2024 (6) TMI 227 - HC - GST

Tax assessment proceedings cannot be initiated against company dissolved under Section 59(8) of IBC Act

M/s. Hitachi Nest Control Systems Pvt. Ltd. Versus Additional Commissioner Of Central Tax Bengaluru, Assistant Commissioner of Commercial Taxes, Bengaluru, State Of Karnataka, Union Of India.

Karnataka HC held that tax assessment proceedings cannot be initiated against a company dissolved under Section 59(8) of IBC Act. The court ruled that ... Initiation of tax assessment proceedings under the provisions of CGST Act against a company which is dissolved under Section 59 (8) of the IBC Act - HELD THAT:- The Hon’ble Division Bench in SPICE ENFOTAINMENT LTD. VERSUS COMMISSIONER OF INCOME TAX [PRINTED AS: SPICE ENTERTAINMENT LTD. VERSUS COMMISSIONER OF SERVICE TAX] [2011 (8) TMI 544 - DELHI HIGH COURT] held that initiating assessment against a ‘non-existing’ / ‘dead person’ is not merely a procedural defect which can be cured but a jurisdictional defect. In other words, the Tax authorities do not have the jurisdiction to initiate tax assessment against a ‘non-existing’ entity. Thus, a company would cease to exist after an amalgamation has occurred and tax assessment cannot be initiated against a non-existent company. Similarly, a company would cease to exist after the voluntary winding up proceedings have occurred and is finally dissolved under Section 59 (8) of the IBC Act. In the instant case, the order passed by the NCLT, Bangalore, dated 15.02.2023 is sufficient to come to the unmistakable conclusion that the petitioner – company had stood dissolved completely in terms of Section 59 (8) of the IBC. Consequently, the petitioner – company who is presently represented by the official liquidator for the limited purpose of the present petition ceased to exist for all other purpose including imposing or fastening any liability upon the petitioner-dissolved company. Under these circumstances, the impugned show cause notice and adjudication order are consequently without jurisdiction or authority of law and the same deserves to be quashed. In the instant case, the show cause notice undisputedly issued subsequently to dissolution and there was no determination of the tax liability of the company which was never in existence at the time of issuance of the show cause notice. In other words, at the time of adjudication order, there was no company in existence for the purpose of determination of the tax, interest or penalty and consequently, the question of invoking Section 88 (3) of the CGST Act as against the Directors would not arise in the facts of the instant case. A plain reading of sub-rule (1) would indicate that from the date of commencement of liquidation, the corporate person shall cease to carry on its business except as far as required for the beneficial winding up of its business; sub-rule (2) contemplates that the corporate person continues to exist until it is dissolved under Section 59 (8) of the IBC - after dissolution under Section 59 (8) of the IBC, the said corporate person would have ceased to exist and as such, the question of any adjudication after dissolution being per se impermissible under Section 88 (3) of the CGST Act and evidently would have no application on this ground also. Petition allowed. Issues Involved:1. Legality of the show cause notice and adjudication order issued against a dissolved company.2. Constitutionality of Clause (iii) to Section 140 (1) of the CGST Act.3. Validity of various notifications issued by the respondents.4. Applicability of Section 88 of the CGST Act to the directors of the dissolved company.Summary:Issue 1: Legality of the Show Cause Notice and Adjudication OrderThe petitioner contended that the impugned show cause notice dated 29.09.2023 and the adjudication order dated 27.12.2023 were illegal, arbitrary, and without jurisdiction as they were issued against a dissolved company. The company was dissolved by the NCLT on 15.02.2023 u/s 59 (8) of the Insolvency and Bankruptcy Code, 2016, and its GST registration was cancelled w.e.f. 30.09.2020. The court referred to the Delhi High Court judgment in Spice Entertainment v. Commissioner of Service Tax and the Supreme Court judgment in Pr. Commissioner of Income Tax, New Delhi Vs. Maruti Suzuki India Ltd, which held that initiating assessment against a non-existent entity is a jurisdictional defect. Consequently, the court quashed the show cause notice and adjudication order as they were issued after the company had ceased to exist.Issue 2: Constitutionality of Clause (iii) to Section 140 (1) of the CGST ActThe petitioner sought a declaration that Clause (iii) to Section 140 (1) of the CGST Act is unconstitutional. However, the court did not delve into this issue as the primary relief was granted by quashing the show cause notice and adjudication order.Issue 3: Validity of Various NotificationsThe petitioner challenged several notifications issued by the respondents as ultra-vires Section 168A of the CGST Act, 2017. The court did not address these challenges explicitly, as the primary relief was granted.Issue 4: Applicability of Section 88 of the CGST ActThe respondents argued that they could proceed against the directors of the dissolved company u/s 88 (3) of the CGST Act. The court examined Section 88 (1) and (2) and found no evidence of compliance with these provisions. The court held that without a valid determination of tax liability against the company before its dissolution, the respondents could not invoke Section 88 (3) against the directors.Order:(i) Petition is hereby allowed.(ii) The impugned show cause notice at Annexure-A dated 29.09.2023 and adjudication order at Annexure-AA6 dated 27.12.2023 are hereby quashed.