Direct Tax Alert - Mumbai Tax Tribunal holds that return filed by amalgamating entity is void ab initio; refund to be granted to successor entity

BACKGROUND

Business reorganisation in the form of amalgamation or demerger or merger of business of one or more entities is a long-drawn process. Furthermore, the reorganisation or restructuring order is normally effective from the preceding date. This leads to a situation wherein there is a significant gap between the effective date of the reorganisation order and the date on which orders are issued by the competent authority (i.e. High Court or National Company Law Tribunal (NCLT), as the case may be). Consequently, it is common that the tax return is filed by the amalgamating company for the period for which amalgamation/ merger is effective (since the reorganisation order may be passed after the due date of filing the tax return). Taking note of this hardship, Finance Act, 2022 has inserted section 170A in Income Tax Act, 1961 (IT Act) to make provision for filing modified tax returns within six months from the end of the month in which the reorganisation order is issued. While this section is applicable if the tax return is already filed, a question may arise as to what would happen if the reorganisation order is received before the due date of filing the tax return and the appointed date for the merger falls in between the fiscal year. Recently, Mumbai Tax Tribunal¹ (‘Tax Tribunal’), needed to delve into a similar matter.

We, at BDO India, have summarised this ruling and provided our comments on the impact of this decision hereunder:

FACTS OF THE CASE

• Taxpayer is engaged in the business of distribution of sports channels. In the fiscal year 2014-15, the Bombay High Court approved the amalgamation of the taxpayer with another group entity (i.e. amalgamated company). Key dates relating to amalgamation are as under:

Date	Event
22 August 2014	Approval of Amalgamation Scheme by Hon’ble Bombay High Court
4 November 2013	Appointed date
21 November 2014	Scheme becoming effective

 

• For fiscal year 2013-14, the Taxpayer filed its tax return (claiming tax refund) on 30 November 2014, duly signed by its director. Subsequently, it filed a revised tax return on 30 March 2016. As the taxpayer had entered into international transactions, the matter was referred to Transfer Pricing Officer. In all the submissions made by the taxpayer, the fact relating to the merger was highlighted. However, the tax officer passed the draft order in the name of the taxpayer and not in the name of the amalgamated company. Hence, the matter was referred to Dispute Resolution Panel (DRP).
• DRP held that the draft assessment order passed in the name of the taxpayer (being an amalgamating company) is void ab initio since the same was passed on to a non-existing company. Further, with respect to granting of refund, it observed that original as well as revised tax returns were filed in the name of the amalgamating company even though amalgamation was effective before the date of filing a tax return. Hence, as there is no valid return available/filed by the taxpayer, there is no authority available with the tax office or the DRP to grant a refund.
• Aggrieved, the taxpayer filed an appeal before the Mumbai Tax Tribunal.

 

Tribunal Ruling

The Mumbai Tax Tribunal confirmed DRP’s direction with respect to the validity of tax returns – i.e., tax returns being non-est. However, with respect to the refund claim, it directed the tax officer to verify the taxpayer’s claim for tax refund and allow the same in accordance with the law. While coming to this conclusion, it made the following observations:

Validity of tax return and order in the name of the amalgamating company

• It is apparent that on 30 November 2014, the taxpayer was a non-existing company as it had already merged with another Company.
• It is also not clear how the PAN of a non-existing entity can be used for filing tax returns. Thus, it was the tax return filed by a non-existing entity.
• There are no provisions in the IT Act which consider a tax return filed in the name of a dead person as a valid return.
• The return filed by the taxpayer was not suffering from any defect as laid down in Explanation to Section 139(9) of the IT Act. Therefore, there was no requirement by the tax officer to issue any such defective notice when the tax return itself was filed in the name of a non-existing entity.
• It would be a dichotomy if the tax return filed by the taxpayer in the name of a non-existing entity is considered a valid return and the assessment order passed by the tax officer on such nonexistent entity based on such tax return is held to be invalid. Rules of the assessment cannot be different for the taxpayer and tax officer.

Claim for tax refund

• Even if the tax return filed by the taxpayer is non-est, it resulted in a situation when the taxpayer has not at all filed the tax return. But even in that case, the tax officer needs to assess the taxpayer and after computing tax liability duty bound to issue a refund order or Demand intimation.
• When the tax officer has assessed the income of the taxpayer independently i.e. without considering the tax return filed, he is duty bound to give credit of taxes under section 199 of the IT Act. Accordingly, due refund of taxes should be allowed to the taxpayer.

 

BDO INDIA COMMENTS

While Finance Act, 2022 has made provision for filing a modified tax return if the original tax return was filed before the NCLT/ High Court order on amalgamation is passed, it does not cover instances where the tax return is filed in the name of the amalgamating company, post the amalgamation. This decision gives guidance on the validity of tax returns filed in such instances. It is imperative to note that assessment in the name of the amalgamating company is a litigative and the judiciary is divided on the same. Supreme Court (SC) in the case of Maruti Suzuki India Limited² has held that assessment in the name of the amalgamating company is void-ab-initio. Please [CLICK HERE ] to read our tax alert on this decision. However, in the case of Mahagun Realtors (P) Ltd³, SC has taken a divergent view. Please [CLICK HERE] to read our tax alert on this decision. With the introduction of sub-section (2A) in section 170 of the IT Act⁴, hopefully, there should be an end to the litigation on the entity on whom the assessment or other proceedings should be completed.

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