Right to Revise Return after Amalgamation

Ankita Tiwari

29 Apr, 2023

The dynamic nature of the global economy demands corporations to restructure themselves to remain competitive. The corporate restructuring includes mergers and acquisitions, takeovers, amalgamations, etc. The power to sanction schemes of restructuring and amalgamation is vested with the National Company Law Tribunal (NCLT) as per sections 230 to 232 of the Companies Act, 2013. A duly sanctioned scheme provides a mechanism for the transfer of business, assets, liabilities, etc. Apart from these the scheme also deals with the impact on stakeholders, tax costs and other related matters. If such a scheme involves tax costs then the question that arises is: When should the return be filed? If there arises a need to revise the return, by when should the revised return be filed? Can the revised return be filed after the amalgamation has been settled? In this blog, we are going to discuss the validity of revised Income Tax Returns (ITR) filed by the two amalgamated companies, after the expiry of the statutory deadline in the Income Tax Act, 1961 (IT Act) without obtaining an extension to the filing deadline from the Central Board of Direct Taxes (CBDT).

The Hon’ble Supreme Court in the case of M/s Dalmia Power Limited &Anr. vs. The Assistant Commissioner of Income Tax (Civil Appeal Nos. 9496-99 of 2019) dated 18^th December 2019 upheld the validity of the revised return filed after the amalgamation has been settled. The rationale behind it is that in the process of amalgamation, the approvals come from various regulatory and statutory authorities who take considerable time and delays are sometimes inevitable. The resulting company which is the successor becomes liable to be taxed making it mandatory to file a revised return of income in terms of the amalgamation. Further, the scheme of amalgamation approved by the NCLT requires the resulting company to comply with all relevant laws to make the amalgamation effective.

Background of the Case

Two Indian companies were involved in separate amalgamation transactions which were approved by the NCLT with retroactive effect. The approved scheme for amalgamation allowed the companies to revise returns after the expiry of the statutory deadline. On that basis, both companies filed their revised returns. However, the tax authorities considered the revised returns invalid. The grounds on which the tax authorities considered the revised returns invalid are:

1. The revised returns were filed after the expiry of the time limit prescribed under section 139(5) of the IT Act.
2. The revised return was not filed electronically as per 12(3) of the Income Tax Rules, 1962 (IT Rules) instead it was filed in a paper form.
3. The companies had not applied for an extension of time to file revised returns from CBDT as per section 119(2) (b) of the IT Act read with CBDT Circular No. 09 of 2015 on late filing of returns.

Aggrieved by the tax authorities, the two companies approached the Hon’ble High Court by filing Writ Petitions. The Single Bench of the Hon’ble High Court upheld the validity of the revised returns filed by the two companies after the amalgamation. Aggrieved by the decision of the Single Bench, the tax authorities filed an appeal before the Division Bench of the Hon’ble High Court. The Division Bench upheld the order of the Single Bench to the extent that revised returns filed in accordance with an amalgamation approved by the NCLT after the expiry of the statutory time frame shall be accepted if the revised returns are filed after applying for an extension of time limit for filing the revised return and over-ruled the order of the single bench to the extent where the revised return is filed without seeking an extension of time limit for filing the revised return from CBDT. Being aggrieved by the order of the Division Bench, the two companies approached the Hon’ble Supreme Court in appeal.

Observations and Ruling of the Hon’ble Supreme Court

The question of law before the Hon’ble Supreme Court was whether the tax authorities should have allowed the two companies to file the revised returns after the expiry of the statutory time when the amalgamation proceedings were pending.

Observations of the Hon’ble Supreme Court

1. The Hon’ble Supreme Court observed that the scheme approved by the NCLT contained a specific clause addressing the situation and allowing the two companies to file revised returns post-expiry of the statutory time limit. Pursuant to the order, the companies filed their revised returns after the last date. The re-computation would affect the total income of the two companies with respect to the loss carryforwards, unabsorbed depreciation, etc.
2. The Hon’ble Supreme Court also observed that no objection was raised by the tax authorities during the NCLT proceedings therefore, once the NCLT approved the scheme, it attained statutory force.
3. The Hon’ble Supreme Court pointed out that on and from the appointed date the existence of the amalgamating companies came to an end and the assets, profits and losses, etc stood transferred to the books of the resulting company.
4. The Hon’ble Supreme Court further observed that section 139(5) did not apply in the present case as there was a delay in filing the revised returns due to the time taken by NCLT to approve the scheme making it impossible for the two companies to file revised returns before the due date.
5. The Hon’ble Supreme Court observed that section 119(2) (b) of the IT Act applies to the two companies as the delay resulted from genuine hardship faced by the two companies at the time of filing the revised return. This provision is inapplicable only in cases where the taxpayer has restructured its business and thereafter obtained approval from NCLT^[1] for filing a revised return.
6. Lastly, the Hon’ble Supreme Court observed that an assessment proceeding aims to assess the tax liability of a taxpayer in accordance with the law. In addition to this, the successor of the taxpayer or the resulting company in the present case shall be assessed only for those incomes which arise after the date of succession. Therefore, the tax authorities should have assessed the income of the amalgamating companies based on the revised returns filed post the amalgamation of the companies.

The ruling of the Hon’ble Supreme Court

The Hon’ble Supreme Court upheld the judgment and order of the Single Bench of the Hon’ble High Court allowing the two amalgamating companies to file revised returns of income and set aside the judgment and order of the Division Bench of the Hon’ble High Court. The Hon’ble Supreme Court also held that the tax authorities cannot override the scheme approved by NCLT.

Conclusion

The Hon’ble Supreme Court’s judgment comes as a relief to companies already amalgamated or willing to amalgamate. It provides much-awaited clarity regarding tax compliance for amalgamating companies after obtaining approval for the scheme of amalgamation from NCLT. This judgment is a result of interpreting the laws as they ought to be i.e. in the right spirit and as per the rationale and evolving tax requirement rather than in its literal way.

Read our Article: Overview of AS-14: Accounting for Amalgamation