Court quashes tax notices sent to companies that no longer existed after merger

Get the full picture - access the original judgement of the court order here

Case Name

GE India Industrial Pvt. Ltd. vs Assistant Commissioner of Income Tax (High Court of Delhi)

W.P.(C) 7644/2021 & CM APPL. 23916/2021

Date: 17th November 2021

Key Takeaways

• Legal notices must be served on existing entities: You can’t serve tax notices under Section 148 to companies that have ceased to exist due to mergers
• Merger consequences: When companies merge, the legal identity of the merged entities ceases to exist
• Revenue’s admission of error: Even when the tax department admits an “inadvertent error,” it doesn’t automatically validate invalid notices
• Fresh notice liberty: Courts may allow revenue departments to take fresh steps as per law after setting aside defective notices

Issue

Can income tax notices issued under Section 148 of the Income Tax Act, 1961 be sustained when they are served on entities that no longer exist due to corporate mergers?

Facts

The income tax department issued notices under Section 148 of the Income Tax Act, 1961 on June 30, 2021, to:

• GE India Technology Centre Pvt. Ltd. (in case W.P.© 7644/2021)
• GE India Exports Pvt. Ltd. (in case W.P.© 7645/2021)

However, there was a fundamental problem - both these companies had already merged with GE India Industrial Pvt. Ltd. and no longer existed as separate legal entities at the time the notices were issued.

The court had initially heard the matter on November 11, 2021, and gave the revenue department time to respond, but no counter-affidavit was filed.

Arguments

Petitioner’s Arguments (GE India Industrial):

• The notices were fundamentally flawed because they were served on non-existent entities
• GE India Technology Centre Pvt. Ltd. and GE India Exports Pvt. Ltd. had already merged with GE India Industrial Pvt. Ltd.
• Since these entities didn’t exist at the relevant time, the notices couldn’t be legally sustained

Revenue Department’s Arguments:

• They admitted that the notices were indeed issued to entities that didn’t exist at the relevant time
• They claimed it was an “inadvertent error”
• They argued they should be entitled to issue fresh notices under Section 148 of the Income Tax Act, 1961
• These fresh notices would relate to the period prior to June 30, 2021

Key Legal Precedents

The connected documents don’t mention any specific case law precedents that the court relied upon in making this decision. The court appears to have decided this matter based on fundamental legal principles regarding corporate existence and the validity of legal notices.

Judgement

The court ruled decisively in favor of GE India Industrial Pvt. Ltd. Here’s what the judges decided:

Court’s Reasoning:

The court held that notices issued under Section 148 of the Act cannot be sustained when they are issued to entities that don’t exist. The fundamental flaw was that the notices were served on companies that had already merged and ceased to exist as separate legal entities.

Orders Made:

1. Notices Set Aside: The impugned notices dated June 30, 2021, were set aside
2. Liberty to Revenue: The revenue department was given liberty to take next steps in the matter, but only as per law
3. Liberty to Petitioner: If the revenue takes any fresh steps, the petitioner company has the liberty to challenge them in accordance with law
4. Writ Petitions Disposed: Both writ petitions were disposed of, and all pending applications were closed

The judgment was delivered by Justice Rajiv Shakdher and Justice Talwant Singh on November 17, 2021.

FAQs

Q1: What happens now that the notices have been set aside?

A: The revenue department can issue fresh notices, but they must follow proper legal procedures and serve them on the correct legal entity (GE India Industrial Pvt. Ltd.).

Q2: Why couldn’t the revenue department just correct their mistake and continue with the same notices?

A: In law, you can’t simply “correct” a notice that was fundamentally flawed from the beginning. A notice served on a non-existent entity is void ab initio (invalid from the start).

Q3: Does this mean GE India Industrial is completely off the hook?

A: Not necessarily. The court specifically gave the revenue department liberty to take fresh steps as per law, meaning they can start the process again correctly.

Q4: What’s the significance of the merger in this case?

A: When companies merge, the merged entities cease to exist as separate legal persons. Any legal action must be taken against the surviving entity (in this case, GE India Industrial Pvt. Ltd.).

Q5: Can the revenue department appeal this decision?

A: While the judgment doesn’t mention any appeal, generally speaking, parties can appeal High Court decisions to the Supreme Court if they meet the required criteria.

1. On the previous date, i.e., 11.11.2021, we had heard the counsel for

the parties and made, thereafter, the following observations in W.P.(C)

7644/2021:

“1. Mr. Abhishek Maratha, Advocate has entered appearance on

behalf of the respondents/revenue.

2. Mr. Sachit Jolly, who appears for the petitioner-company, says

that, apart from anything else, the impugned notice issued under

Section 148 of the Income Tax Act, 1961 [in short "the Act"], is

flawed, for the reason that it was served on an entity i.e., GE

India Technology Centre Pvt. Ltd., which was not in existence at

the relevant time, as it had merged with the petitioner-company

i.e., GE India Industrial Pvt. Ltd.

3. Prima facie, there appears to be merit in the contention

advanced by Mr. Jolly.

3.1. Mr. Maratha says that, he will revert with instructions on this

aspect of the matter.

4. We may also note that although opportunity was given to the

respondents/revenue to file a counter-affidavit in the matter; no

affidavit has been filed, as yet.

5. List the matter for directions on 17.11.2021.

6. Interim order dated 05.08.2021 is made absolute during the

pendency of the writ petition. CM No.23918/2021 is, accordingly,

disposed of.”

1.1. Similar observation were made in the order dated 11.11.2021, passed

in W.P.(C) 7645/2021.

2. Mr. Abhishek Maratha, learned counsel appearing for the

respondents/revenue, has reverted with instructions.

2.1. Mr. Maratha says that, admittedly, notice(s) were issued to entities

i.e., GE India Technology Centre Pvt. Ltd. and GE India Exports Pvt. Ltd.,

which were not in existence at the relevant time, as they had merged with

the petitioner-company i.e., GE India Industrial Pvt. Ltd.

2.2. It is, however, Mr. Maratha’s contention that it was an inadvertent

error, and therefore, the respondents/revenue are entitled in law to issue

fresh notice(s) in the above-captioned matters, under Section 148 of the

Income Tax Act, 1961 [in short “the Act”], and that these notice(s) will

relate to the period prior to 30.06.2021.

2.2(a) However, Mr. Jolly, vehemently, opposes the aforesaid submissions

adverted by Mr Maratha.

3. To our minds, the impugned notice(s) issued under Section 148 of the

Act cannot be sustained, as they were issued to entities [i.e., GE India

Technology Centre Pvt. Ltd. in W.P.(C) 7644/2021 and GE India Exports

Pvt. Ltd. in W.P.(C) 7645/2021], which were not in existence at the relevant

time, as they had merged with the petitioner-company i.e., GE India

Industrial Pvt. Ltd.

3.1. Therefore, the impugned notice(s) dated 30.06.2021 are set aside.

4. The respondents/revenue will have liberty to take next steps in the

matter, albeit as per law. In case any such steps are taken, the petitioner-

company will have the liberty to assail the same, in accordance with law.

5. The above-captioned writ petitions are disposed of in the aforesaid

terms. Consequently, pending application(s) shall also stand closed.

RAJIV SHAKDHER, J

TALWANT SINGH, J

NOVEMBER 17, 2021