Reassessing a Merged Entity: Validity of Notices and the Requirement of Preliminary Verification
I. Introduction
In SONANSH CREATIONS PVT LTD v. ASSISTANT COMMISSIONER OF INCOME TAX AND ANR. (Delhi High Court, Judgment delivered on January 10, 2025), the Court addressed the question of whether a reassessment notice may be deemed invalid if initially directed to an entity that, through merger/amalgamation, no longer exists. The Petitioner, Sonansh Creations Pvt. Ltd. (formerly Sonali Realtech Pvt. Ltd.), had assailed the notices and orders issued under Sections 148A(b) and 148 of the Income Tax Act, 1961 (“the Act”) on the ground that these were, at first, directed to a merged entity (Tulsi Tracom Pvt. Ltd.). The Court also delved into whether the Assessing Officer (“AO”) must rationally verify the information suggesting income escapement before reopening an assessment.
The central dispute revolved around:
- Whether a notice issued under Section 148A(b) in the name of a now non-existent company invalidates the reassessment process.
- Whether the AO had adequately verified material indicating that income had escaped assessment.
- The effect of the Petitioner’s detailed response that no money was received from certain alleged “accommodation entry” entities.
II. Summary of the Judgment
The Delhi High Court set aside the notices under Sections 148A(b) and 148, as well as the order under Section 148A(d), on the following primary ground: the AO had not verified the alleged entries through which Tulsi Tracom Pvt. Ltd. (the merged entity) was purported to have received accommodation funds. Despite the Petitioner’s specific denial and the furnishing of relevant bank statements showing no such receipts, the AO proceeded solely on raw data flagged by the tax department’s system without any corroborating material. The Court held that while the final notice under Section 148 was indeed properly directed toward the surviving amalgamated entity (Sonansh Creations Pvt. Ltd.), the overall assessment exercise could not proceed when there was no indication that the AO had made any actual inquiry or considered the Petitioner’s explanations.
Nevertheless, the Court clarified that if the AO finds credible material in the future to establish that the Petitioner indeed availed accommodation entries, the AO would remain free to initiate fresh proceedings in accordance with law.
III. Analysis
A. Precedents Cited
1. Principal Commissioner of Income Tax, New Delhi v. Maruti Suzuki (India) Ltd.
The Petitioner relied on this Supreme Court decision to argue that any notice served on a non-existent entity (due to amalgamation) would be void ab initio. In that matter, all critical jurisdictional notices and final assessment orders had been issued in the name of a dissolved/amalgamating company, invalidating the entire assessment.
However, the Delhi High Court distinguished the Petitioner’s facts by explaining that the jurisdictional notice to commence the actual reassessment (Section 148) was eventually issued to the correct, surviving entity, even if the preliminary notice under Section 148A(b) was in the name of the non-existent amalgamating entity. The Court noted that the procedure under Section 148A (preliminary inquiry) differs from the formal assumption of jurisdiction through a notice under Section 148.
2. GKN Driveshafts (India) Ltd. v. Income Tax Officer & Ors.
The Supreme Court had outlined a mechanism wherein an assessee, upon receiving a reopened assessment notice, could request the reasons for the belief that income had escaped assessment. Although Section 148A was not then in effect, the Court recognized that its codification through Section 148A carries forward the same goal: preventing arbitrary or capricious reopening of assessments by ensuring an opportunity to respond and a check on the material in the AO’s possession.
3. Union of India & Ors. v. Ashish Agarwal
This decision clarified that statutory changes introduced by the Finance Act, 2021 (including Section 148A) were intended to simplify and streamline the reassessment process, allowing the AO to provide transparency to assessee taxpayers. Under these reforms, the AO’s preliminary inquiry and the issuance of notices must follow certain procedural safeguards. The Court reaffirmed that the AO must still ensure any reopening is conducted with adequate rational basis, not solely on unverified suspicions.
B. Legal Reasoning
1. Issuance of Notice in the Name of a Non-Existent Entity
The Court held that issuing a preliminary notice under Section 148A(b) to a non-existent (amalgamated) company did not automatically vitiate the reassessment process. The determinant factor is whether the formal notice under Section 148 that triggers the AO’s reassessment jurisdiction is issued in the name of the correct, surviving entity and whether the assessee is offered an adequate opportunity to respond. In this case, the AO did correct the name before the final notice under Section 148 was served upon Sonansh Creations Pvt. Ltd. (the amalgamated entity).
2. Requirement of Preliminary Verification and “Information”
The Court emphasized that Section 148A of the Act was introduced to ensure that an AO does not indiscriminately reopen assessments. The AO is bound to evaluate whether the information in his possession is credible and suggests a plausible escapement of income. That requires at least verifying basic facts—for instance, checking whether the alleged bank entries exist or if the taxpayer’s explanation negates the possibility of those entries. Since Petitioner’s bank statements showed no such deposits from the alleged “accommodation entry” providers, the AO’s approach of disregarding the Petitioner’s response fell short of statutory requirements.
3. Determining Escapement Thresholds Beyond Three Years
The Petitioner had also argued that notice issuance was invalid under Section 149 of the Act. Although the Court ultimately set aside the notices on other grounds, it reiterated that escaping income of fifty lakh rupees (INR 50,00,000) or more is a threshold for issuing such notices beyond three years, and that the AO must have prima facie materials substantiating that the escaped income meets the threshold. Here, no cogent evidence was shown to meet that standard, thus calling into question the process of reopening.
C. Impact of the Judgment
1. Clarifies Valid Reassessment Procedure for Merged Entities
This decision underscores that where a preliminary notice is directed to a defunct/amalgamating entity, the process will not necessarily fail if the AO rectifies the error and issues the final notice to the surviving entity. Nonetheless, the surviving entity must be given an opportunity to respond and placed on notice regarding the core allegations for the reassessment proceeding to be valid.
2. Reinforces AO’s Duty for Minimal Scrutiny
The Court’s approach emphasizes that a mere “flag” from a departmental data source is insufficient. The AO must ensure that the underlying allegations (for instance, that certain deposits were received) actually appear in the taxpayer’s bank statements or documented accounts. Where an assessee specifically rebuts the contents of an AO’s “information” by providing contradictory bank evidence, the AO should investigate further before deciding to reopen the assessment.
3. Encourages Balanced Adjudicatory Steps
By setting aside the impugned notices but expressly allowing fresh issuance if new evidence emerges, the Court balances the legitimate needs of revenue authorities to investigate escapement of income with the rights of the taxpayer to be free from casual or unverified assessment proceedings.
IV. Complex Concepts Simplified
1. Section 148 vs. Section 148A: Section 148A, introduced by the Finance Act, 2021, added a preliminary step requiring the AO to provide notice and reasons for reopening (“why your assessment should not be reopened”) before issuing the main notice under Section 148. Thus, 148A(b) is a “show cause” and “preliminary inquiry,” whereas Section 148 is the actual triggering of the reopened assessment.
2. “Accommodation Entries” Allegation: This typically refers to phony transactions designed to introduce untaxed money into a taxpayer’s accounts as loans, share application money, or other receipts. The AO’s burden is to prove or at least demonstrate credible suspicion that such transactions took place, rather than simply asserting them based on unverified or raw data.
3. Merger Consequences in Tax Law: When a company merges with or is amalgamated into another, the original entity ceases to exist. Therefore, any notice or order in the name of the dissolved/amalgamating entity has no legal effect, unless the law specifically allows for subsequent correction and if the surviving entity is properly notified.
V. Conclusion
The Delhi High Court’s ruling in SONANSH CREATIONS PVT LTD v. ASSISTANT COMMISSIONER OF INCOME TAX AND ANR. clarifies that when reassessment proceedings are initially commenced with a Section 148A(b) notice erroneously naming a defunct company, those proceedings remain curable as long as the ultimate Section 148 notice and the final order under Section 148A(d) correctly identify the merged (surviving) entity and provide it an opportunity to be heard. Still, the AO must not ignore crucial (and credible) evidence furnished by the assessee showing that the alleged basis of reopening (the existence of suspicious banking entries) does not hold true.
By invalidating the reassessment in this matter—while simultaneously leaving the door open for the AO to reassess if genuine evidence of income escapement materializes—the Court demonstrates a balanced approach. It confirms the dual principle that (a) mere technical flaws in naming a non-existent entity can be rectified if the final notices duly correct the mistake and (b) no reassessment should be initiated based only on raw or unverified allegations that are specifically disproven by the taxpayer’s timely disclosure of evidence.
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