In a significant decision, the Bombay High Court in City Corporation Ltd. v. Assistant Commissioner of Income-tax Circle 1(1) [2025] 171 taxmann.com 301 (Bombay), quashed income tax reassessment notices issued to a non-existent entity. This case highlighted the critical importance of compliance with procedural and substantive legal principles in reassessment proceedings under the Income Tax Act, particularly in cases involving mergers and amalgamations.
Case Background
The issue arose after the merger of City Corporation Ltd. (CCL) with AFTPL, effective from April 1, 2018. The merger was approved by the National Company Law Tribunal (NCLT) through an order dated April 27, 2020. The merger’s validity was undisputed, and the Income Tax Department was informed of the merger on August 27, 2020, via a formal communication, which was acknowledged by the Deputy Commissioner of Income-tax, Circle 1(1), Pune.
Despite being aware of the merger, the department issued reassessment notices under Section 148 of the Income Tax Act on March 31, 2023, in the name of AFTPL, which had ceased to exist following its amalgamation with CCL.
Legal Issues Addressed
Validity of Notices Issued to Non-Existent Entities
The primary issue was whether the notices issued to AFTPL, a non-existent entity post-merger, were valid under the law. The petitioner argued that such notices constituted a jurisdictional error and were invalid. The Court relied heavily on the Supreme Court’s landmark ruling in CIT v. Maruti Suzuki India Ltd. [2019] 107 taxmann.com 375 (SC), which held that issuing notices to a non-existent entity is a substantive illegality, not merely a procedural lapse. It was reiterated that a merged company ceases to exist upon the approval of a merger scheme, and any notice issued in its name is fundamentally flawed.
Technical Glitch Defense
The Income Tax Department contended that the notices were issued to AFTPL due to a ‘technical glitch’ in its system, which allegedly prevented the issuance of notices in the name of CCL. The department argued that this was a procedural error that could be rectified under Section 292B of the Income Tax Act, which protects against minor procedural lapses. However, the Court rejected this defense, stating that the error was not procedural but substantive. Issuing notices to a non-existent entity is a jurisdictional defect that cannot be cured under Section 292B.
Relevant Precedents
In addition to Maruti Suzuki, the Court referred to several similar judgments, including:
Uber India Systems (P.) Ltd. v. Asstt. CIT [2024] 168 taxmann.com 200 (Bombay): The Court held that issuing notices under Section 148A(b) and Section 148 to a non-existent entity post-merger was illegal and invalid.
Alok Knit Exports Ltd. v. Dy. CIT [2021] 130 taxmann.com 457 (Bombay): The Court quashed notices issued to a merged entity, emphasizing that such errors are fundamental violations of jurisdictional principles and cannot be excused as minor mistakes under Section 292B.
Court’s Observations and Decision
The Court made the following key observations:
The Income Tax Department was fully aware of the merger and had acknowledged it in its records as early as August 27, 2020.
Despite this knowledge, the department issued reassessment notices to AFTPL, a company that had ceased to exist as of April 1, 2018.
The department’s justification of a technical glitch was unconvincing, as such errors cannot justify a fundamental jurisdictional defect.
The Court ruled that the notices issued to AFTPL were invalid and non-est in law. It emphasized that issuing notices to a non-existent entity constitutes a substantive illegality, as held in Maruti Suzuki.
Courts Observations and Decision
The Court made the following key observations:
The Income Tax Department was fully aware of the merger and had acknowledged it in its records as early as August 27, 2020.
Despite this knowledge, the department issued reassessment notices to AFTPL, a company that had ceased to exist as of April 1, 2018.
The department’s justification of a technical glitch was unconvincing, as such errors cannot justify a fundamental jurisdictional defect.
The Court ruled that the notices issued to AFTPL were invalid and non-est in law. It emphasized that issuing notices to a non-existent entity constitutes a substantive illegality, as held in Maruti Suzuki.
Clarifications and Directions
While quashing the impugned notices, the Court clarified that its decision does not preclude the Income Tax Department from issuing fresh notices to the correct entity, CCL, for reassessment, provided the law permits it and the circumstances justify it. The Court made it clear that its ruling was limited to the validity of the notices issued to a non-existent entity.
Conclusion
The ruling in City Corporation Ltd. v. Assistant Commissioner of Income-tax Circle 1(1) serves as a reminder of the importance of adhering to legal principles in reassessment proceedings. It underscores the need for tax authorities to exercise due diligence, particularly in cases involving corporate restructuring, to avoid jurisdictional errors that render proceedings invalid.
This judgment not only strengthens the principle that merged entities lose their independent existence but also reinforces the need for meticulous compliance with procedural and substantive requirements in tax administration. The case sets a significant precedent, ensuring accountability in cases of similar lapses in the future.
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