Is the tax game over after amalgamation?

November 01,2017
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Sumeet Khurana (Director-Direct Tax, Lakshmikumaran & Sridharan Attorneys)

Introduction

In a recent decision in the case of G.E. Medical[1], Hon’ble Income Tax Appellate Tribunal (‘ITAT’ or ‘Tribunal’) upheld an assessment framed in the name of an amalgamating company despite that it had ceased to exist because of its amalgamation with another company. The issue of validity of assessment post amalgamation often arises in tax proceedings so the Author through this article seeks to decipher the law surrounding that.

Legal framework

Prior to insertion of Section 24B in the Income tax Act, 1922 (Section 159 of the Income tax Act, 1961), it was held by Bombay High Court[2] that where a person died after the commencement of the financial year but before his income of the previous year was assessed, his executor was not liable to pay tax and that if the death occurred while assessment proceedings were pending then the assessment proceedings could not be continued after his death. Section 159 of the Income tax Act, 1961 corresponds to section 24B (supra) and provides for assessment and tax recovery mechanism after death of the taxpayer.

A company is a juristic personality which not only comes into existence by operation of law but its cessation also takes place by operation of law. Section 159 deals with assessment and tax recovery after the death of a person but there is no similar provision in the Act dealing specifically with companies if they cease to exist on account of winding up or merger. Section 170 deals with cases of succession in general and can be applied to succession of companies by way of amalgamation. It provides that in a case where predecessor cannot be found (e.g. transferor company in case of amalgamation cannot be found) the assessment shall be made on the successor (transferee company) for (a) the year of succession till the date of succession and (b) for the year preceding the year of succession.

Sub-section (2) of Section 170 provides that if the predecessor cannot be found then the income shall be assessed on the successor. The purpose of this sub-section is to have the machinery in place for realization of taxes in case predecessor cannot be found. Sub-section (3) complements it by providing for cases where predecessor can be found and has been assessed but tax cannot be realized from him.

Jurisprudence

Various judicial decisions[3] have held that once a company (say transferor) has amalgamated with another (say transferee) and this fact has been brought to the notice of the tax officer (Assessing Officer or ‘AO’) then the tax assessment cannot be framed on the transferor company. These decisions have held that an assessment on transferor despite succession / amalgamation is a nullity.

However, where the taxpayer did not inform the AO about amalgamation and assessment got framed on the transferor, the High Court[4] and Tribunal[5] refused to accept the contention of the taxpayer that the assessment on non-existent transferor is invalid.

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