Reassessment notice on non-existent entity after demerger unjustified: SC

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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.