The
Supreme Court on Tuesday ruled that issuing a reassessment notice to a
non-existent entity after its demerger is unwarranted and unjustified.
The
court quashed the reassessment notice under Section 148 of the Income Tax Act
dated March 28, 2007, and the consequent assessment order issued to the
non-existent MCTM Corporation Private Limited after its demerger, as per a
final dissolution order of the Madras High Court.
MCTM
Corporation Private Limited was demerged through a dissolution order passed by
the Madras High Court in 2006. Subsequently, the Income Tax Department issued a
notice under Section 148 and initiated income-escaping assessment proceedings
against the non-existent company in 2007.
MCTM
filed a writ petition before the High Court challenging the income-escaping
assessment. However, the High Court dismissed the writ, stating that MCTM had
an alternative remedy available under the Income Tax Act, 1961.
MCTM
then approached the Supreme Court against the High Court's order.
The
apex court ruled in favour of MCTM and quashed the income-escaping assessment,
stating that once a company is amalgamated or merged with another entity, it
ceases to exist, and any subsequent assessment order passed in the name of the
non-existent entity would be without jurisdiction. The court also noted that
the High Court should have exercised its writ jurisdiction under Article 226 of
the Constitution of India.
Manish
Garg, Lead - Transfer Pricing and Litigation, AKM Global, said the ruling
provides much-needed clarity, emphasising that fresh proceedings cannot be
initiated against a company that has merged, amalgamated, or ceased to exist.
"The
tax department often issues notices for fresh proceedings against such
non-existent companies, creating significant challenges for taxpayers and
wasting time for both parties. In such cases, a writ petition becomes a
preferable option for taxpayers seeking quick relief. This ruling from the apex
court will now serve as a strong precedent for taxpayers when arguing similar
writs before High Courts. It will also help reduce litigation involving such
matters," he said.