Bombay HC Quashes Reassessment Notice Issued to Non-Existent Entity [Read Order]

The Bombay High Court has held that a reassessment notice issued under Section 148 of the Income Tax Act, 1961 to a company that had ceased to exist upon its conversion into a limited liability partnership (LLP) is void ab initio and unenforceable in law.

The petitioner, Erangal Comtrade and Consultancy LLP, successor to Erangal Comtrade and Consultancy Private Limited, had filed a writ petition challenging the reassessment proceedings initiated against the erstwhile company. The impugned notice had been issued under Section 148 of the Act to reassess income for the Assessment Year (A.Y.) 2017-18 in the name of the company, which had ceased to exist from 17 March 2016 upon its conversion into the LLP.

The petitioner, represented by Senior Advocate Mr. P. J. Pardiwalla, Mr. Nitesh Joshi and Mr. Atul K. Jasani explained that the erstwhile company had carried on trading, investment and rental income activities before conversion and had been duly converted into the LLP under the Limited Liability Partnership Act, 2008, effective from 17 March 2016. For A.Y. 2016-17, the company and the LLP had filed separate returns covering their respective pre and post-conversion periods, which were accepted by the Department.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

For A.Y. 2017-18, the LLP filed its return offering to tax interest income of ₹50,34,979 arising on fixed deposits vested in it upon conversion. The return was scrutinized and an assessment was completed under Section 143(3) assessing the said interest income, though a minor dispute regarding TDS credit remained pending before the Assessing Officer.

Notwithstanding this, the Assessing Officer (AO) issued the impugned notice under Section 148 to the non-existent private company, alleging escapement of income on account of fixed deposits of ₹22.11 crore and interest thereon.

The LLP immediately informed the AO that the company had ceased to exist upon conversion. Despite this intimation, the AO continued proceedings and passed a reassessment order under Sections 147/143(3), assessing ₹22.11 crore as unexplained investment and ₹50.34 lakh as undisclosed interest income, and raising a demand of ₹16.57 crore in the name of the defunct company.

Before the High Court, Counsel for the petitioner, argued that the notice and consequential reassessment order were illegal and void since they were issued in the name of a non-existent entity, contrary to settled law. He submitted that the AO was informed of the conversion well in advance and was fully aware that the private company no longer existed. He further submitted that the alleged escaped income had already been duly disclosed and assessed in the LLP’s return for A.Y. 2017-18 and that the final order was passed without disposing of the objections filed by the LLP.

Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here

The Division Bench of Justice B. P. Colabawalla and Justice Amit S. Jamsandekar held that the issuance of a reassessment notice to a non-existent entity was void ab initio. The Court observed that the company had ceased to exist with effect from 17 March 2016 and that it was inconceivable how such a non-existent entity could be called upon to file a return of income for A.Y. 2017-18.

In the light of the Supreme Court’s judgment in Principal CIT v. Maruti Suzuki India Ltd. (2020), the Bench reiterated that assessment or reassessment proceedings initiated against an entity that has ceased to exist are invalid in law.

The Bench ruled that the impugned notice under Section 148 issued to Erangal Comtrade and Consultancy Pvt. Ltd. and the consequent assessment order were both unsustainable and stood quashed and set aside. The Court also noted that since the assessment order emanated from the invalid notice, it too could not survive.

Support our journalism by subscribing to Taxscanpremium. Follow us on Telegram for quick updates