In merger cases, transferor company assessment cannot be mechanically merged with transferee company through same re-assessment order of transferee company

 In a recent ruling, the Mumbai Bench of the Income Tax Appellate Tribunal (“ITAT”) held that income or disallowances relating to a predecessor company for a period prior to amalgamation cannot be assessed by clubbing them with the income of the successor entity through a single reassessment order. The ITAT categorically ruled that the Income-tax Act does not envisage a composite or consolidated reassessment of predecessor and successor incomes, even where the successor is liable for the predecessor’s tax dues.

 

In this case, pursuant to a search action, reassessment proceedings under section 147 were initiated in the name of the successor company for assessment years preceding the effective date of amalgamation. While framing the reassessment, the Assessing Officer sought to make additions relating to transactions undertaken by the predecessor company prior to amalgamation and clubbed such additions with the income of the successor in a single reassessment order. The Revenue justified the action by relying on section 170 and the Supreme Court’s decision in Maruti Suzuki, contending that post-amalgamation, proceedings could only be carried out in the name of the surviving entity.

 

The ITAT examined the statutory scheme of sections 159 to 163 and section 170 of the Act and observed that the law draws a clear distinction between assessment of income and recovery of tax liability. While section 170 permits assessment of the predecessor’s income and recovery of tax from the successor in appropriate cases, it does not authorize assessment of the predecessor’s pre-amalgamation income as the income of the successor by clubbing both in one order. The Tribunal noted that, at best, the successor can be proceeded against only in a representative capacity, and even then, the assessment of the predecessor’s income must remain separate and identifiable. In reaching this conclusion, the ITAT relied on coordinate bench decisions in City Gold Education Research Ltd. and Manish Tyagi, and distinguished the Supreme Court’s ruling in Maruti Suzuki as being confined to the invalidity of notices issued in the name of a non-existent entity, and not as permitting clubbing of predecessor and successor incomes.

 

Accordingly, the ITAT held that the reassessment proceedings, insofar as they sought to assess pre-amalgamation income of the predecessor by clubbing it with the successor’s income through a single reassessment order, were without jurisdiction and liable to be quashed. Once the reassessment itself was held to be invalid on jurisdictional grounds, the additions made on merits were rendered unsustainable.

 

This ruling reinforces the principle that amalgamation does not permit a mechanical merging of tax assessments. While the successor may be liable to discharge the predecessor’s tax dues, the assessment of pre-amalgamation income must strictly follow the representative assessment framework under the Act and cannot be clubbed with the successor’s own income through a composite reassessment order.