Issuing Notices to a Non-Existent Entity is a Substantive Illegality, Not a Mere Procedural Lapse: Bombay High Court Quashes Income Tax Reassessment Notices

Tax Department Cannot Blame System Glitches for Fundamental Errors – Bombay High Court Holds Notices to a Merged Company as Void Ab Initio and quashed reassessment notices issued under Section 148 of the Income Tax Act, 1961, to Amanora Future Towers Pvt. Ltd. (AFTPL), a company that ceased to exist following its merger with City Corporation Limited (CCL). The Division Bench of Justice M.S. Sonak and Justice Jitendra Jain held that issuing reassessment notices to a non-existent entity is not a mere procedural lapse but a fundamental jurisdictional defect, rendering such notices void ab initio. The Court categorically stated that the Income Tax Department could not hide behind technical glitches to justify such blatant errors.

City Corporation Limited, engaged in infrastructure development, merged with its wholly owned subsidiary Amanora Future Towers Pvt. Ltd. following an order by the National Company Law Tribunal (NCLT) dated April 27, 2020, with effect from April 1, 2018. The merger was duly communicated to the Income Tax Department on August 27, 2020, and the department acknowledged its receipt. Despite this, the Assistant Commissioner of Income Tax, Pune, issued reassessment notices on March 31, 2023, in the name of AFTPL for multiple assessment years.

The Court rejected the Revenue’s argument that the issuance of notices in the name of the merged entity was a "technical glitch" and that such notices should be treated as issued to CCL. The Bench, relying on the Supreme Court's ruling in PCIT v. Maruti Suzuki India Ltd., (2019) 416 ITR 613 (SC), observed that a notice issued to a non-existent company is a jurisdictional defect and cannot be validated merely because the amalgamated entity participated in the proceedings. The Court emphasized that participation of the merged company does not cure the defect, nor does it create an estoppel against the law.

The Revenue attempted to justify the mistake by claiming that its automated system had issued the notices based on the PAN of the dissolved entity. The Court rejected this explanation, stating that jurisdictional defects cannot be overlooked simply because of technical failures in the tax department's utility system. The Court remarked that a system-generated notice does not absolve the department of its responsibility, nor does it rectify a jurisdictional flaw. The Bench made it clear that treating the notice as one issued to CCL was not permissible, as it would amount to ignoring fundamental principles of law.

The Court also distinguished the present case from Skylight Hospitality LLP v. ACIT, (2018) 405 ITR 296 (Del HC), on which the Revenue sought to rely. The Court noted that in Maruti Suzuki, the Supreme Court had already distinguished Skylight, holding that the latter was decided on its peculiar facts. The Bombay High Court reiterated that where the tax department has prior knowledge of a merger but still issues reassessment notices to a non-existent entity, such notices are void and unsustainable.

The judgment referred to various precedents, including Uber India Systems (P.) Ltd. v. ACIT, (2023) 150 taxmann.com 195 (Bom HC), Alok Knit Exports Ltd. v. DCIT, (2023) 149 taxmann.com 387 (Bom HC), and Adani Wilmar Ltd. v. ACIT, (2023) 150 taxmann.com 178 (Guj HC), all of which reaffirmed that reassessment notices issued to merged or dissolved companies are invalid and cannot be sustained under Section 292B of the Income Tax Act. The Court also referred to PCIT v. Vedanta Ltd., (2023) 150 taxmann.com 449 (Del HC), which held that a notice issued in the name of a dissolved entity is a fatal flaw that cannot be rectified post-facto.

While quashing the reassessment notices, the Court clarified that the Revenue is not barred from initiating reassessment proceedings against CCL, provided such proceedings comply with statutory limitations and procedural safeguards. The Bench explicitly stated that the only reason the notices were being set aside was that they were issued in the name of a dissolved entity despite the department's knowledge of the merger. The Court left all other issues regarding reassessment open, making it clear that any future notice must be issued in strict compliance with the Income Tax Act.

The Bombay High Court’s decision is a significant affirmation of legal principles governing tax reassessment in cases of corporate mergers. The ruling ensures that Revenue authorities cannot arbitrarily issue reassessment notices to defunct entities and later claim them to be valid. It establishes that the dissolution of a company due to merger is a legally recognized fact, and any proceedings against a non-existent entity are null and void from inception.

The case was titled City Corporation Limited v. Assistant Commissioner of Income Tax, Pune & Ors. The Court allowed the writ petitions, quashing the reassessment notices as void ab initio, while granting liberty to the Revenue to proceed against CCL in accordance with the law. The judgment serves as a strong precedent against arbitrary reassessment actions and reinforces the principle that jurisdictional defects in tax notices cannot be cured by procedural adjustments.

Date of Decision: 29 January 2025