Reassessment Against Non-Existent Entity Void: Bombay HC Quashes S.148 Notice & ₹16.57 Cr IT Demand Against Petitioner [Read Order]
The Court found that the notice and consequent assessment order were wrongly issued in the name of the erstwhile company, which had ceased to exist after conversion into an LLP in 2016
Reassessment
Reassessment
In a significant ruling reinforcing the principle that tax reassessment cannot be initiated against non-existent entities, the Bombay High Court has quashed a Section 148 notice and consequential assessment order issued against the petitioner.
The controversy arose when the AO issued a notice dated March 30, 2021, under Section 148 of the Income Tax Act, 1961, seeking to reopen the assessment for AY 2017–18. The notice was addressed to Erangal Comtrade and Consultancy Private Limited, the erstwhile company that had ceased to exist on March 17, 2016, following its conversion into the petitioner LLP.
Despite being informed of the conversion, the Revenue proceeded to serve reasons for reopening and ultimately passed a reassessment order dated March 30, 2022, against the defunct company.
The reassessment order treated fixed deposits worth ₹22.11 crore as unexplained investment under Section 69 and added interest income of ₹50.34 lakh as undisclosed income. A demand notice of ₹16.57 crore was consequently issued against the erstwhile company. The petitioner LLP challenged both the notice and the assessment order before the High Court.
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The petitioner argued that the reassessment proceedings were void ab initio since they were initiated against a non-existent entity. It was further contended that the alleged escaped income had already been offered to tax by the LLP in its return for AY 2017–18, which was scrutinised and assessed under Section 143(3) in December 2019.
The LLP also pointed out that objections filed to the reopening reasons were not disposed of before passing the final order, violating settled procedure.
The Court agreed with the petitioner’s primary contention, holding that reassessment against a dissolved or converted entity is impermissible. Referring to the Supreme Court’s decision in PCIT v. Maruti Suzuki India Ltd. (2019), the Bench reiterated that once an entity ceases to exist due to amalgamation or conversion, any notice issued in its name is invalid. Participation in proceedings by the successor cannot cure the jurisdictional defect.
The Division Bench of Justice B. P. Colabawalla and Justice Amit S. Jamsandekar observed that the Revenue’s reasoning, that the erstwhile company had failed to file its return for AY 2017–18, was untenable, since the company was not in existence during that year. It emphasised that certainty and consistency in tax litigation are vital, and reassessment against non-existent entities undermines these principles.
Accordingly, the Bench quashed the Section 148 notice and the assessment order dated March 30, 2022, along with the consequential demand of ₹16.57 crore. The Court noted that once the notice itself is invalid, the assessment order emanating from it cannot survive.
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