2025 (4) TMI 1456 - HC - Income Tax

Corporate Merger Voids Tax Reassessment: Invalid Notice Quashed Due to Non-Existent Entity and Procedural Errors

Vital Connections LLP Versus The National Faceless Assessment Centre & Ors.

HC quashed reassessment notice and assessment order issued to a non-existent entity after corporate merger. The court found the notice invalid as it was ... Reopening of assessment u/s 147 - notice in the name of a non-existent entity - HELD THAT:- From the perusal of the records, it will be seen that in response to the notice cum draft Assessment Order u/s 147 r.w.s. 144B addressed to the Assessee in question the Petitioner had responded on 29.03.2022 (uploaded on the same day), stating the factum of amalgamation and specifically uploading the certified copy of the Scheme of Amalgamation Order passed by the NCLT and other annexures. Additionally, on 29.03.2022, further detailed submissions on facts and law including a detailed reply on merits was uploaded along with copies of several decisions of the Hon’ble Supreme Court, etc. The Petitioner also sought a video conference reserving its right to make further submissions. Therefore, in such circumstances the Respondent could not have assumed the jurisdiction to issue a notice in the name of a non-existent entity. Following the ratio laid down in the case of PCIT Vs. Maruti Suzuki India Ltd[2019 (7) TMI 1449 - SUPREME COURT] the Assessment Order and the consequent notice of demand u/s 156 deserves to be and are hereby quashed and set aside. Assessee appeal allowed. 1. ISSUES PRESENTED and CONSIDERED- Whether the reassessment proceedings initiated under Section 148 of the Income-tax Act, 1961 were valid when the notice was issued in the name of an entity (the Assessee) which had ceased to exist due to amalgamation with the Petitioner LLP prior to issuance of the notice.- Whether the failure of the Respondent to dispose of the objections raised by the Petitioner regarding the invalidity of the reassessment notice and to grant a hearing before passing the assessment order under Section 147 read with Section 144B of the Act violated principles of natural justice.- Whether the impugned assessment order and consequential demand notice could be sustained in law given the facts of merger and subsequent conversion of the amalgamated entity into an LLP.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of Reassessment Notice Issued in the Name of a Non-Existent EntityRelevant Legal Framework and Precedents: The reassessment proceedings under Section 148 of the Income-tax Act require issuance of a notice to the correct Assessee. The principle that a notice issued to a non-existent entity is void ab initio has been recognized in various judicial pronouncements. The Supreme Court's decision in PCIT Vs. Maruti Suzuki India Ltd., (2019) 416 ITR 613 (SC) was relied upon, which held that reopening notices issued in the name of a non-existent entity are invalid.Court's Interpretation and Reasoning: The Court noted that the Assessee, Kauvery Trexim Private Limited, had been amalgamated with Vital Connections Private Limited pursuant to an NCLT order dated 15.12.2017. Subsequently, Vital Connections Private Limited was converted into a Limited Liability Partnership named Vital Connections LLP (the Petitioner) effective 13.03.2018. The Respondent issued the reassessment notice dated 31.03.2021 in the name of Kauvery Trexim Private Limited, an entity that had ceased to exist well before the notice date.Key Evidence and Findings: The Petitioner had submitted the certified copy of the Scheme of Amalgamation Order passed by the NCLT and annexures along with its response to the notice cum draft assessment order dated 28.03.2022. This demonstrated the merger and the non-existence of the Assessee as a separate legal entity at the time of issuance of the notice.Application of Law to Facts: Since the reassessment notice was issued in the name of a non-existent entity, the proceedings initiated thereunder were void ab initio. The Respondent's failure to issue the notice in the name of the amalgamated entity or the Petitioner LLP rendered the reassessment invalid.Treatment of Competing Arguments: The Respondent contended that there was no record to show that the Petitioner had intimated the merger approval order to the jurisdictional Assessing Officer prior to issuance of the notice. However, the Court observed that the Petitioner had brought the merger to the Respondent's attention through its submissions and uploaded the relevant documents promptly upon receipt of the notice. The Respondent's argument was insufficient to validate the notice issued to a non-existent entity.Conclusions: The Court concluded that the reassessment notice issued under Section 148 of the Act in the name of Kauvery Trexim Private Limited was invalid and the consequent assessment order passed under Section 147 read with Section 144B was liable to be quashed.Issue 2: Denial of Hearing and Non-Disposal of Objections Prior to Passing Assessment OrderRelevant Legal Framework and Precedents: Principles of natural justice mandate that an assessee must be given an opportunity of hearing before adverse orders are passed. Section 144B of the Income-tax Act provides for issuance of a show cause notice and opportunity to the assessee before finalizing the assessment order. The Court relied on established jurisprudence that non-disposal of objections and denial of hearing vitiates the assessment proceedings.Court's Interpretation and Reasoning: The Petitioner submitted objections to the reassessment proceedings on 22.07.2021 and reiterated these objections in response to the notice dated 14.03.2022. Upon issuance of the show cause notice and draft assessment order on 28.03.2022, the Petitioner submitted a partial response on 29.03.2022 requesting disposal of objections and sought a video conference hearing. Despite these requests, the Respondent passed the assessment order on 30.03.2022 without disposing of the objections or granting a hearing.Key Evidence and Findings: The record showed the Petitioner's repeated requests for disposal of objections and for a hearing, which were ignored. The Respondent proceeded to finalize the assessment order within two days of the show cause notice, indicating denial of a reasonable opportunity to the Petitioner.Application of Law to Facts: The Court held that the Respondent's failure to dispose of objections and refusal to grant a hearing before passing the assessment order was a breach of natural justice and rendered the assessment order unsustainable.Treatment of Competing Arguments: The Respondent did not specifically address the denial of hearing argument but relied on the absence of prior intimation of merger to justify the proceedings. The Court found this insufficient to override the procedural lapses demonstrated.Conclusions: The assessment order passed without disposing of objections or granting a hearing was quashed for violation of principles of natural justice.Issue 3: Validity of Demand Notice and Further ProceedingsRelevant Legal Framework and Precedents: A demand notice under Section 156 of the Income-tax Act can only be sustained if the underlying assessment order is valid. The Court referred to the principle that if the assessment order is quashed, the consequential demand notice also falls.Court's Interpretation and Reasoning: Since the assessment order dated 30.03.2022 was quashed, the consequent demand notice dated the same day for Rs. 8,28,41,280/- also could not stand.Key Evidence and Findings: The demand notice was issued pursuant to the impugned assessment order.Application of Law to Facts: The Court set aside the demand notice along with the assessment order but clarified that the Department was free to issue a fresh notice to the correct entity if permitted under law.Treatment of Competing Arguments: The Respondent did not contest the setting aside of the demand notice if the assessment order was quashed.Conclusions: The demand notice was quashed along with the assessment order, with liberty to the Department to proceed afresh in accordance with law.3. SIGNIFICANT HOLDINGS'Following the ratio laid down in the case of PCIT Vs. Maruti Suzuki India Ltd., reported (2019) 416 ITR 613 (SC), the Assessment Order dated 30.03.2022 and the consequent notice of demand under Section 156 of the Income Tax Act, 1961 deserves to be and are hereby quashed and set aside.''The Respondent could not have assumed the jurisdiction to issue a notice in the name of a non-existent entity.''The impugned Assessment Order dated 30.03.2022 as well as the demand notice of even date are hereby quashed and set aside. It will be open for the Department to issue fresh notice to the Assessee, if statutorily permitted.'Core principles established include the requirement that reassessment notices must be issued to the correct legal entity existing at the time of issuance, and that failure to provide an opportunity of hearing and to dispose of objections prior to passing assessment orders violates natural justice and renders such orders invalid.Final determinations were that the reassessment notice issued to the non-existent entity was void ab initio, the assessment order passed without disposing objections and granting hearing was invalid, and the consequential demand notice was also quashed. The Department was permitted to initiate fresh proceedings in compliance with legal requirements.