The Finance Bill, 2022 proposed to amend Section 170(2A) to clarify on the validity of proceedings in case of business reorganization. The section provides that the assessment or other proceedings pending or completed on the predecessor in the event of a business reorganization, shall be deemed to have been made on the successor. In this regard, Mr. RAMPRASAD T (Chartered Accountant)  outlines the existing provisions u/s 170 and outlines the intention of the legislation in introducing the said amendment. The author touches upon SC ruling in Maruti Suzuki and recent Bangalore ITAT ruling in Serendipity Infolabs and opines that the said amendment in Section 170 is intended to bring in clarity and uniformity on assessment/reassessment made pending approvals in case of amalgamation/demerger. Likewise, the author discusses the new section 170A which provides for filing of modified return by successor company prior to date of order by High Court/Tribunal/Adjudicating authority.

“Assessment in case of Successor-in-interest“

Section 170 of the Income-tax Act, 1961 (‘Act’) provides for taxation of income from business or profession in case of succession of business or profession otherwise than death.

The transferor ( here in after referred to as predecessor) of the business or profession shall be assessed in respect of income[1] of the previous year in which succession takes place up to the date of succession. After such date transferee, who continues to carry on business or profession, (here in after referred to as successor) shall be assessed for the income of the previous year after the date of succession. (Sec 170(1))

The word succession covers amalgamation of business by operation of law involving a detailed procedure by making applications to NCLT / High Courts. Substantial time is involved in obtaining the necessary approvals concurring the scheme of amalgamation. Any assessment during the tenure of pending approval has to be made as per the provisions of the sec 170(1).

Any notice issued by AO for the purpose of assessment  is to be made on the existing or active entity and not on the one whose business is closed.

The matter of  validity of issue of notices by AO on the transferor, non-existing entity, particularly when it ceases to exist on the date of passing an order  has been dealt with by the Hon’ble Supreme Court[2] and High Courts/Tribunals on various occasions held that issue on notices on non-existing entity is invalid and void.

Hon’ble Supreme Court in the land mark judgment in case of Maruti Suzuki India Limited [TS-429-SC-2019] case held that despite the fact that AO was informed that amalgamating company ceased to exist as a result of approved scheme of amalgamation , the jurisdictional notice issued only in its name is invalid.

In a recent judgement  of ITAT Bangalore in case of Serendipity Infolabs Pvt Ltd[3] has distinguishing the judgement of Supreme Court in Maruti Suzuki India Limited has held that where notice issued U/S 143(2) much prior to the date of approval of merger Hon’ble NCLT and replies to notices are filed by assessee after the date of approval of merger and this fact was not brought to the notice of AO. Therefore, issue of order in the name of the transferor company is mere irregularity which is rectifiable under 292B of the Act.

To bring clarity and uniformity on assessment/reassessment made pending approvals in case of amalgamation/demerger  finance bill 2022 has introduced an amendment to sec 170 of the Act. Subsection (2A) to sec 170 inserted by validating any proceedings of assessment or reassessment made in the name of predecessor during the period in which application for business reorganisation[4] is pending before NCLT/High Court/tribunal or adjudication authority under IBC and date of order passed by such authority received by the Pr. CIT/CIT.

Any assessment completed during period of pendency of approval for business reorganisation in the name of predecessor holds good.

Every scheme of amalgamation or merger provide for the appointed date, the date on which the assets and liabilities of the transferor vest with transferee. This date is relevant for arriving at the income of the predecessor and successor[5].

Any return filed by the successor prior to the date of order by High Court/Tribunal/Adjudicating authority for any assessment year relevant to the previous year to which order applies should be modified, not revised, within 6 months from the end of the month in which said order was issued in such form and manner as may be prescribed in accordance with and limited to the said order (New Sec 170A).

Such return be filed notwithstanding any thing contrary in provisions of sec 139 of the Act. As per the existing law revision of the tax return is possible till the end of the relevant assessment year only and the modification of return of return in line with scheme approved will not amount to revision of return U/s 139(5) of the Act.

The Hon’ble Supreme Court  in Dalmia Power Ltd[6] case held that sec 170(1) of the Act provides that successor shall be assessed in respect of the income of the previous year after date of succession only. The court held that in view of the provisions of the sec 170(1) of the Act department is required to assess the income after taking into account the revised returns filed after amalgamation of the companies. 

These amendments have nullified the favourable judgements and bring clarity. These proposed changes will effect from 1^st April 2022.

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[1] Income includes capital gain accruing from the transfer of business.

[2] Few cases are :-Maruti Suzuki India Limited- [TS-429-SC-2019] / Spice Enfortainment-[TS-5196-SC-2017-O] / Mani Square Ltd [TS-7989-ITAT-2020(KOLKATA)-O] / Genpact India (P) Ltd [TS-6994-ITAT-2020(Delhi)-O] / Infosys BPM Limited [TS-7214-ITAT-2021(BANGALORE)-O]

[3] [TS-7865-ITAT-2020(Bangalore)-O]

[4] Means reorganisation of business involving amalgamation or de-merger or merger of the business of one or more persons.

[5] Marshall Sons &Co[TS-5102-SC-1996-O]

[6] [TS-5272-SC-2019-O]