BRIEF FACTS OF THE CASE
- Widia India Tooling Private Limited had been amalgamated with the petitioner, i.e. M/s. Kennametal India Ltd, pursuant to an approved Scheme of Amalgamation and consequently ceased to exist as a separate legal entity.
- Despite this, a show cause notice and the consequent adjudication order were issued in the name of Widia India Tooling Pvt. Ltd., an entity no longer in existence.
- Accordingly, the petitioner invoked the writ jurisdiction of the Hon'ble High Court of Karnataka seeking quashing of the impugned notice and order issued against the amalgamating company.
JUDGMENT AND CONCLUSIONS DRAWN BY THE HIGH COURT
- The High Court held that no proceedings could be initiated against a company that has merged or amalgamated with another company for a simple reason that the earlier company that has been amalgamated has lost its legal character and does not exist as a legal entity.
- However, proceedings could be initiated against the resultant company or the amalgamated company, inasmuch as the assets and liabilities of the earlier company have been taken over by the resultant company.
- In arriving at this conclusion, the High Court relied on the following judicial precedents under the Income-tax Act, wherein it has been consistently held that proceedings cannot be continued against an entity that has amalgamated and ceased to exist:
- Trelleborg India Pvt. Ltd. vs. Stateof Karnataka[(2024)20 Centax355(Kar)]
- Hitachi Nest Control Systems Pvt. Ltd. vs. Additional Commissioner of Central Tax, Bengaluru[(2024)20 Centax89(Kar)]
- Commissioner of Income Tax vs. Maruti Suzuki India Ltd. [[2019] 416 ITR 613(SC)]
AURTUS COMMENTS
- The Karnataka High Court reaffirmed the settled legal position that once an amalgamating company ceases to exist pursuant to an approved Scheme of Amalgamation, it loses its separate legal identity. Consequently, any tax proceedings initiated or continued in its name are void ab initio.
- In the present case, since both the show cause notice and the adjudication order were issued in the name of the non-existent amalgamating company (M/s. Widia India Tooling Pvt. Ltd.), they were quashed. However, the Court granted liberty to the department to initiate proceedings afresh against the correct legal entity, i.e., M/s. Kennametal India Ltd.
- Asper Section 85 of the CGST Act, where a taxable person liable to pay GST transfers their business, whether wholly or partially, by sale, gift, lease, leave and license, hire, or in any other manner, both the transferor and the transferee shall be jointly and severally liable to pay any tax, interest, or penalty due up to the time of such transfer. This liability applies whether the dues were determined before the transfer and remained unpaid or are determined thereafter.
- In cases of amalgamation, the resultant company steps into the shoes of the amalgamating company with respect to all rights, obligations, and liabilities. This ensures that the interests of Revenue are safeguarded, notwithstanding the dissolution of the original entity. However, while the substantive liability transfers to the resultant company, the procedural validity of proceedings requires that notices and orders be issued to the correct, existing legal entity and not to one that has ceased to exist.
- Furthermore, where there is a transfer of credit pursuant to the amalgamation by way of ITC-02, the credit balance available in the amalgamating company can be, inter alia, utilised to discharge tax demands raised on that company. Also, in cases involving demands on account of wrong availment and reversal of credit, the interest calculation under Section 50 of the CGST Act should consider the credit balance in the amalgamating entity
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