Companies undergoing a scheme of amalgamation generally file their standalone original return of income without considering the impact of amalgamation to comply with the provisions of section 139(1) of the Income Tax Act, 1961 (Act). Once the scheme is sanctioned, revised return of income (return) are filed giving effect to the scheme.
However, where the scheme is approved post the due date for filing the revised return, due compliance with the timeline becomes a practical challenge with the tax authorities rejecting such returns on procedural grounds.
Recently, the Supreme Court, in the case of M/s. Dalmia Power Ltd. & Anr1 has directed the Income Tax Department (Department) to consider the revised returns filed beyond the prescribed timeline to give effect to the amalgamation scheme approved by NCLT.
Brief Facts of the case
- M/s Dalmia Power Limited (DPL) and M/s Dalmia Cement (Bharat) Limited (DCL) (hereinafter jointly referred to as 'assessees'), had entered into an inter-connected scheme of arrangement and amalgamation with nine group entities.
- The appointed date of the scheme was 1 January 2015 and effective date was 30 October 2018.
- After sanctioning of the scheme, manual revised returns were filed on 27 November 2018.
- The Assessing Officer (AO) disregarded the revised returns on the ground that the same were filed late and no condonation of delay had been obtained from the CBDT in accordance with section 119(2)(b) of the Act and circular no. 9/2015 dated 9 June 2015.
- Aggrieved, the assessees filed a writ
petition before the Madras High Court. . The learned Single Judge
of the Hight Court allowed the writ holding that:
- The scheme allowed the assessees to file revised returns beyond the prescribed period and the department had objected on the same. Once approved, it attains statutory force which cannot be overridden by the Department.
- Section 139(5), 119(2)(b), circular no.9/2015 and the requirement of electronically filing the return as per Income Tax Rules are not applicable to a case where revised return is filed pursuant to a scheme of amalgamation which is approved by the NCLT.
- However, in response to the Writ Appeals filed by the Department challenging the judgement passed by the Single Judge, the Division Bench of Madras High Court reversed the decision of the single judge. The Bench directed the assessees to comply with the procedure for filing belated revised returns.
- Aggrieved by the Judgement of the Division Bench, the assessee filed common civil appeal with the Supreme Court.
- Whether the revised returns filed beyond the timeline prescribed under the Act pursuant to approval of the amalgamation scheme by the NCLT can be held to be valid?
- The assessees submitted that there was an impossibility of performance (i.e. to file the revised returns before the due date) as the scheme itself was approved after the due date.
- The scheme contained enabling clauses for filing revised returns beyond the timelines without incurring any liability on account of interest, fee, penalty, etc.
- The Department did not raise any objection on the scheme within 30 days from the receipt of the notice. Thus, it can be presumed that they had no representations to be made on the proposed scheme.
- The revised returns should be considered as invalid since the assessee failed to make an application to CBDT for condonation of delay.
- The Court observed that the scheme entitled the taxpayer to file belated revised returns.
It further observed that in accordance with the provisions of section 230(5) of the Companies Act, 2013, notices were issued to the Department and other regulators. Since no objection was raised within the stipulated period, the schemes attained statutory force not only inter se the Transferor and Transferee Companies, but also in rem.
- The Court referred to earlier decision in the case of Marshall Sons & Co. (India) Ltd.2 wherein the Supreme Court had held that pursuant to the scheme of amalgamation, the amalgamating company ceases to exist and assessment of transferee company must take into the account income of both the transferor and transferee companies.
- It ruled that the provisions of section 139(5) would not have applicability in the case as the revision was not undertaken on account of any omission or wrong statement.
- It upheld assessee's argument of impossibility of performance as the scheme itself was approved and sanctioned after the due date.
- Based on a plain reading of section 119(2)(b), the Court held that the same would not hold applicability where an assessee has restructured its business and filed revised return with prior approval and sanction of NCLT, without any objection from department.
- Relying on various judicial precedents3, the Court laid that the purpose of assessment proceedings is to assess tax liability of an assessee correctly in accordance with the law.
- Section 170(1) of the Act provides that the successor of an assessee shall be assessed in respect of the income of previous year after the date of succession. Relying on the said provision, the Court held that it is incumbent upon the Department to assess the total income of the successor in respect of the previous assessment year after the date of succession.
1. Dalmia Power Limited & Anr v. ACIT, Trichy (TS-785-SC-2019)
2. Marshall Sons & Co. (India) Ltd. v. ITO (1997) 2 SCC 302
3. Kailash v Nankhu (2005) 4 SCC 480; State of Punjab v Shamlal Murari (1976) 1 SCC 719; National Thermal Power Co. Ltd. v. Commissioner of Income Tax, (1997) 7 SCC 489
In a M&A scenario, schemes receiving sanction beyond the due date of filing return / its revision is a common phenomenon. In absence of any set procedure, the assessees have been filing manual returns with the Department to give effect to the Scheme. While the procedure is still not in place, this is definitely a welcome decision delivered by the Supreme Court.
The decision has taken cognizance of the various principals and rationales which had been laid down in various earlier decisions. It has also duly recognized the practical issues which a taxpayer faces where the technical compliances are impossible to meet with.
It is pertinent to note that the court has specifically taken into cognizance the fact that the scheme specifically included enabling clause for filing of revised returns beyond the due date which was not objected to by the Department. Hence, it becomes pertinent in any M&A scheme to include such safeguards.
It is high time that the government takes due measures and includes enabling provisions in the Act to avoid such undue litigation and provide clear guiding principles and utilities to facilitate due compliance.
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