2016 (4) TMI 1484 - AT - Income Tax

Assessment under Section 153A void where no incriminating material seized and Revenue failed to rebut assessee's submissions

ACIT, Cent. Circle 3, New Delhi Versus Mahagun Realtors Pvt. Ltd. and Vica-Versa

ITAT DELHI (AT) quashed the assessment framed under section 153A, holding it void where no incriminating material was found or seized and the Revenue ... Assessment u/s 153A - material and information furnished by the assessee in the original returns filed by the assessee - HELD THAT:- DR could not controvert the submissions made by the ld. AR that there was no incriminating material that was found or seized during the search and seizure proceedings. Hence the additions made in the asstt. order by the AO in admittedly not based on any material found or seized during the course of search. We are, therefore, of the opinion that the case of the assessee is squarely covered by the decision of CIT vs. Kabul Chawla [2015 (9) TMI 80 - DELHI HIGH COURT] For the reasons set out above, we uphold the legal issue raised by the assessee in the cross objection and hold the impugned assessment as null and void. We, therefore, without going into the merits of the Revenue’s appeal the same stands dismissed. Assessment u/s 153A completed on a non existing entity - whether a curable defect u/s 292B? - A company, incorporated under the Indian companies Act is a juridical person. It takes its birth and gets life with incorporation. It dies with the dissolution, as per the provisions of the companies Act. It is trite law that the amalgamating company ceases to exist in the eyes of law. Having regard to this consequence provided in law, assessment upon a dissolved company is impermissible as there is no provision in income tax to make an assessment thereupon. Assessment upon an amalgamated company is a technical mistake, within the meaning of section 292B was raised and answered in Spice Entertainment Ltd. [2011 (8) TMI 544 - DELHI HIGH COURT] held once it is found that assessment is framed in the name of non-existing entity it does not remain a procedural irregularity of the nature which could be cured by invoking the provisions of section 292B. Thus, we allow the legal issue raised by the assessee in its cross objection without going into merits of the case and quash the assessment made under 153A on the assessee as illegal and without jurisdiction. ISSUES PRESENTED AND CONSIDERED 1. Whether an assessment framed under section 153A of the Income Tax Act on an amalgamating (dissolved) company-i.e., a non-existing entity at the time of notice and assessment-is valid or is a jurisdictional nullity requiring assessment on the successor (amalgamated) company under section 170(2). 2. Whether participation in assessment proceedings by the successor/amalgamated company or cure-all provisions for procedural defects (section 292B) can validate an assessment framed against a non-existing entity. 3. Whether an assessment under section 153A premised on additions not corroborated by incriminating material seized during search and seizure is maintainable, and whether such assessment is barred by limitation where no incriminating material was found (including reliance on the principle in the Kabul Chawla line of decisions). ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of assessment under section 153A when notice served on a non-existing (dissolved/amalgamating) company and proper person for assessment is the successor under section 170(2) Legal framework: Section 153A empowers assessment after search and seizure; section 170(2) provides that where the predecessor (amalgamating company) cannot be found the assessment of income up to date of succession and preceding year shall be made on the successor (amalgamated) company. Companies are juridical persons whose existence is governed by company law; upon amalgamation the transferor company ceases to exist. Precedent treatment: The Court follows decisions of the jurisdictional High Court holding that assessment must be made on the successor under section 170(2) where predecessor cannot be found, and that an assessment framed on a dissolved/non-existing entity is impermissible. The Court cites and applies High Court authority (Dimension Apparels & Saraswati Industrial Syndicate principles) and the principle in Spice Entertainment that framing assessment on a non-existing entity is a jurisdictional defect not curable under section 292B. Interpretation and reasoning: The Tribunal reasons that because an amalgamating company ceases to have legal existence, there is no statutory basis to make assessment upon it. Section 170(2) prescribes assessment on the successor where the predecessor cannot be found; hence assessment in the name of the dissolved entity is invalid. The Tribunal rejects the Revenue's contention that liabilities passing to the successor justify assessing the predecessor; instead the statutory text requires assessment on the successor. The Tribunal further reasons that substitution or rectification cannot convert a fundamental absence of jurisdiction into validity. Ratio vs. Obiter: Ratio - An assessment framed under section 153A on a dissolved/amalgamated company (non-existing person) is a jurisdictional nullity; assessment must be on the successor under section 170(2). Obiter - Observations on the nature of juridical personality and general inapplicability of section 176/159 to companies are explanatory but support the ratio. Conclusion: The assessment framed on a non-existing amalgamating company is illegal and without jurisdiction and must be quashed; the proper course is assessment on the successor as mandated by section 170(2). Issue 2: Whether participation by the successor or application of section 292B (curing technical defects) can validate an assessment framed against a non-existing entity Legal framework: Section 292B permits rectification of mistakes apparent from record or to treat certain procedural defects as cured where participation by parties results in substantial conformity; however jurisdictional defects are distinct and may not be cured by procedural provisions. Precedent treatment: The Tribunal relies on High Court precedent (Spice Entertainment and related authorities) holding that framing assessment against a non-existing entity is a jurisdictional defect that cannot be cured by section 292B, and that participation does not create estoppel to cure jurisdictional infirmity. Interpretation and reasoning: The Tribunal holds that participation by the successor/amalgamated company in proceedings does not validate an assessment initiated and completed in the name of a non-existent entity because there can be no estoppel against the law where jurisdictional defect exists. The Tribunal treats such a defect as non-procedural and not amenable to curative provisions. Ratio vs. Obiter: Ratio - Section 292B or participation cannot cure a jurisdictional defect arising from assessment against a non-existing entity. Obiter - Remarks on the limited scope of section 292B to technical/procedural errors. Conclusion: The contention that participation or section 292B cures the defect is rejected; the assessment remains invalid despite participation or any purported technicality. Issue 3: Validity of additions under section 153A where additions are not based on material seized during search and seizure and whether such assessment is barred by limitation (Kabul Chawla principle) Legal framework: Section 153A authorises assessment following search and seizure; material seized or discovered during search is a primary basis for additions. Where additions are made without being supported by incriminating seized material, the legitimacy and limitation aspects of the assessment arise. Precedent treatment: The Tribunal refers to the principle articulated in Kabul Chawla that assessments under section 153A, where no incriminating/seized material supports the additions and the return was filed and processed earlier, may be void/limited. The Tribunal treats that line of authority as squarely applicable. Interpretation and reasoning: The Tribunal observes that the contested additions in the impugned assessments were not based on any material found or seized during the search; moreover returns for the relevant years were filed and processed under section 143(1) prior to search. Given absence of seized material and reliance on pre-existing returns, the Tribunal holds the position falls within the Kabul Chawla principle and supports invalidation of assessment proceedings arising therefrom. Ratio vs. Obiter: Ratio - Additions made under section 153A which are not based on material seized/discovered during the search and where returns were filed and accepted may render the assessment invalid or barred by limitation under the Kabul Chawla line. Obiter - Comment on particulars of special auditor reports and timing of notices where relevant. Conclusion: Where contested additions are not supported by incriminating/seized material, the assessment under section 153A is liable to be held null and void; accordingly the Revenue's appeals based on such additions are dismissed without delving into merits. Interrelationship and final disposition Cross-references: Issue 1 and Issue 2 are interlinked - the jurisdictional nullity (Issue 1) is reinforced by the principle that curative provisions/participation cannot validate such defects (Issue 2). Issue 3 independently supports nullification of assessments where additions lack seizure-based material and are time-barred under relevant authority (Kabul Chawla), but the Tribunal principally quashes assessments on jurisdictional grounds in respect of amalgamated/non-existing entities. Final conclusion: The Tribunal allows the cross-objections challenging jurisdiction, holds the assessments under section 153A framed on non-existing amalgamating companies to be illegal and without jurisdiction, rejects the attempt to cure such defect by participation or section 292B, and, in respect of additions lacking seized material, applies the Kabul Chawla principle to dismiss the Revenue's appeals without deciding the merits of disputed additions.