High Court of Bombay Declares Issuing Income Tax Notice to a Non-Existing Entity Post-Merger as Substantive Illegality: “Notice issued in the name of a non-existing company is a substantive illegality and not merely a procedural violation”

Court’s Decision

The Bombay High Court ruled in favor of the petitioner and quashed the notices issued under Section 148 of the Income Tax Act, 1961. The Court found that the notices were issued to a non-existing company, Amanora Future Towers Pvt. Ltd. (AFTPL), which had merged with City Corporation Limited (CCL). The Court held that issuing a notice to a non-existing entity constitutes a “substantive illegality” and not a mere procedural error. Therefore, the notices could not be upheld.

Facts

1. Merger of Companies: City Corporation Limited (CCL) merged with its wholly-owned subsidiary, Amanora Future Towers Pvt. Ltd. (AFTPL), effective from April 1, 2018. This merger was sanctioned by the National Company Law Tribunal (NCLT) in April 2020.
2. Communication to Income Tax Authorities: On August 27, 2020, CCL informed the Income Tax Department about the merger, which was duly acknowledged by the Department. The Department had full knowledge of the merger.
3. Notice Issued: Despite the merger, the Assistant Commissioner of Income Tax issued a notice under Section 148 of the Income Tax Act on March 31, 2023, to AFTPL for the assessment year 2013-14, even though AFTPL no longer existed as a separate entity post-merger.
4. Petition Filed: CCL challenged the notice on the grounds that it was issued to a non-existing entity (AFTPL) and thus should be quashed.

Issues

The central issue was whether a notice under Section 148 of the Income Tax Act could be validly issued to a non-existing company after its merger with another entity. Specifically, the question was whether the notice issued to AFTPL, which had ceased to exist due to the merger, was legally valid.

Petitioner’s Arguments

1. Non-Existence of AFTPL: The petitioner argued that AFTPL, which had merged with CCL, ceased to exist after the merger. Hence, the Income Tax Department could not have issued the notice to AFTPL.
2. Reliance on Precedents: The petitioner cited precedents, including the Supreme Court judgment in Maruti Suzuki India Ltd. and other cases such as Uber India Systems and Alok Knit Exports Ltd., to argue that issuing a notice to a non-existent entity is a substantive illegality.
3. Substantive Illegality: The petitioner contended that the notice issued in the name of AFTPL was not merely a procedural violation but a substantive legal error.

Respondent’s Arguments

1. Technical Glitch: The respondents acknowledged that the notice was issued in the name of AFTPL but argued that this was due to a technical glitch in the system. They explained that while the notice was generated in the name of AFTPL, the intention was to serve it to the petitioner (CCL), and all approvals had been obtained in CCL’s name.
2. No Legal Invalidity: The respondents contended that the notice issued to AFTPL should be treated as valid, considering it was generated based on technical factors beyond their control, and it could be treated as valid for the merged entity, CCL.

Analysis of the Law

1. Maruti Suzuki Precedent: The Court referred to the Supreme Court’s judgment in Maruti Suzuki India Ltd., which held that issuing a notice to a non-existing company constitutes a substantive illegality, not a mere procedural violation. The Court further discussed how the legal basis for issuing a notice must be consistent with the fact that the entity in question has ceased to exist post-merger.
2. Skylight Hospitality: The respondents tried to draw parallels with the Delhi High Court’s decision in Skylight Hospitality LLP, where a notice was issued to a company that had merged. However, the Court distinguished this case, emphasizing that the facts in Skylight Hospitality were peculiar and did not align with the present case.
3. No Rectification under Section 292B: The Court also analyzed the applicability of Section 292B of the Income Tax Act, which allows for the rectification of procedural errors. However, the Court noted that a substantive error, like issuing a notice to a non-existing entity, cannot be rectified under this provision.

Precedent Analysis

The Court discussed several precedents where notices had been issued to non-existing companies:

1. Maruti Suzuki India Ltd.: This case reinforced the position that issuing a notice to a non-existing company is an illegal act, not just a procedural lapse.
2. Uber India Systems and Alok Knit Exports Ltd.: These cases also emphasized that such actions are not minor errors but legal invalidities.
3. Skylight Hospitality: While the respondents relied on this case, the Court rejected their argument, clarifying that the facts of that case were different and could not be applied here.

Court’s Reasoning

1. Fundamental Error: The Court highlighted that the respondents, despite knowing about the merger, issued the notice to AFTPL, which was a fundamental error. The explanation that this was due to a “technical glitch” was deemed insufficient to justify the action.
2. No Acceptable Explanation: The Court rejected the respondent’s attempt to shift the blame onto the utility system’s limitations. It stated that a legal error in issuing a notice to a non-existing company could not be excused as a simple clerical mistake.
3. Distinction from Skylight Hospitality: The Court also clarified that the facts in Skylight Hospitality were not applicable in this case. The decision in Maruti Suzuki was binding and more relevant, thus supporting the petitioner’s position.

Conclusion

The Bombay High Court quashed the impugned notices issued under Section 148 of the Income Tax Act. The Court found that the notices issued to a non-existing company, despite the authorities’ knowledge of the merger, were legally invalid. The Court made it clear that such errors could not be corrected by treating the notices as valid for the merged entity.

Implications

This ruling sets a precedent on the invalidity of notices issued to non-existing companies post-merger, reinforcing that such substantive errors cannot be corrected under procedural provisions like Section 292B. The judgment emphasizes that notices must be issued in the name of the surviving entity, not a dissolved one. While the ruling specifically addresses tax reassessment notices, its broader implications could affect similar legal proceedings involving entities that have undergone mergers or acquisitions.

The ruling also clarifies that procedural errors or technical glitches cannot be used to justify actions that are substantively illegal under the law.

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