Introduction
Recently, the Hon’ble Income Tax Appellate Tribunal addressed an issue in the case of Boopendradas (Vikash) Sungker v. DCIT[i], focusing on whether an assessment order can be issued against a company that has become a non-existing company during the assessment proceedings. This issue gains significance in cases where companies cease to exist during or after assessment proceedings. While established jurisprudence generally holds that such proceedings are impermissible, exceptions arise under specific statutory provisions like ss. 170 and 176 of the Income-tax Act, 1961 (‘Act’).
Facts
M/s Red Fort India Real Estate Humayun (‘Assessee’), a company limited by shares, was incorporated under the provisions of the Mauritius Companies Act, 2001(MCA) for the specific purpose of investing in the securities of Prestige Projects Pvt Ltd (‘Prestige India’). The beneficial shareholding of the Assessee was held by Red Fort India Real Estate Fund 1 LP, situated on Cayman Island (‘Red Ford Cayman’).
During the financial year (‘F.Y.’) 2008-09, the Assessee invested Rs. 1,12,00,000 in 11,22,000 Class A Equity Shares of Prestige India under the Foreign Direct Investment (FDI) route.
Another investment of Rs.106,35,13,000 in various shares of Prestige India was made during F.Y. 2008-09 to 2011-12 by Alena Investment Limited in Cyprus (‘Alena Cyprus’), a wholly-owned subsidiary of the Assessee.
The entities held the aforementioned investment made by the Assessee and Alena Cyprus for almost 10 years. Subsequently, during the assessment year (‘A.Y.’) 2018-19, the Assessee received an offer to sell its stake/investment in Prestige India. However, the prospective buyer, Prestige Builders and Developers Pvt. Ltd. (‘Indian Buyer’), wanted to conclude with a single seller.
Therefore, Alena Cyprus transferred its shares in Prestige India to the Assessee under a Securities Purchase Agreement dated (SPA) 06.10.2017, i.e. AY 2018-19, at the fair value of such securities, for a total consideration of Rs.200,61,39,424/-, as against the original cost of Rs.106,35,13,000.
The Assessee, in its return of income filed in India for the A.Y. 2018-19, reported capital gains of Rs.4,85,87,899, out of which Rs.4,85,78,113 was claimed as not chargeable to tax under a.13(4) of the India-Mauritius Double Taxation Avoidance Agreement (‘DTAA’). A nominal gain of Rs.9,785 was offered to tax. Further, Alena Cyprus had also filed its return of income in India for the AY 2018-19, wherein the long-term capital gains of Rs. 80,86,75,225 arising from the sale of shares to the Assessee were declared exemption claimed under a. 13 of the India-Cyprus DTAA. The return filed by Alena Cyprus was duly processed and concluded vide intimation dated 12.04.2019 passed under section 143(1) of the Act.
On 28.12.2020, the Assessee filed an application before the Financial Services Commission, Mauritius (‘SFC, MA’) during the pendency of assessment proceedings for dissolution and removal of the company from the Register of Companies, Mauritius (‘RoC’) as the specific purpose of the company was achieved. This was communicated to the Assessing Officer (‘AO’) on 01.03.2021.
In compliance with Mauritius Law, the Assessee filed another application before the RoC on 04.06.2021 to remove the company's name from the ROC.
Meanwhile, the AO passed the draft assessment order dated 30.09.2021 (‘Draft Order’) under s. 144C(1) of the Act, denying the benefit of exemption under a. 13(4) of the DTAA to the Assessee, holding that there was no commercial/ economic substance behind the existence of that Company in Mauritius and, therefore, the benefit of Treaty cannot be applied, simply on the basis of TRC issued by the Revenue authorities of Mauritius to that company. Additionally, the AO also disregarded the separate legal existence of Alena Cyprus, holding the same to be a mere arrangement to take benefit of India Cyprus Treaty and added the entire capital gains derived by Alena Cyprus on the sale of securities/shares of Prestige India, to the income of the assessee.
Accordingly, the AO proposed an assessment at a total income of Rs.97,14,67,000 under the head capital gains on the sale of securities/shares of Prestige India in the hands of the assessee. Against the Draft Order, the Assessee filed its objections before the Dispute Resolution Panel (‘DRP’).
Subsequently, after filing objections, the RoC removed the name of the Assessee under the s. 308 of the (Mauritius) Companies Act 2001. This was duly intimated to DRP vide letters 04.02.2022 and 11.02.2022. However, the DRP proceeded to issue directions under s.144C(5) of the Act vide order dated 03.06.2022, confirming the Draft Order of the AO.
Accordingly, AO passed a final assessment order (‘order’) against the Assessee under s.143(3) read with s.144C (13) of the Act assessing the total income of the Assessee at Rs.97,14,67,000.
The order passed by the AO was challenged before the Tribunal, contending the order was invalid as it was passed against a non-existent entity.
Held
a. Whether, in the present case, the order can be passed against the non-existing entity under the Act?
The Tribunal dismissed the Appeal filed by the Assessee through Boopenderdas Vikas Sungker (‘Appellant’) by invoking s.176(1) of the Act, which permits the assessment of income in cases of discontinued businesses during an A.Y. It allows the income earned from the expiry of the previous year until the date of discontinuance to be taxed at the discretion of the AO.
The Tribunal observed that the Assessee had responded to the notice under s. 142(1) of the Act, where it disclosed that the company was in the process of winding up as of 28.12.2020. However, the Assessee did not provide details regarding a successor or an authorized agent to contest proceedings once the company was struck off. Consequently, the Tribunal held that the case laws cited by the Assessee, which involved entities undergoing amalgamation or liquidation where assets were succeeded by another entity, were not applicable in this case.
It was further noted that the company was still in existence when the Draft Order was passed on 30.09.2021. The AO had not been informed of any steps taken after 28.12.2020, apart from a letter addressed to the Chief Executive of the SFC, MA. This letter merely intimated the Assessee’s intention to apply to the RoC for the removal of its name. However, the actual application for removal was filed on 04.06.2021, and the AO was not informed of this at any point.
The Tribunal found that the Assessee’s paper submissions contained inaccuracies and omissions, as they failed to disclose the ongoing assessment proceedings before the Indian tax authorities.
The Tribunal held that s. 176 of the Act applies when a corporate entity voluntarily opts for business discontinuance and dissolves, distributing its assets without notifying the AO as required under s. 176(3). Under such circumstances, the Assessee cannot claim the order was issued against a non-existent entity.
Finally, the Tribunal observed that the company’s removal from the RoC on 29.10.2021 coincided with the DRP objections, suggesting that the Assessee attempted to frustrate the assessment proceedings by ceasing operations and dissolving the company.
b. Whether the Assessee had locus standi to file the objections before DRP?
The Tribunal examined whether the Assessee had the legal standing (locus standi) to file objections before the DRP.
The Tribunal noted that the Assessee’s legal representative informed the DRP via letters dated 04.02.2022 and 11.02.2022 that the company had been dissolved and removed from the RoC as of 29.10.2021. A letter dated 04.02.2022, issued by PwC, stated that the Power of Attorney (PoA) executed by the director on 13.10.2021 had lapsed, and the director no longer had authority post-liquidation. PwC requested that the proceedings be abated as they had become infructuous.
The Tribunal observed that another letter dated 11.02.2022 clarified that the representative no longer served as a director of the liquidated company and thus lacked the authority to respond to the notice. The Tribunal held that, in the absence of a valid PoA, the representatives lacked authority to appear before the Tribunal for the Assessee. It held that as per s. 2(7) of the Act, the legal representatives did not qualify as 'assessees', as they had no contingent liability or personal responsibility for the tax demand
The Tribunal noted that the AO retained the right to recover tax from the Assessee’s assets under s. 173 of the Act, which provides for recovery from a non-resident’s assets. Additionally, the AO could invoke s. 179 of the Act to recover dues from former directors, allowing them only a limited defense to prove no gross neglect or misconduct on their part.
The Tribunal relied upon the decision of ITAT, Delhi, in the case of ACIT v. M/s Zeus Impex Pvt. Ltd[ii], wherein it was held that an appeal filed by the former director of a company whose name was struck off before the Commissioner of Income Tax-Appeal (‘CIT-A’) is defective and incompetent.
The Tribunal further relied on ITAT's decision in Dwarka Portfolio (P) Ltd. v. ACIT [iii], wherein it was held that the appeal filed on behalf of the company whose name is struck off is maintainable. The certificate of incorporation issued by the assessee-company cannot be treated as cancelled for realizing amounts due or for discharging liabilities.
The Tribunal dismissed the appeal filed by the Appellant by relying on the decision of Zoetic Infrastructure and Constructions Pvt. Ltd. v. ITO[iv], wherein it was held that protective assessments, the pre-emptive assessments made against the companies whose names have been stuck off by RoC for statutory defaults under the Companies Act, are valid and cannot be set aside.
Our Analysis
In the present case, the Assessee neither designated a successor nor notified the tax authorities of its cessation of existence, as required under s. 176(3) of the Act. This provision mandates that when a business is discontinued, the taxpayer must inform the AO. The failure of the Assessee to comply with this statutory requirement played a pivotal role in the Tribunal’s decision to uphold the validity of the assessment order.
Jurisprudence is well-established that assessment proceedings against a non-existent entity are legally impermissible. This principle has been upheld in numerous judicial precedents, particularly in cases involving amalgamating or merging companies. Under s. 170 of the Act, the tax liability of an amalgamating or merging company is transferred to the entity into which it has merged or amalgamated. Thus, in such cases, the successor company is obligated to bear the tax liabilities of its predecessor.
Thus, the Tribunal emphasized that while the principle against assessing non-existent entities holds merit, the unique circumstances of this case justified the applicability of s. 176. The Assessee’s failure to meet its statutory obligations supported the validity of the assessment order. This decision highlights the importance of statutory compliance in ensuring procedural fairness and addressing tax liabilities during corporate dissolution.
End Notes
[i] 2024 SCC OnLine ITAT 1679 dated 06.09.2024.
[ii] ITA. No. 375 to 379/Del/2022.
[iii] 2022) 139 taxmann.com 477 (Delhi-Trib.).
[iv] ITA No.5896/Del/2019.
Authored by Kushagra Gahlot, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.