Assessment on Non-Existent Amalgamated Company Held Invalid: ITAT Kolkata Ruling in ACIT Vs Pearltree Tradelink Pvt. Ltd.

1. Background and Context

In ACIT Vs Pearltree Tradelink Pvt. Ltd. (Now Amalgamated with India Cable Net Company Ltd.), ITA No. 2392/Kol/2019, the Income Tax Appellate Tribunal, Kolkata Bench, delivered its order on 01/09/2022 for Assessment Year 2014-15. The dispute arose from an assessment framed in the name of Pearltree Tradelink Pvt. Ltd. after it had already merged with India Cable Net Company Ltd. pursuant to a court-approved amalgamation scheme.

The Revenue brought an appeal against the order of the Commissioner of Income Tax (Appeals)-4, Kolkata [Ld. CIT(A)], who had:

  • Annulled the assessment on the ground that it was made on a non-existent entity post-amalgamation, and
  • Deleted substantive additions relating to:
    • Alleged unexplained cash credits under Section 68 aggregating to ₹150.20 crore, and
    • Disallowance of expenditure amounting to ₹1,51,10,83,171.

The Tribunal upheld the Ld. CIT(A)’s decision on both jurisdiction and merits, resulting in dismissal of the Revenue’s appeal.

(i) Amalgamation Scheme and Effective Date

Pearltree Tradelink Pvt. Ltd. had amalgamated with India Cable Net Company Ltd. pursuant to a scheme sanctioned by the Hon’ble Calcutta High Court under Sections 391 to 394 of the Companies Act, 1956.

Key dates and events:

  • Effective date of amalgamation as per the scheme: 31.03.2014
  • Approval of the scheme by Hon’ble Calcutta High Court: order dated 08.05.2014
  • Return of income for AY 2014-15 filed: 07.11.2014
  • Processing under Section 143(1): completed in routine course
  • Selection for scrutiny and issue of notices under Section 143(2) and Section 142(1): notices issued in the name of Pearltree Tradelink Pvt. Ltd.
  • Assessment completed ex parte: order dated 31.12.2016 in the name of Pearltree Tradelink Pvt. Ltd., which, by then, was no longer in existence as a separate legal entity.

By the time the assessment order was passed, Pearltree Tradelink Pvt. Ltd. had ceased to exist, having merged into India Cable Net Company Ltd. in terms of the sanctioned scheme.

(ii) Principle Against Assessment of Non-Existent Entities

The Ld. CIT(A) applied the doctrine that an assessment made on a non-existent entity post-amalgamation is void. Reliance was placed on the decision in:

"Spice Infotainment Ltd. Vs CIT, (2011) 247 CTR 500 (Delhi)"

This decision, as noted, stands approved by the Hon’ble Supreme Court on 02.11.2017. The ratio in "Spice Infotainment Ltd. Vs CIT" is that once an amalgamation has taken effect and the transferor company stands dissolved, it no longer survives in law. Any assessment framed subsequently in the name of such a dissolved company is invalid and unenforceable.

The Ld. CIT(A) found that:

  • The amalgamation of the assessee with India Cable Net Company Ltd. was effective from 31.03.2014;
  • The assessment order dated 31.12.2016 was, therefore, passed in the name of an entity that had ceased to exist; and
  • On this jurisdictional defect alone, the entire assessment was liable to be quashed.

The Revenue, while appealing before the ITAT, did not raise any specific challenge to this foundational finding of the Ld. CIT(A) regarding invalidity of the assessment on account of non-existence of the assessee.

3. Loan Creditor Addition of ₹150.20 Crore under Section 68

(i) Nature of Loans Considered by the Assessing Officer

The central addition in dispute under Section 68 related to loans recorded in the books of the assessee:

  • Loan from India Cable Net Company Ltd.: ₹1,50,20,00,000
  • Loan from Dreamline Manpower Solutions Pvt. Ltd. (holding company): ₹20,00,000

Thus, the aggregate figure of ₹150.20 crore was brought to tax by the Assessing Officer (AO) as unexplained cash credit under Section 68.

The assessee had reportedly filed: