Supreme Court upholds the validity of assessment made in the case of a nonexistent amalgamating entity
The Supreme Court in PCIT v Mahagun Realtors (P) Ltd. (Mahagun Ruling) upheld the validity of an assessment order made in the case of a non-existent entity, Mahagun Realtors (P) Ltd. (MRPL), which had merged into Mahagun India Private Limited (MIPL) by an order of the Delhi High Court dated 10 September 2007.
This ruling seemingly unsettles a prior ruling of the Supreme Court in PCIT v Maruti Suzuki India Limited (Maruti Suzuki Ruling) which held that once an amalgamating company ceases to exist, it cannot be regarded as a ‘person’ under the income tax law. Therefore, the Revenue can neither initiate a tax proceeding nor pass an order against such an entity.
However, the facts in the Mahagun Ruling are slightly different to those in the Maruti Suzuki Ruling. In the Maruti Suzuki Ruling, the assessee had disclosed the fact of its amalgamation to the jurisdictional Assessing Officer (AO) even before the case being selected for scrutiny. In the Mahagun Ruling, MRPL (i.e., the amalgamating company) consistently held itself out as the assessee before tax officers and courts even after its amalgamation.
As mentioned above, MRPL amalgamated with MIPL by virtue of an order of the Delhi High Court dated 10 September 2007. The order provided that the amalgamation would take effect from 1 April 2006. A search and seizure operation was undertaken against the Mahagun group (including MIPL and MRPL) on 27 August 2008. The directors of both companies were questioned during these proceedings. Even at this stage, the directors did not disclose to the Revenue that MRPL had merged into MIPL and had ceased to exist. Further, in response to notices issued after the search and seizure operation, MRPL filed a return of income in its own name and with its own PAN number. The return of income did not disclose that the company had undergone a merger and had ceased to exist, despite a specific disclosure requirement. Consequently, the AO passed an assessment order in the name of ‘Mahagun Realtors (P) Ltd., represented by Mahagun India Private Limited’. The assessee also filed an appeal before the Commissioner of Income Tax (Appeals) in a similar manner.Download PDF to read more
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