reassessment notice issued to Taxsmile.com India Pvt. Ltd.
2. Spice Entertainment Ltd. / Spice Enfotainment Ltd. (Supreme Court proceedings referred to in the quoted passage from Maruti Suzuki India Ltd.) — The Supreme Court’s ruling in Maruti Suzuki India Ltd. referred to the decision concerning Spice Entertainment, where proceedings against an amalgamated entity had been treated as invalid. The principle is also discussed in the TaxGuru publication concerning notices to non-existent entities.
FULL TEXT OF THE JUDGMENT OF KARNATAKA HIGH COURT
The petitioner has challenged the notice dated 28/03/2018 issued under Section 148 of the Income Tax Act, 1961 (‘Act’ for short) relating to the assessment year 2011-12 and the order of overruling the objections dated 29/11/2018 as well as the notice dated 11/12/2018 issued under Section 142(1) of the Act.
2. The petitioner is a company engaged in the business of software development. The petitioner had filed return of income for the assessment year 2011-12 by declaring total income of Rs.1,52,73,876/- on 21/09/2011.
3. The case of the petitioner’s company was taken up for scrutiny by issuing notice under Section 143(2) of the Act. Thereafter, assessments were concluded under Section 143(3) of the Act, on 31/01/2014 by the second respondent. Subsequently, M/s. Taxsmile.com India Pvt. Ltd., was amalgamated with M/s. eMudhra Ltd., in terms of the order of this Court dated 23/04/2015 passed in Company Petition No. 23/2015 and connected matters with the appointment date fixed as 01/04/2014. The second respondent had issued notice dated 28/03/2018 under Section 148 of the Act, relating to the assessment year 2011-12. On the request made by the petitioner for supply of reasons to re-open the assessment, the same being furnished, the petitioner had filed written objections dated 22/11/2018, the second respondent passed an order dated 29/11/2018 overruling the objections filed by the petitioner. Notice was issued under Section 142(1) of the Act, in the name of M/s. Taxsmile.com India Pvt. Ltd., seeking the petitioner to file the details of the selling cost. The petitioner being aggrieved by the notice issued under Section 148 of the Act as well as the order of overruling the objections on the notice issued under Section 142(1) of the Act, is before this Court.
4. Learned counsel Sri. Chythanya K.K, appearing for the petitioner would submit that the notice issued under Section 148 of the Act impugned herein, is without jurisdiction as issued on the non-existing company and the same is nothing but change of opinion without any tangible material moreover, beyond the period of limitation prescribed under the first proviso to Section 147 of the Act.
5. Learned counsel has placed reliance on the judgment of the Hon’ble Apex Court in the case of Principal Commissioner of Income Tax v. Maruti Suzuki India Ltd., reported in (2019) 107 taxmann.com 375 (SC) in support of his contention.
6. Learned counsel appearing for the revenue would submit that on the date of issuance of notice under Section 148 of the Act, the department was oblivious of the fact of amalgamation of company M/s. Taxsmile.com India Pvt. Ltd., with M/s. eMudhra Ltd. The petitioner has not informed the amalgamation of the company M/s. Taxsmile.com India Pvt. Ltd., with M/s. eMudhra Ltd., neither in the objections filed to the reasons recorded nor at any time, to the authorities. It is for the first time in this writ petition, the petitioner has come up with a plea of non-existence of the company M/s. Taxsmile.com India Pvt. Ltd. The Income Tax Department was not a party to the proceedings before this Court relating to the amalgamation of the company M/s. Taxsmile.com India Pvt. Ltd.
7. Learned counsel made an endeavour to distinguish the judgment of the Hon’ble Apex Court in the case of Maruthi Suzuki India Ltd., supra, contending that upon the order of amalgamation passed by the competent Court, the same was made known to the Income Tax Department in that case, notice was issued in the name of the amalgamating company, despite the amalgamated company MSIL therein, addressed a communication to the officer intimating the fact of amalgamation. In that context, initiation of assessment proceedings against an entity which has ceased to exist was held to be void ab initio, but in the absence of such communication made either by the amalgamating company or amalgamated company, the proceedings initiated under Section 148 of the Act, cannot be held to be against a non-existing company. Accordingly, the learned counsel for the revenue seeks for dismissal of the writ petition.
8. I have given my anxious and careful consideration to the arguments addressed by the learned counsel for the parties and perused the material on record.
9. The main grievance of the learned counsel for the petitioner is that M/s. Taxsmile.com India Pvt. Ltd., was amalgamated with M/s. eMudhra Ltd, in terms of the order dated 23/04/2015 passed in Company Petition No.23/2015 and connected matters, which was well within the knowledge of the department. However, notice under Section 148 of the Act was issued on 28/03/2018 on the non-existing company M/s. Taxsmile.com India Pvt. Ltd.
10. It is not in dispute that the transfer memo along with forwarding memo dated 24/10/2018 was issued by the second respondent forwarding the file for further action to DCIT-2(1)(2), Bangalore, wherein it is specifically stated that the jurisdiction of the assessee lies with the officer at Bengaluru, in view of the amalgamation of M/s. Taxsmile.com India Pvt. Ltd. with M/s. eMudhra Ltd. The Compliance Response Sheet at Annexure-H, furnished by M/s. Taxsmile.com India Pvt. Ltd, indicates that the said company has been merged with M/s. eMudhra Ltd and merged entity’s return has been filed for the assessment year 2015-16 and the same has been acknowledged by the department. This document would disclose that the amalgamation of M/s. Taxsmile.com India Pvt. Ltd with M/s. eMudhra Ltd, was within the knowledge of the department.
11. Though the learned counsel for the revenue made an endeavour to contend that the Income Tax Department not being arrayed as party to the company proceedings, the order was not within its knowledge, cannot be countenanced for the reason that the Registrar of Companies before filing the appropriate affidavit before this Court in the said proceedings had issued notice to the Income Tax Department. Based on the reply received, wherein, it was observed by the department that M/s eMudra Ltd, is required to adhere to the provisions of the Income Tax Act and Rules and also notifications and instructions. Upon the claim being sanctioned and particularly on the subsequent transfer memo issued and the Compliance Response Sheet submitted, the department cannot feign ignorance of the amalgamation order merely for the reason that no specific objection was raised by the petitioner on this aspect in the objections filed to the reasons recorded by the Assessing Officer.
12. In view of the proceedings initiated under Section 148 of the Act at the ‘n’ th hour before the limitation getting lapsed on 31/03/2018, even if the matter is now remanded back to the Assessing Officer, it would be a futile exercise, since the defective notice issued under Section 148 of the Act, cannot be cured at this length of time.
13. The Hon’ble Apex Court in the case of M/s. Maruthi Suzuki Limited supra, has categorically observed thus;
“In the present case, despite the fact that the assessing officer was informed of the amalgamating company having ceased to exist as a result of the approved scheme of amalgamation, the jurisdictional notice was issued only in its name. The basis on which jurisdiction was invoked was fundamentally at odds with the legal principle that the amalgamating entity ceases to exist upon the approved scheme of amalgamation. Participation in the proceedings by the appellant in the circumstances cannot operate as an estoppel against law. This position now holds the field in view of the judgment of a co-ordinate Bench of two learned judges which dismissed the appeal of the Revenue in Spice Entertainment on 2 November 2017. The decision in Spice Entertainment has been followed in the case of the respondent while dismissing the Special Leave Petition for AY 2011-2012. In doing so, this Court has relied on the decision in Spice Entertainment.”
While arriving at such a decision, the Hon’ble Apex Court has taken note of Section 292-B of the Act also, which is apposite to refer to and the same reads as under;
“292B. No return of income, assessment, notice, summons or other proceeding, furnished or made or issued or taken or purported to have been furnished or made or issued or taken in pursuance of any of the provision of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect, or omission in such return of income, assessment, notice, summons or other proceeding if such return of income, assessment, notice, summons or other proceeding is in substance and effect in conformity with or according to the intent and purpose of this Act.”
The jurisdiction assumed by the Assessing Officer to issue notice under Section 148 of the Act to non-existing company is substantive illegality and not the procedural violation of the nature adverted to in Section 292-B of the Act. The substantive defective notice issued against a non-existing company is not curable. On this ground alone, without adjudicating upon the other issues raised by the petitioner inasmuch as the limitation aspect, change of opinion, non-existence of tangible material and non-failure on the part of the assessee disclosing full and true material facts need not be examined. Without going into these aspects, the writ petition requires to be allowed on the ground of issuance of notice under Section 148 of the Act to the non-existing company.
14. Hence, Notice dated 28/3/2018 issued under Section 148 of the Act, at Annexure-A, the order overruling the objections of the petitioner dated 29/11/2018 at Annexure-B and Notice dated 11/12/2018 issued under Section 142(1) of the Act at Annexure-S are quashed.
15. The writ petition is allowed, in terms of the above.
