Revenue authorities cannot issue notices against non-existent entities after company amalgamation under Section 87 CGST Act

The Delhi HC quashed a show cause notice and assessment order issued against a non-existent entity following company amalgamation. The court held that Section 87 of the CGST Act, 2017 preserves transactions between amalgamating companies and transposes liabilities to the amalgamated entity, but does not permit revenue authorities to issue notices or pass orders against non-existent entities. The provision treats companies as distinct only until the amalgamation order date and registration cancellation. Since liabilities transfer to the amalgamated entity, revenue collection rights remain protected without proceeding against the non-existent company. The petition was allowed.

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Issues Involved:

1. Validity of Show Cause Notice (SCN) and final order issued against a non-existent entity.
2. Applicability of Section 160 of the CGST Act, 2017, in rectifying procedural defects.
3. Interpretation and application of Section 87 of the CGST Act, 2017, concerning amalgamated companies.

Detailed Analysis:

1. Validity of SCN and Final Order Issued Against a Non-Existent Entity:

The primary issue concerns the validity of the SCN dated 03 December 2023 and the final order dated 27 April 2024 issued under Section 73 of the CGST Act, 2017, against the Amalgamating Company, which had ceased to exist following its amalgamation with the petitioner. The court noted that the Scheme of Arrangement between the Amalgamating Company and the petitioner was approved by the National Company Law Tribunal (NCLT) on 10 August 2022, with an appointed date of 01 April 2022. Consequently, the Amalgamating Company ceased to exist in law. Despite this, the respondents issued notices and framed orders in the name of the dissolved entity. Drawing parallels with the Supreme Court's judgment in Maruti Suzuki, the court held that proceedings initiated against a non-existent company are void and a nullity. The court emphasized that an assessment or notice issued in the name of a dissolved entity cannot be salvaged by procedural provisions such as Section 292B of the Income Tax Act, which has a parallel in Section 160 of the CGST Act.

2. Applicability of Section 160 of the CGST Act, 2017:

The court examined whether Section 160 of the CGST Act could rectify the procedural defect of issuing notices and orders against a non-existent entity. Section 160, akin to Section 292B of the Income Tax Act, provides that proceedings should not be invalidated due to procedural mistakes if they conform to the intent and purpose of the Act. However, the court concluded that the issuance of a notice or order against a non-existent entity constitutes a substantive illegality, not merely a procedural defect. Therefore, Section 160 could not be invoked to validate the impugned SCN and final order.

3. Interpretation and Application of Section 87 of the CGST Act, 2017:

The respondents contended that Section 87 of the CGST Act allowed them to issue notices to the Amalgamating Company. Section 87 addresses the liability of companies involved in amalgamation or merger for transactions occurring before the effective date of the merger. The court clarified that Section 87 ensures that transactions between merging companies are taxed appropriately, treating them as distinct entities until the merger's effective date. However, it does not authorize issuing notices or orders against a non-existent entity post-merger. The court emphasized that liabilities of the dissolved entity would automatically transfer to the amalgamated entity, ensuring the Revenue's interests are protected without necessitating actions against the defunct company.

Conclusion:

The court allowed the writ petition, quashing the SCN dated 03 December 2023 and the final order dated 27 April 2024. It underscored that proceedings against a non-existent entity are void, and the Revenue must direct its actions against the amalgamated entity. The court left it open for the respondents to initiate proceedings permissible under the law against the petitioner.

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