2021 (4) TMI 1228 - HC - Income Tax

Court Validates Notice to Nonexisting Entity, Emphasizes Successor Liability

The court upheld the validity of a notice issued under Section 147 of the Income Tax Act to a nonexisting entity, emphasizing successor liability under ... Reopening of assessment u/s 147 - notice issued on non-existig entity - Scheme of Amalgamation - HELD THAT:- When Section 170(ii) contemplates that the successor Company is liable and responsible, mere service of notice in respect of company, which was not existing cannot be a ground to assail the proceedings instituted for reopening of assessment under Section 147. On perusal of the said letter reveals that the address of the sender as well as the change of the address is one and the same. HCL Peripherals Limited merged with HCL Corporation Limited with effect from 01.04.2009 and both the offices are running in the same premise. Further, acknowledgement of the notice issued by the respondent has not been disputed by the petitioner. Therefore, Section 170(ii) would be applicable in the present case and the said ground cannot be considered for the purpose of quashing the entire proceedings initiated under Section 147 of the Act. Even on merits, the respondent could able to establish that there is a 'reason to believe' in view of certain new materials noticed in the matter of purchased units of mutual funds to the extent of ₹ 52,39,18,310/-. his being the facts and circumstances established, the petitioner has to participate in the reassessment proceedings by submitting their documents, evidences to establish their case. Thus, the respondents have to proceed with reopening of the assessment already made and the proceed with the assessment by following the procedures as contemplated under the Act and by affording opportunity to the assessee. In view of the fact that the petitioner has not established any acceptable reason for the purpose of assailing the impugned order, the writ petition stands dismissed. Issues:1. Validity of notice issued under Section 147 of the Income Tax Act, 1961 on a nonexisting entity.2. Allegation of income escapement due to unreported mutual fund purchases.3. Dispute over the correctness of reasons for reopening assessment under Section 147.4. Interpretation of Sections 170(i) and 170(ii) regarding successor liability and notice service.Issue 1: Validity of Notice:The petitioner challenged the notice under Section 147 issued on a nonexisting entity, arguing it should be invalidated due to the company's amalgamation and nonexistence at the time of the notice. The petitioner contended that the notice was served on a dead person, emphasizing the lack of compliance with statutory notice requirements. However, the court held that under Section 170(ii), the successor company is liable even if the predecessor is not found, and mere service of notice on a nonexisting company does not warrant quashing the proceedings initiated under Section 147. The court noted the address change communication by the company and acknowledged the continuity of operations post-merger.Issue 2: Alleged Income Escapement:The Deputy Commissioner of Income Tax initiated proceedings under Section 147 based on the belief that the company had purchased mutual fund units worth a specific amount not reflected in the income tax return. The petitioner disputed this claim, providing evidence to refute the alleged income escapement. Despite the petitioner's contentions, the respondent upheld the reopening of assessment, leading to a legal dispute over the accuracy of the reasons for initiating proceedings under Section 147.Issue 3: Dispute Over Reopening Reasons:The petitioner argued that the reasons for reopening assessment under Section 147 were factually incorrect, emphasizing that no income escapement had occurred. The respondent rejected this argument, citing provisions of the Income Tax Act, particularly Explanation 1 to Section 147, to justify the continuation of the proceedings. The court analyzed the contentions raised by both parties regarding the factual accuracy of the reasons for reopening assessment and the obligations of the petitioner to cooperate in the assessment process.Issue 4: Interpretation of Successor Liability and Notice Service:The court interpreted Sections 170(i) and 170(ii) concerning successor liability and notice service. It emphasized that when the predecessor cannot be found, the successor is accountable as per Section 170(ii). The court highlighted the importance of cooperation from the petitioner in the reassessment process, noting that the respondent had valid reasons to believe in income escapement based on new material related to mutual fund purchases. Consequently, the court dismissed the writ petition, directing the petitioner to participate in the reassessment proceedings and follow the procedures outlined in the Income Tax Act.---