First published on www.Taxguru.in on 6 February 2020
The Hon’ble Supreme Court while deciding the issue held that provisions of Section 170(1) and not Section 139(5) of the Income Tax Act, 1961, apply to assessees who file revised returns of income on account of being successors in business by virtue of a Scheme of Arrangements and Amalgamations duly sanctioned by NCLT under Sections 230-232 of the Companies Act, 2013.
The Hon’ble Supreme Court, while restoring the Judgement and Order of the learned Single Judge of the Madras High Court allowing the appellant companies to file their revised Returns of Income agreed with the Ld. Single Judge that the Department could not override an approved Scheme of Arrangement and Amalgamation, which has statutory force, by rejecting the revised returns of Income filed by the amalgamating assessees as being invalid.
The Appellants were before the Hon’ble Supreme Court challenging the Judgement and Order of a Division Bench of the Hon’ble Madras High Court which had held in favour of the Department, directing the Appellants to comply with the procedure for filing belated revised returns of income and held that Clauses 63 and 64 of the two Schemes of Arrangement and Amalgamation can only be construed as an “enabling clause” and did not imply consent of the Department to the Schemes.
Facts in brief:
The Appellants, with a view to restructure and consolidate their businesses and enable better realisation of their business potentials and enhance value for their shareholders entered into 4 interconnected Schemes of Arrangement and Amalgamation with 9 companies and their respective shareholders and creditors. The Appellants were the Transferee Companies (or the Amalgamated companies) and the 9 companies were the Transferor Companies (or the Amalgamating companies) under the Scheme.
The Transferor and Transferee companies filed Company Petitions under sections 391 to 394 of the Companies Act, 1956 before the Madras and Guwahati High Courts. On the Companies Act, 2013 coming into force, the Company Petitions were transferred to the NCLT at Madras and Guwahati respectively. The Appointed date of the Scheme was 01.01.2015 and would come into effect from 30.10.2018. The Schemes were approved and sanctioned by the NCLT, Guwahati vide Orders dt.18.05.2017 and 30.08.2017 while the NCLT, Madras sanctioned the Schemes vide Orders dt. 16.10.2017, 20.10.2017, 26.10.2017, 28.12.2017, 10.01.2018, 20.04.2018 and 01.05.2018.
After the Schemes were sanctioned and approval was granted by the NCLT, the Appellants/Transferee Companies manually filed revised Returns of Income on 27.11.2018 based on the revised and modified computation of total income and tax liability of the Transferor/Amalgamated Companies. The revised Returns of Income came to be filed well after the due date for filing revised Returns of Income u/s 139(5) because the final order of NCLT was passed on 01.05.2018 and which resulted in impossibility to file revised Returns of Income before the prescribed date of 31.03.2018.
The Income Tax Department issued a notice on 04.12.2018 u/s 143(2) to give effect to the approval of the Scheme. The notice was subsequently recalled on 05.12.2018 on the ground that the Appellants had filed revised Returns of Income without following procedure for obtaining permission from CBDT for condonation of delay u/s 119(2)(b) read with CBDT Circular No. 9/2015 dated 09.06.2015.
The Department subsequently passed assessment order dt. 28.12.2018 for A. Y. 2016-17 with respect to the Appellant No.2.
The Appellants filed Writ Petitions before the Madras High Court praying for quashing of the Order dt. 05.12.2018 and for direction to the Department to complete assessments with respect to A. Y. 2015-16 and 2016-17 after taking into account the revised returns filed on 27.11.2018 as well as the Orders of the NCLT, Chennai approving the Schemes of Arrangement and Amalgamation.
The Learned Single Judge, by a common order, allowed the Writ Petitions and quashed the Order dt. 05.11.2018 passed by the Department. The salient observations of the Ld. Single Judge were:
1. Clause 64(c) of the Scheme enabled the Appellants to file revised Returns of Income beyond the prescribed period under the Act.
2. The Department could not override an approved Scheme of Arrangement and Amalgamation which has statutory force, by rejecting revised returns filed by the Appellants as being invalid.
3. The Department did not object to the Schemes notified u/s 230(5) of the Companies Act, 2013.
4. Sections 139(5) and 119(2)(b) and Rule 12(3) of the Income Tax Rules, did not apply to an assessee which had filed its return pursuance to a Scheme of Arrangements and Amalgamation approved and sanctioned by the NCLT.
The Department filed Writ Appeal under Clause 15 of the Letters Patent Act challenging the judgement and order of the Single Judge. The Division Bench of the Madras High Court vide the impugned Judgement set aside the order of the Single Judge. The salient features of the impugned Judgement and order were:
1. The Appellants were directed to comply with the procedure for filing belated returns i. e. follow procedure prescribed in Section 119(2)(b) r/w Circular 9/2015.
2. Clause 64 of the scheme was mere an “enabling clause”. The Department cannot be viewed to have agreed to consider the revised Return of Income, merely because it did not object to Clause 64.
3. NCLT, while sanctioning the Scheme, clarified that the Appellants would be required to approach relevant statutory authorities for obtaining necessary permissions and compliances.
4. Department did not consent to waive the procedures or statutory requirements laid down in the Income Tax Act in respect of filing of revised Returns of Income.
Analysis of the Hon’ble Supreme Court’s Judgement and Order
The Hon’ble Supreme Court has referred to two different Schemes of Arrangement and Amalgamation between the Appellants and two different sets of amalgamating Companies. The relevant “enabling clause” in each of the Scheme shows that the Appellants were entitled to file revised Returns of Income, after the prescribed time limit for filing revised returns had lapsed, without there being any liability on account of interest, penalty or any other sum.
The Court has further observed that in compliance with S. 230(5) of the Companies Act, 2013 r/w Rule 8(1) of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, notices were sent to the Department and various other statutory authorities. These statutory authorities could raise objections within 30 days from the date of receipt of the notice. In the event that the authorities fail to communicate their objections, it will be presumed that they had no representation to make on the proposed schemes.
The Department did not raise any objections within the stipulated 30 days despite service of notice. Pursuant thereto, the Schemes were sanctioned by NCLT, Chennai and Guwahati vide Orders at various dates and the Schemes attained statutory force, not only inter se the Transferor and Transferee Companies, but also in rem against the various statutory authorities, Department or other regulators likely to be affected by the Schemes.
Every scheme of arrangement and amalgamation provides for an Appointed Date. The Appointed Date is the date on which the assets and liabilities of the Transferor company vest in and stand transferred to the Transferee company and is the Date on which the Scheme comes into effect. If such date is modified by the Court, then the modified date becomes the Appointed Date.
The Hon’ble Supreme Court in Marshall Sons & Co. (India Ltd. v. ITO (1997) 2 SCC 302, had held that pursuant to the Scheme of Arrangement and Amalgamation, the assessment of the Transferee Company must take in to account the income of both the Transferor and Transferee Companies.
Applying the ratio of the above case to the instant case, on the Schemes having become effective, the Transferor / Amalgamating companies ceased to exist with effect from the Appointed Date and the assets, profits and losses etc. were transferred to the books of the Appellants (Transferee/Amalgamated Companies). Since the Schemes had provisions for filing of revised Returns of Income beyond the time limit prescribed u/s 139(5) and since, post the amalgamation, the re-computation would have a bearing on the total income of the Appellants with respect to A. Y. 2016-17, particularly on matters in relation to carry forward of losses, unabsorbed depreciation, etc., the Appellants filed their revised Returns of Income on 27.11.2018.
The Department’s argument against the Appellants appears to be in the wrong direction. The Counsel for the Department argued on the applicability of Sections 139(5) and 119(2)(b) r/w Circular 9/2015. The provisions of Section 139(5) apply to a situation where an assessee having filed its returns of income under sub-sections (1) or (4) of Section 139, discovers an omission or mistake in the returns of income filed, may furnish a revised returns of income under sub-section (5) within the time limit prescribed under that sub-section.
In the case of the Appellants, the returns of income, filed originally within time, were not revised due to any errors, omissions or mistakes, but were revised in pursuance of the re-stated/re-computed profits or losses, arising out of the Schemes having become effective. The delay was on account of time taken to obtain sanction of the Schemes of Arrangement and Amalgamation from the NCLT.
There was an impossibility of performance, for the assessee companies, to have filed the revised Returns of Income for A. Y. 2016-17 before the due date of 31.03.2018 since the last of the sanctions to the Schemes by NCLT were obtained only on 22.04.2018 and 01.05.2018.
The Department further argued that the Appellants ought to have made a representation to CBDT u/s 119(2)(b) for condonation of delay, which is applicable in case where an assessee faces genuine hardship in filing of return after the expiry of the stipulated period. The Hon’ble Supreme Court held that the provisions of Section 119(2)(b) would not be applicable where an assessee has restructured its business and filed a revised Return of Income under approval obtained from a Scheme approved and sanctioned by the NCLT and not objected to by the Department.
The Hon’ble Supreme Court quoting from one of its earlier judgements stated that “the purpose of assessment proceedings is to assess the tax liability of an assessee correctly in accordance with law”.
The final observation of the Hon’ble Supreme Court in setting aside the judgement and order dated 04.07.2019 of the Division Bench of the Madras High Court and restoring the Judgement and Order dated 30.04.2019 of the Single Judge of that Court is very lucid and lays down the law with respect to taxability of income in case of Amalgamations sanctioned by NCLT under the provisions of the Companies Act, 2013 and applicable Rules thereunder. The observation in para 10 of the Judgement is reproduced below:
10. Section 170(1) of the Income Tax Act, provides that the successor of an Assessee shall be assessed in respect of the income of the previous year after the date of succession.
Section 170(1) of the Income Tax Act provides as under:
17. Succession to business otherwise than on death.
(1) Where a person carrying on any business or profession (such person hereinafter in this Section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this Section referred to as the successor) who continues to carry on that business or profession,-
(a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession;
(b) the successor shall be assessed in respect of the income of the previous year after the date of succession.
Sub-section (1) of Section 170 makes it clear that it is incumbent upon the Department to assess the total income of the successor in respect of the previous assessment year after the date of succession.
In the present case, the predecessor companies/transferor companies have been succeeded by the Appellants/transferee companies who have taken over their business along with all assets, liabilities, profits and losses etc.
In view of the provisions of Section 170(1) of the Income Tax Act, the Department is required to assess the income of the Appellants after taking into account the revised Returns filed after amalgamation of the companies.
The judgement of the Hon’ble Supreme Court in the given case will come as a significant relief to assessee companies which have amalgamated or intend to amalgamate to achieve economies of scale, kill competition and consolidate. The fear of the taxman on the prowl to achieve his target-oriented tax collection goals will, at least to cases of succession in businesses, abate.
The Department in its eagerness to simply collect taxes, in a way resorts to “extortion” by misusing or misapplying the law. Rather than focussing on serious assessment of tax liabilities by invoking the correct provisions of the tax law, the Department resorts to tax terrorism, leading to long drawn tax dispute litigations. From the given case it can be clearly seen how ill-informed the assessing officers and the Department’s own Counsels are about the tax law which they are expected to enforce in the right spirit and also how poorly the tax law is interpreted. Or is it that the Department does not believe in interpreting the law as it should be and rather would interpret it the way they want it to be, with caution to the wind? Thankfully, the Courts are there to interpret the tax laws in the right spirit and according to the rationale that applies to the complex and ever evolving taxing situations.