2025 (8) TMI 1181 - AT - Income Tax

Assessment void ab initio against non-existent amalgamated entity; successor file modified return under s.170A; s.68 disallowed; s.80IA allowed

Kumar Urban Development Pvt. Ltd. (Successor to Kumar Housing Corporation Pvt. Ltd.) Versus DCIT, Circle – 14, Pune And (Vice-Versa) And Kumar Urban Development Pvt. Ltd. (Successor to Kumar Housing Corporation Pvt. Ltd.) Versus DCIT, Circle – 14, Pune

Kumar Urban Development Pvt. Ltd. (Successor to Kumar Housing Corporation Pvt. Ltd.) Versus DCIT, Circle – 14, Pune And (Vice-Versa) And Kumar Urban ... ISSUES PRESENTED AND CONSIDERED 1. Whether an assessment or notice issued and an assessment order framed in the name of an entity that has ceased to exist by reason of amalgamation (a 'non-existing entity'), despite prior intimation of merger to the tax authorities, is void ab initio. 2. Whether advances received from customers shown as liabilities can be treated as unexplained credits under section 68 (or otherwise) where projects are 100% complete as at the relevant year-end and revenue recognition under the Percentage of Completion Method (PCM) is delayed; and whether such advances must be brought to tax for the year in which the project is complete (i.e., whether income can be preponed under section 28 instead of treated as unexplained credit under section 68). 3. Whether the assessee is entitled to deduction under section 80-IA in respect of income preponed to the year of assessment on account of advances relating to an eligible project where earlier years/orders have allowed 80-IA for the project. 4. Whether amounts shown as long-outstanding sundry creditors which were not confirmed by creditors and remained on books for several years can be treated as income under section 41(1) as cessation of liability, or require other treatment. 5. Whether the departmental failure (technical system glitches/registrations on e-filing portal) or inability of the Assessing Officer to change successor details can validate notices/orders issued in the name of a non-existing entity. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of assessment framed on a non-existing entity Legal framework: An assessing notice/order must be issued to a person who exists at the time the notice is issued; principles established by higher courts treat issuance of notice/assessment to a dissolved/merged entity as substantive illegality where the department had knowledge of non-existence. Precedent treatment: The Court followed the ratio of the leading Supreme-Court decision holding notices/orders issued to a non-existent merged company to be void (treated as substantive illegality, not merely procedural). The Tribunal also relied on a jurisdictional High Court decision applying that ratio and distinguishing cases where a clerical or technical mistake was shown to be innocent (those being exceptional/peculiar facts). Other decisions treating issuance to a non-existent entity as non-est were cited and followed; decisions where a technical glitch was held harmless on the facts were distinguished. Interpretation and reasoning: Where the assessee had furnished intimation and the department had knowledge (or the seizable material/records related to the pre-merger PAN/name), issuance of notices to the dissolved entity constitutes a fundamental flaw. Technical inability of the Assessing Officer to register successorship on the portal or system glitches cannot cure the substantive illegality of issuing a notice/assessment to a non-existing entity once the department is on notice of the merger. The Tribunal rejected the argument that internal approvals or reference to both PANs in files could validate a notice generated in the name of the dissolved entity. Ratio vs. Obiter: Ratio - assessment framed on a non-existing entity despite intimation/knowledge is void ab initio and cannot be saved as procedural/clerical error. Obiter - remarks on departmental IT process limitations and possibility of issuing fresh notice to the correct entity were made. Conclusion: The assessment orders/notices issued in the name of the non-existing (amalgamated) entity are void ab initio; the assessee's grounds on this issue are allowed and the department may, if permissible, issue fresh notice to the correct (successor) entity. Issue 2 - Treatment of advances from customers: unexplained credits (s.68) v. revenue recognition (s.28 and accounting PCM) Legal framework: Unexplained credits under section 68 permit addition where source of credit is not satisfactorily explained. Revenue recognition in construction contracts follows accounting principles (e.g., PCM); where projects are 100% complete at year-end, revenue cannot be legitimately postponed beyond completion unless consistent with applicable tax/accounting rules and supported by documentary/audit evidence. Section 251(1)(a) notice may be used to shift the theory of taxation (e.g., AO's section 68 to taxation under business income) if the assessee is apprised. Precedent treatment: The Tribunal examined facts and evidence rather than relying on a single precedent; it noted that AO initially treated advances as unexplained credits but that the appellate authority (CIT(A)) changed the characterisation to business income under section 28 after issuing notice under section 250(1) (referencing section 251(1)(a)). Prior tribunal findings on the company's earlier claims and accounting practice were considered. Interpretation and reasoning: The Tribunal accepted that (a) advances were received through banking channels and customers were identifiable; (b) the assessee followed PCM and had recognized revenue in subsequent years; but (c) for four projects the WIP statement showed 100% completion at the relevant year-end, making postponement of revenue on completion projects unsustainable. Therefore, for those projects, advances shown as liabilities were incorrectly retained and ought to be recognized as revenue in the year of completion. The Tribunal quantified corrections: reduction of addition from AO's figure by substituting verified advances (corrected tabulation) and further set-off of closing WIP (to reflect that corresponding costs forming part of WIP must be shifted when revenue is recognized), arriving at a net addition figure. The Tribunal emphasised that the AO must reverse the corresponding revenue in subsequent years and adjust WIP accordingly so there is no double taxation. Ratio vs. Obiter: Ratio - where projects are fully complete at year-end, advances relating to those projects cannot be legitimately deferred and, if not satisfactorily explained as retained for legitimate reason, should be taxed as business income for that year (with corresponding adjustment of WIP). Obiter - procedural observations on the use of section 250/251 powers and on the need for verifying customer-wise ledger folios. Conclusion: The appellate authority's recharacterisation and recalculation reducing the AO's addition is sustained in substance as to principle (completed projects' advances taxable in the year) but the Tribunal ultimately set aside the CIT(A)'s order on other grounds (see Issue 1 and Issue 3). Where evidence established genuine receipt and later taxation, care must be taken to avoid double addition by reversing income in later years with corresponding WIP adjustments. Issue 3 - Entitlement to deduction under section 80-IA on preponed income Legal framework: Deduction under section 80-IA depends on fulfillment of statutory/notification conditions, starting date of operations as declared in Form 10CCB, and other eligibility criteria; prior tribunal orders concluding eligibility in earlier years are relevant. Precedent treatment: The Tribunal relied on its own earlier orders and decisions allowing 80-IA for the same project in prior assessment years, as well as the assessee's filed Form 10CCB showing date of commencement supportive of eligibility. Interpretation and reasoning: The Tribunal found the CIT(A)'s factual conclusion (that the project's start date was a later date) to be incorrect on record; Form 10CCB for AY 2014-15 recorded an earlier commencement date. Given prior allowances of 80-IA for the project and the assessee's history, the Tribunal held the assessee entitled to claim deduction under section 80-IA in respect of the income attributable to the eligible project, even if that income were preponed to the year in question. Ratio vs. Obiter: Ratio - where prior tribunal findings and documentary proof establish project eligibility and commencement date, the deduction under section 80-IA remains available on income preponed to the year of assessment. Obiter - procedural comments on claiming the deduction in subsequent years were made. Conclusion: The assessee is entitled to deduction under section 80-IA for the income attributable to the eligible project; this affected the correctness of CIT(A)'s treatment and resulted in dismissal of revenue's appeal on this point. Issue 4 - Taxation of long-outstanding sundry creditors as cessation of liability (s.41(1)) Legal framework: A liability extinguished or not required to be paid may be brought to tax under section 41(1). However, longstanding recognition/acknowledgement of liability over successive years and binding precedent require care before treating aged creditors as income. Precedent treatment: The Tribunal cited binding High Court and Supreme Court authorities holding that mere passage of time or limitation does not necessarily result in cessation of liability where the assessee has consistently acknowledged debt; similarly, a coordinate High Court decision held that amounts outstanding for many years could not be treated as income where liabilities remained recorded and not written back. Interpretation and reasoning: Relying on jurisdictional High Court authority, the Tribunal found that the assessing approach treating long-outstanding creditors as income under section 41(1) was not correct where liabilities had been repeatedly acknowledged; therefore, the Ld. CIT(A)'s confirmation of addition on this ground was set aside on merit. Ratio vs. Obiter: Ratio - aged creditor balances are not ipso facto taxable as income under section 41(1) merely because they are old or barred by limitation; consistent book entries/acknowledgements and precedents must be considered. Obiter - instructions about reversal in later years if amounts are written back were observed. Conclusion: The additions on account of long-outstanding sundry creditors were not sustainable; the assessee's grounds on this issue were allowed. Issue 5 - Effect of departmental/system technicalities on validity of notices/orders Legal framework: Substantive legality of a notice/order cannot be preserved by explaining technical or administrative reasons for issuance to a non-existent entity where the department had knowledge of the merger; exceptional cases where clerical mistakes were shown to be innocent on the facts are narrowly confined. Precedent treatment: The Tribunal distinguished decisions where courts upheld notices generated by system error on peculiar facts and substantial explanatory record; those were held to be exceptional and not applicable where department had knowledge and substantive error occurred. Interpretation and reasoning: The Tribunal rejected departmental reliance on non-editable system fields, approvals, or internal file notations as sufficient to cure the substantive illegality of issuing a notice to a dissolved entity once the department was on notice. The proper remedy is quashing and, if warranted, issuance of fresh notice to the correct entity. Ratio vs. Obiter: Ratio - technical/system glitches do not validate notices issued to non-existing entities where department had knowledge; such errors cannot be salvaged except in narrow factual situations where evidence shows the mistake was innocent and administrative file contained adequate indication that proceedings were directed at the correct entity. Obiter - possibility of fresh notice to correct entity preserved. Conclusion: Technical glitches or inability of the AO to effect e-filing portal changes do not validate notices/orders issued to non-existing entities where the department had notice of the merger; such notices/orders are void and may be quashed, leaving open power to issue fresh notice to the correct successor where law permits.