Commissioner Of Income Tax-Iii v. Dimension Apparels Pvt. Ltd

* IN THE HIGH COURT OF DELHI AT NEW DELHI Decided on: 08.07.2014 ITA 327/2014, C.M. NO.10527/2014 +ITA 327/2014, C.M. NO.10527/2014+ITA 328/2014, C.M. NO. 10528/2014 +ITA 329/2014+ITA 330/2014, C.M. NO. 10641/2014+ITA 332/2014, C.M. NO. 10690/2014 COMMISSIONER OF INCOME TAX-III..... Appellant Versus DIMENSION APPARELS PVT. LTD...... Respondent Through : Ms. Suruchii Aggarwal, Sr. StandingCounsel for the revenue.None on behalf of the respondent. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE VIBHU BAKHRU MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) % 1.The Appellants (hereafter, "the Revenue") challenge an orderdated 21.06.2013 of the Income Tax Appellate Tribunal ("ITAT") -Delhi (Branch B) in ITA Nos. 571/DEL/2012; 572/DEL/2012;573/DEL/2012,574/DEL/2012and576/DEL/2012.TheITATquashed the assessment order against the respondent (hereafter “theAssessee”) framed under Sections 143(3), 153A and 153C of theIncome Tax Act, 1961 (hereafter “the Act”).2.The Assessment Order was made on 31.12.2010, and covered the assessment years 2003-04 to 2008-09. The assessee had contendedthat it had ceased to exist from 7.12.2009, because, by virtue of anorder of this Court – it had been amalgamated with another companyunder Sections 391(2) and 394 of the Companies Act. Aggrieved bythe Assessment Order, the assessee appealed to the CIT(A). It arguedthat the assessment order was invalid, because on the date on which itwas passed, the Assessee had already ceased to exist (having beenamalgamated). The CIT(A) agreed with this contention and held that: “In my considered opinion, a Company, incorporated underthe Indian companies Act is a Juridical person. It take itsbirth and gets life with incorporation. It dies with thedissolution, as per the provision of the companies Act. It istrite law that the amalgamating company ceases to exist inthe eyes of law. Having regard to this consequence providedinlaw,assessmentuponadissolvedcompanyisimpermissible as there is no provision in income tax to makean assessment thereupon. Therefore, I agree with theappellant that assessment on a company, which has beendissolved/amalgamated under section 391 and 394 of theCompanies Act, 1956, is invalid. There is no provision inthe IT Act, to make assessment on an amalgamatingcompany (transferor/dissolved company), even though theappellantcompanyparticipatedinassessmentproceedings.” 3.The revenue, being aggrieved by the CIT(A)’s decisionappealed to the ITAT. The said order was, however, upheld on appealby the ITAT. 4.The revenue, in its appeal argues, first of all that by virtue ofSections 170(1) and 170(2) of the Income Tax Act, in cases ofsuccession of business, where the predecessor cannot be found, the assessmentthatwouldotherwisehavebeenmadeuponthepredecessor, shall instead be made upon the successor in a likemanner.It is secondly contended that the error in the assessmentorder, if any, is a minor one, at best an irregularity; thus saved bySection 292B of the Act. It was argued lastly that the assessee haditself participated in the proceedings throughout and could not beheard to complain against the assessment order. The revenue relies onthe Madras High Court ruling in Marshall Sons and Co. vs. IncomeTax Officer (1992) 195 ITR 417. 5.The assessee contends that no question of law arises forconsideration. It submits that the text and phraseology of Sections 170(1) and (2) do not support the revenue's arguments. The assesseefurther relies on Saraswati Industrial Syndicate v. CIT, 1990 Supl. (1)SCR 332 in support of its contentions and the findings of the taxauthorities below, i.e. the CIT (A) and the ITAT. Spice EntertainmentLtd. Vs. CIT - ITA No.475 of 2011, decided by a Division Bench ofthis Court, as well as an earlier decision in Commissioner of IncomeTax v. Vived Marketing Servicing Pvt. Ltd. ITA No. 273/2009 wererelied on by the assessee as well, in support of its contentions. It wasalso pointed out that the jurisdictional defect in this case could not becured under Section 292-B of the Act. 5.The assessee contends that no question of law arises forconsideration. It submits that the text and phraseology of Sections 170(1) and (2) do not support the revenue's arguments. The assesseefurther relies on Saraswati Industrial Syndicate v. CIT, 1990 Supl. (1)SCR 332 in support of its contentions and the findings of the taxauthorities below, i.e. the CIT (A) and the ITAT. Spice EntertainmentLtd. Vs. CIT - ITA No.475 of 2011, decided by a Division Bench ofthis Court, as well as an earlier decision in Commissioner of IncomeTax v. Vived Marketing Servicing Pvt. Ltd. ITA No. 273/2009 wererelied on by the assessee as well, in support of its contentions. It wasalso pointed out that the jurisdictional defect in this case could not becured under Section 292-B of the Act. 6.Sections 170(1) and 170(2) of the Act do not assist the revenuein their case. The revenue does not contest that in a case ofamalgamation, the predecessor (being a dissolved company) “cannotbe found”. Consequently, Section 170(2) applies. This provisionclarifies that where the predecessor cannot be found, “the assessment of the income of the previous year in whichthe succession took place up to the date of the successionand of the precious year preceding that year shall be madeon the successor in like mannerand to the same extent as itwould have been made on the predecessor.” (EmphasisSupplied) 7.The revenue seems to argue that the assessment is justifiedbecause the liabilities of the amalgamating company accrue to theamalgamated (transferee) company. While that is true, the questionhere is which entity must the assessmentbe made on. The text ofSection 170(2) makes it clear that the assessment must be made on thesuccessor (i.e., the amalgamated company). 8.The Supreme Court, in Saraswati Industrial Syndicate (supra)held that “aftertheamalgamationofthetwocompaniesthetransferor company ceased to have any entityand theamalgamated company acquired a new status and it was notpossible to treat the two companies as partners or jointlyliablein respect of their liabilities and assets.” (EmphasisSupplied) 9.With respect to the specific issue of assessment, in Vived Marketing Servicing Pvt. Ltd. No. (supra) the Court observed that: “When the Assessing Officer passed the order of assessmentagainst the respondent company, it had already beendissolvedand struck off the register of the Registrar ofcompanies u/s 560of the Companies Act. In thesecircumstances, the Tribunalrightly held that there couldnot have been any assessmsent order passed against thecompany which was not in existence as on that date in theeyes of law it had already been dissolved.” (EmphasisSupplied)against the respondent company, it had already beendissolvedand struck off the register of the Registrar ofcompanies u/s 560of the Companies Act. In thesecircumstances, the Tribunalrightly held that there couldnot have been any assessmsent order passed against thecompany which was not in existence as on that date in theeyes of law it had already been dissolved.” (EmphasisSupplied) 10.Vived Marketing Servicing Pvt. Ltd. (supra) also noted thatSection 176 of the IT Act, which contains provisions pertaining to adiscontinuationofbusiness,doesnotapplytoacaseofamalgamation/dissolution. It was also held that Section 159 of the Act,which provides for tax liability to beattachedto the legalrepresentatives of a deceased person, is likewise inapplicable. Thelanguage of Section 159 evidently only applies to natural persons, andcannot be extended, through a legal fiction, to the dissolution ofcompanies. 11.Marshall Sons and Co. (supra), is relied on by the revenue. Itwas held in that judgment that “the transferor-company shall, with effect from the transferdate, be deemed to have carried on its business for and onbehalf of the transferee-company and, accordingly, theprofits and losses of the transferor- company for the periodcommencing from the transfer date, shall be deemed to bethe profits or losses of the transferee-company and shall beavailable to the transferee-company for disposal in anymanner.” 11.Marshall Sons and Co. (supra), is relied on by the revenue. Itwas held in that judgment that “the transferor-company shall, with effect from the transferdate, be deemed to have carried on its business for and onbehalf of the transferee-company and, accordingly, theprofits and losses of the transferor- company for the periodcommencing from the transfer date, shall be deemed to bethe profits or losses of the transferee-company and shall beavailable to the transferee-company for disposal in anymanner.” 12.That case, however, involved a controversy about the effectivedate of amalgamation, and not about whether an assessment of incomecan be made on an amalgamated company. In fact, the logic of theMadras High Court’s decision undermines the Appellants’ case. TheMadras High Court found for the Revenue, because, in its opinion, theeffective date of amalgamation came after the date of the assessment.The assessee argued that the date of amalgamation was January 1,1982, whereas the assessment order was dated November 25, 1984. 13.The Madras High Court held that “according to the records maintained pursuant to theprovisions of the Companies Act, the subsidiary companyhad continued to remain in existence up to January 21,1986, even long after January 1, 1982.” 14.On this basis, it held the Assessee liable. This obviously impliesthat had the company not been in existence at the time of theassessment order, it would not have been liable. 15.In Spice (supra), this Court, after discussing the law declaredby the Supreme Court in Saraswati Industrial Syndicate (supra) stated that: "9.The Court referred to its earlier judgment inGeneral Radio and Appliances Co. Ltd. Vs. M.A. Khader(1986) 60 Comp Case 1013. In view of the aforesaidclinching position in law, it is difficult to digest thecircuitous route adopted by the Tribunal holding that theassessment was in fact in the name of amalgamatedcompany and there was only a procedural defect. 10.Section 481 of the Companies Act provides fordissolution of the company. The Company Judge in the HighCourt can order dissolution of a company on the groundsstated therein. The effect of the dissolution is that thecompany no more survives. The dissolution puts an end tothe existence of the company. It is held in M.H. Smith (PlantHire) Ltd. Vs. D.L. Mainwaring (T/A Inshore), 1986 BCLC342 (CA) that "once a company is dissolved it becomes anon-existent party and therefore no action can be brought initsname.Thusaninsurancecompanywhichwassubrogated to the rights of another insured company washeld not to be entitled to maintain an action in the name ofthe company after the latter had been dissolved. 11.After the sanction of the scheme on 11th April, 2004,the Spice ceases to exit w.e.f. 1st July, 2003. Even if Spicehad filed the returns, it became incumbent upon the Incometax authorities to substitute the successor in place of thesaid “dead person‟. When notice under Section 143 (2) was sent, the appellant/amalgamated company appeared andbrought this fact to the knowledge of the AO. He, however,did not substitute the name of the appellant on record.Instead, the Assessing Officer made the assessment in thename of M/s Spice which was non existing entity on thatday. In such proceedings and assessment order passed inthe name of M/s Spice would clearly be void. Such a defectcannot be treated as procedural defect. Mere participationby the appellant would be of no effect as there is no estoppelagainst law." 16.The authority of the above precedent binds us; we see no reasonto differ from the logic and reasoning in Spice (supra). 17.The other aspect is as to the applicability of Section 292-B ofthe Act, which reads as follows: 16.The authority of the above precedent binds us; we see no reasonto differ from the logic and reasoning in Spice (supra). 17.The other aspect is as to the applicability of Section 292-B ofthe Act, which reads as follows: "292B. No return of income assessment, notice, summons orother proceedings furnished or made or issue or taken orpurported to have been furnished or made or issued ortaken in pursuance of any of the provisions of this Act shallbe invalid or shall be deemed to be invalid merely byreasons of any mistake, defect or omission in such return ofincome, assessment, notice, summons or other proceeding ifsuch return of income, assessment, notice, summons orother proceedings is in substance and effect in conformitywith or according to the intent and purpose of this Act." 18.The Revenue argues that the assessment was in substance andeffect in conformity with the Act, because the Assessing Officer had used correct nomenclature in writing the name of the Assessee, alongwith the fact that the company had amalgamated, as well as the correctaddress of the amalgamated company. Consequently, they contend that “the mere omission, if any on the part of the AO to mentionthe name of the appellant/amalgamated company in place ofM/s Dimension Apparel… [is]… therefore a proceduraldefect.” 19.The question of whether an assessment upon an amalgamatedcompany is a mistake within the meaning of Section 292B was raisedand answered by the Delhi High Court in Spice (supra). In that case,the Tribunal had held that “the assessment in substance and effect has been madeagainst amalgamated company in respect of assessment ofincome of amalgamating company for the period prior toamalgamation and mere omission to mention the name ofamalgamatedcompanyalongwiththenameofamalgamating company in the body of assessmentagainstthe item "name of the assessee" is not fatal to the validity ofassessment but is a procedural defect covered by Section292B of the Act.” (Emphasis Supplied) 20.This Court rejectedthis argument, holding that “it [becomes] incumbent upon the Income Tax Authorities tosubstitute the successor in place of the said ‘dead person’.Such a defect cannot be treated as procedural defect… onceit is found that assessment is framed in the name of non-existing entity it does not remain a procedural irregularityof the nature which could be cured by invoking theprovisions of Section 292B of the Act.” (Emphasis Supplied) 21.In Spice (supra) the reason for the inapplicability of Section292-B was additionally premised on the decision of the Punjab &Haryana High Court in CIT v. Norton Motor, 275 ITR 595, that whileSection292Bcancuretechnicaldefects,itcannotcurea“jurisdictional defect in the assessment notice.” In Spice (supra),therefore, this Court expressly classified “the framing of assessmentagainst a non-existing entity/person” as a jurisdictional defect. Thishas been a consistent position. As early as 1960, in CIT v. ExpressNewspapers, 1960 (40) ITR 38 (Mad), the Madras High Court heldthat “there cannot be an assessmentof non-existent person…The assessment in the instant case was made long after theFree Press Company was stuck off from the register of thecompanies, and it could not be valid.” (Emphasis Supplied) 22.On the last contention, i.e with respect to participation by theprevious assessee, i.e the amalgamating company (which ceases toexist), again Spice (supra) is categorical; it was ruled on that occasionthat such participation by the amalgamated company in proceedingsdid not cure the defect, because “there can be no estoppel in law.”Vived Marketing Servicing Pvt. Ltd., (supra) had also reached thesame conclusion. 23.It is thus clear that all contentions sought to be urged by therevenue are in respect of familiar grounds, which have been ruledupon, against it, consistently in two decisions of this court. Therefore,no substantial question of law arises in this appeal. 24.Accordingly, there is no merit in the appeals; they are 22.On the last contention, i.e with respect to participation by theprevious assessee, i.e the amalgamating company (which ceases toexist), again Spice (supra) is categorical; it was ruled on that occasionthat such participation by the amalgamated company in proceedingsdid not cure the defect, because “there can be no estoppel in law.”Vived Marketing Servicing Pvt. Ltd., (supra) had also reached thesame conclusion. 23.It is thus clear that all contentions sought to be urged by therevenue are in respect of familiar grounds, which have been ruledupon, against it, consistently in two decisions of this court. Therefore,no substantial question of law arises in this appeal. 24.Accordingly, there is no merit in the appeals; they are accordingly dismissed along with the pending applications withoutany order as to costs. S. RAVINDRA BHAT(JUDGE) JULY 08, 2014 VIBHU BAKHRU(JUDGE)