2023 (9) TMI 885 - AT - Income Tax

Tribunal Invalidates Reassessment Orders for A.Y. 2008-09 and 2009-10 Due to Jurisdiction Issues and Non-Existent Entity.

The Deputy Commissioner of Income Tax, CC – 7 (3), Mumbai Versus Bhawna Computers Pvt Ltd, Mumbai And (Vice-Versa)

For A.Y. 2008-09, the Tribunal quashed the reassessment order as invalid due to lack of proof of notice under section 148 and assessment of a non-existent ... Reopening of assessment u/s 147 - Conversion of company into LLP - notice in hands of Successor company, i.e. in the hands of assessee LLP - AO Jurisdiction to assess the income of the predecessor company - new proceedings in the name of the successor LLP after the date of conversion / registration - DR submitted that although the company ceased to exist, the Ld. AO had rightly issued the notice to the successor LLP only - HELD THAT:- The situation that arises is that the successor LLP can be assessed for the income of the predecessor company for A.Y. 2016-17 (upto 22.03.2016 being date of succession) and a year preceding to the year of succession which is A.Y. 2015-16 in the case at hand. It was stated that that there is no other year, which can be assessed in the hands of successor for the income of the predecessor, and there is no other section which was brought over notice in the Act too, which permits any other year for assessing income of the predecessor. On carefully considering the provisions of section 170(2), years which can be assessed for the income of the predecessor can be the year of succession (upto the date of succession) and the immediately preceding previous year and no other years can be assessed in the hands of the successor. Therefore, in the present case at hand, we are of the view that the Ld. AO could not have acquired jurisdiction to assess the income of the predecessor company for the years prior to A.Y. 2015-16. We hold that the Ld. AO lacks jurisdiction in reopening and assessing the case of the predecessor company for A.Y. 2009-10 in the hands of assessee LLP. We quash the reassessment order passed by the Ld. AO for A.Y. 2009-10 and therefore, ground no. 1 of the appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the reassessment order under section 147/148 is valid where (a) service of notice under section 148 and supply of reasons recorded for reopening are not proved, and (b) the assessee participated in proceedings despite non-supply of reasons. 2. Whether proceedings reopened under section 147/148 should instead have been initiated under section 153C where information arose from search/survey of third parties. 3. Whether an assessment/reassessment order passed in the name of a predecessor company is valid after conversion of that company into a Limited Liability Partnership (LLP) - i.e., whether the predecessor 'ceased to exist' or 'cannot be found', and whether the successor LLP can be proceeded against for years prior to succession. 4. Scope and applicability of section 170(2) of the Income Tax Act (assessment of predecessor in hands of successor when predecessor 'cannot be found') to a case of conversion of company into LLP, and the temporal limits on years that may be assessed in the hands of successor. 5. (Incidental) Whether merits additions under section 68 (share application money treated as unexplained cash credit) require adjudication where reassessment is held invalid. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of reassessment where proof of service of notice under section 148 and supply of reasons recorded is lacking Legal framework: Reopening of assessment requires issuance and service of notice under section 148 and supply of reasons recorded for reopening (statutory requirement implicit in principles of fair procedure). Supply of reasons enables the assessee to object; absence of supply can vitiate proceedings. Precedent treatment: Decisions of the jurisdictional High Court recognizing that failure to supply reasons recorded can render reassessment invalid were relied upon by the bench. Interpretation and reasoning: The Tribunal examined assessment records and remand reports. The assessing officer could not produce proof that reasons recorded were supplied. The assessee repeatedly sought reasons in writing during proceedings and before the first appellate authority. Mere recital in assessment order that reasons were provided was not accepted in absence of supporting proof. Participation by the assessee in proceedings did not cure the procedural defect because non-supply deprived the assessee of the fundamental right to know the basis for jurisdiction and to object effectively. Ratio vs. Obiter: Ratio - Non-supply of reasons recorded, when not shown to have been provided, renders reassessment invalid even if the assessee participated; participation alone does not cure the prejudice caused. Conclusion: Reassessment for the relevant year (AY 2008-09) was quashed as bad in law for failure to supply reasons recorded; the Department's inability to prove supply was decisive. Issue 2: Whether section 153C should have been invoked instead of section 147/148 when information arose from search of third parties Legal framework: Section 153C applies when income or asset information belonging to a person is found during search/seizure of another person and specifies special procedures; section 147/148 applies where AO forms belief that income has escaped assessment based on information in possession. Precedent treatment: Principles distinguish situations where tangible incriminating material of the assessee was found during search (necessitating section 153C) from situations where only information received from third-party search is available (permitting reopening under section 147). Interpretation and reasoning: The Tribunal found the material before the AO comprised information received from searches on third parties, not incriminating documents or tangible material belonging to the assessee. Because no material belonging to the assessee was found in the search, the ingredients of section 153C were not fulfilled. The AO had tangible information from DDIT arising out of third-party searches and therefore correctly invoked section 147/148. Ratio vs. Obiter: Ratio - Invocation of section 147/148 is proper where the AO has information (but not incriminating material belonging to the assessee discovered in third-party search) indicating escapement of income; section 153C is inapplicable absent material belonging to the assessee. Conclusion: No infirmity in invoking section 147/148 on this ground; section 153C was not the correct provision in the factual matrix. Issue 3: Validity of assessment/reassessment passed in the name of a non-existent predecessor company after conversion into LLP Legal framework: The LLP Act provides that upon registration of conversion, the company is deemed dissolved and removed from ROC records; the Third Schedule permits pending proceedings as on the date of registration to be continued by or against the LLP. Income-tax law allows assessment of predecessor in hands of successor under section 170, with specific limitations. Precedent treatment: Authorities hold that a company struck off the ROC can be regarded as 'cannot be found' for purposes of section 170(2); Supreme Court and High Court precedents establish that once struck off, the company has ceased to exist in legal terms for these purposes. Other decisions treat orders passed in name of non-existent entity as void. Interpretation and reasoning: The Tribunal analysed the LLP Act provisions and concluded that conversion effective on the certificate date causes the company to be deemed dissolved and its assets/liabilities to vest in the LLP; only proceedings pending as on that date may be continued in the hands of the LLP. For AY 2008-09 the reassessment order was passed in the name of the dissolved company (quashed for other reasons). For AY 2009-10, the impugned notice was issued after conversion, and therefore initiation of proceedings in the hands of the successor LLP for years earlier than permitted by section 170(2) was impermissible. Where the assessment order is passed in the name of a non-existent entity knowing that conversion had occurred, such an order is a fundamental error and cannot be cured as typographical; it is a nullity. Ratio vs. Obiter: Ratio - When a company is converted into an LLP and thus deemed dissolved and removed from ROC records as of the certificate date, (a) only proceedings pending on that date may be continued in the hands of the successor LLP (Third Schedule clause 8), and (b) the successor cannot be assessed for predecessor's years prior to those allowed by section 170(2); an assessment/order in the name of a non-existent predecessor is void. Conclusion: Reassessment for AY 2009-10 (initiated after conversion) was quashed for lack of jurisdiction under section 170 and because proceedings in the name of the dissolved predecessor could not validly be initiated post-conversion; orders passed in the name of the non-existent company are nullities. Issue 4: Scope of section 170(2) - years assessable in hands of successor when predecessor 'cannot be found' Legal framework: Section 170(2) permits assessment of predecessor's income in hands of successor where predecessor 'cannot be found'; it limits years to (i) the previous year in which succession took place up to date of succession and (ii) the previous year immediately preceding that year. Precedent treatment: Textual commentaries and precedents affirm that section 170(2) is the exclusive provision for assessing predecessor's income in successor's hands when predecessor cannot be found; it does not permit assessment for other years. Interpretation and reasoning: Applying section 170(2) to conversion dated 22.03.2016, the Tribunal held that successor LLP could, at most, be assessed for predecessor's income for AY 2016-17 (upto date of succession) and AY 2015-16. Reopening for AY 2009-10 (earlier years) in the hands of the successor LLP was therefore beyond the statutorily permissible scope and lacked jurisdiction. Ratio vs. Obiter: Ratio - Section 170(2) confines the reach of successor-based assessment to the year of succession (up to the date of succession) and the immediately preceding year; it does not authorize assessment of earlier years in successor's hands. Conclusion: AO lacked jurisdiction to reopen and assess predecessor's earlier years (including AY 2009-10) in the hands of successor LLP; reassessment was quashed on this ground. Issue 5: Necessity to decide merits additions under section 68 where reassessment is quashed Legal framework: Merits of additions (section 68) are adjudicated only if the underlying reassessment is valid and sustainable. Interpretation and reasoning: Because reassessment orders for relevant years were quashed as invalid on procedural and jurisdictional grounds, the Tribunal did not adjudicate the departmental grounds challenging deletion/confirmation of section 68 additions. Ratio vs. Obiter: Ratio - Where reassessment is declared void, merits of additions made in that reassessment need not be adjudicated. Conclusion: Merits issues under section 68 remained unadjudicated because reassessments were quashed; departmental appeals on merits were dismissed as moot.