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Amendment to Assessment of Successor for Business Reorganisation under section 170: Budget 2022

amendment-to-assessment-of-successor-for-business-reorganisation-under-section-170-budget-2022

Finance Bill, 2022 has amended the provisions of section 170 in order to bring clarity to the assessment of successor in case of business reorganisation viz., merger or amalgamation or demerger, outstanding demand and filing of return in such cases.


Amendments related to successor entity subsequent to business reorganization 


Chapter XV of the Act refers to liability in certain special cases. Section 170, inter-alia, governs the procedure of taxation in case of succession to business in the event of reorganization or restructuring of the business which is discussed as under.



Though section 170 provides for assessment in cases of succession otherwise than by death, in practice once an entity starts the process of reorganization by filing an application with the adjudicating authority or any High Court, the period of time involved in coming to a conclusion with respect to such reorganization is found to be a long-drawn process and is not time-bound. The reorganization often is from a preceding date. During the pendency of the court proceedings the income tax proceedings and assessments are carried on and often completed on the predecessor entities only. Courts have held such proceedings and consequent assessments illegal as the predecessor assessee ceases to exist in the midst of a perfectly valid and legal proceeding.


Hence, till the decision of the court is received, the proceedings of the Act have to be continued in the case of the predecessor only and such proceedings once completed, cannot become illegal as a result of subsequent order of any court. 


Therefore, with a view to clarify that such proceedings under the Act are valid, it is proposed to insert a sub-section (2A) to section 170, to provide that the assessment or other proceedings pending or completed on the predecessor in the event of a business reorganization, shall be deemed to have been made on the successor.


Further, it is seen that post such reorganization, the affairs of the successor entity go through a complete change with effect from the date from which such reorganization takes place


However, due to the indefinite timeline involved in issuing such orders, there is a gap between the effectivity of such order and the date on which such order is issued by the competent authority. This also affects the final accounts of such entities as they are unable to modify their already filed returns in accordance with the reorganization. Hence, in order to remove this anomaly, it is proposed to insert a new section 170A to the Act, to enable for the entities going through such business reorganization, for filing of modified returns for the period between the date of effectivity of the order and the date of issuance of final order of the competent authority.



Further, it has been noted that in the cases of business reorganisation, instances have been found where the Court or Tribunal or an Adjudicating Authority, as defined in clause (1) of section (5) of the Insolvency and Bankruptcy Code, 2016, as the case may be, as a part of the restructuring process, recast the entire liability to ensure future viability of such sick entities and in the process, modify the demand created vide various proceedings in the past, by the Income Tax department as well, amongst other things.


However, it is observed that there is no procedure or mechanism provided in the Act to reduce such demands from the outstanding demand register. Hence, in order to remove this anomaly, it is proposed to insert a new section 156A to the Act to give effect to the orders of the competent authority and to modify such demands in accordance with such directions


Thus, amendments related to the assessment of the successor entity for business reorganisation are proposed in the following three sections-


1. Section 170(2A): Any assessment or reassessment or other proceedings made on the predecessor when the reorganization is pending before any Court shall be deemed to have been made on the successor entity and all the provisions of this Act shall apply to the successor entity.


2. Section 170A: The Successor entity has been given the opportunity to furnish a modified reutrn within a period of six months from the end of the month in which the reorganization order is issued by any Court.


3. Section 156A: The Assessing Officer has been given the power to reduce the demand amount in accordance with the order of the Adjudicating Authority under IBC.


For this purpose, Clause 50, Clause 53 and Clause 54 of the Finance Bill, 2022 amends the Act in the following manner-


Amendment of section 170. 


53. In section 170 of the Income-tax Act,–


(i) after sub-section (2), the following sub-section shall be inserted, namely:–– 


‘(2A) Notwithstanding anything contained in sub￾sections (1) and (2), where there is a business reorganisation, the assessment or reassessment or other proceedings, made on the predecessor during the course of pendency of such reorganisation, shall be deemed to have been made on the successor and all the provisions of this Act shall, so far as may be, apply accordingly. 


Explanation.– For the purposes of this sub-section, the expressions,–


(i) “business reorganisation” means the reorganisation of business involving the amalgamation or de-merger or merger of business of one or more persons; 


(ii) “pendency” means the period commencing from the date of filing of application for such reorganisation of business before the High Court or tribunal or the date of admission of an application for corporate insolvency resolution by the Adjudicating Authority as defined in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016 and ending with the date on which the order of such High Court or tribunal or such Adjudicating Authority, as the case may be, is received by the Principal Commissioner or the Commissioner.’. 


Insertion of new section 170A. 


54. After section 170 of the Income-tax Act, the following section shall be inserted, namely:–


Effect of order of tribunal or court in respect of business reorganisation. 


‘170A. Notwithstanding anything to the contrary contained in section 139, in a case of business reorganisation, where prior to the date of order of a High Court or tribunal or an Adjudicating Authority as defined in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016, as the case may be, any return of income has been furnished by the successor under the provisions of section 139 for any assessment year relevant to the previous year to which such order applies, such successor shall furnish, within a period of six months from the end of the month in which the said order was issued, a modified return in such form and manner, as may be prescribed, in accordance with and limited to the said order. 


Explanation.–In this section, “business reorganisation” shall have the same meaning as assigned to it in clause (i) of the Explanation to sub-section (2A) of section 170.’. 


Insertion of new section 156A. 


50. After section 156 of the Income-tax Act, the following section shall be inserted, namely:–


Modification and revision of notice in certain cases.


“156A.(1) Where any tax, interest, penalty, fine or any other sum in respect of which a notice of demand has been issued under section 156, is reduced as a result of an order of the Adjudicating Authority as defined in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016, the Assessing Officer shall modify the demand payable in conformity with such order and shall thereafter serve on the assessee a notice of demand specifying the sum payable, if any, and such notice of demand shall be deemed to be a notice under section 156 and the provisions of this Act shall accordingly, apply in relation to such notice. 


(2) Where the order referred to in sub-section (1) is modified by the National Company Law Appellate Tribunal or the Supreme Court, as the case may be, the modified notice of demand as referred to in sub-section (1), issued by the Assessing Officer shall be revised accordingly.”.


Explaining the proposed amendments in section 170(2A), section 170A and section 156A


Clause 53 seeks to amend section 170 of the Act relating to succession to business otherwise than on death. 


It is proposed to amend the said section to insert a new sub-section (2A) to provide a deeming provision in order to save and validate the proceedings and to hold the assessment or other proceedings pending or completed on the predecessor in the event of a business reorganisation, to be held in the hands of the successor and to insert an Explanation to define the expressions,–– 


(i) “business reorganisation” means the reorganisation of business involving the amalgamation or de-merger or merger of business of one or more persons


(ii) “pendency” to mean the period commencing from the date of filing of application for such reorganisation of business before the High Court or tribunal or the date of admission of an application for corporate insolvency resolution by the Adjudicating Authority as defined in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016 and ending with the date on which the order of such High Court or tribunal or such Adjudicating Authority, as the case may be, is received by the Principal Commissioner or the Commissioner.


This amendment will take effect from 1st April, 2022. 


Clause 54 seeks to insert a new section 170A in the Act relating to the effect of the order of tribunal or court in respect of business reorganisation. 


It is proposed to provide that notwithstanding anything contained in section 139, in case of business reorganisation, where prior to the date of order of a High Court or tribunal or an Adjudicating Authority as defined in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016, as the case may be, any return of income has been furnished by the successor under the provisions of section 139 for any assessment year relevant to the previous year to which such order applies, such successor shall furnish, within a period of six months from the end of the month in which the said order was issued, a modified return in such form and manner, as may be prescribed, in accordance with and limited to the said order. 


It is further proposed to insert an Explanation in the said section to define the expression “business reorganisation” shall have the same meaning as assigned to it in clause (i) of the Explanation to sub-section (2A) of section 170. 


This amendment will take effect from 1st April, 2022.


Clause 50 seeks to insert a new section 156A in the Act relating to modification and revision of notice in certain cases. 


It is proposed to provide that where any tax, interest, penalty, fine or any other sum in respect of which a notice of demand has been issued under section 156, is reduced as a result of an order of an Adjudicating Authority as defined in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016, the Assessing Officer shall modify the demand payable in conformity with such order and shall thereafter serve on the assessee a notice of demand specifying the sum payable, if any, and such notice of demand shall be deemed to be a notice under section 156 and the provisions of this Act shall apply accordingly. 


It is further proposed to provide that where the order referred to in sub-section (1) is modified by the National Company Law Appellate Tribunal or the Supreme Court, as the case may be, the modified notice of demand as referred to in sub-section (1), issued by the Assessing Officer shall be revised accordingly. These amendments will take effect from 1st April, 2022. 


Author’s Comments


These amendments will surely bring much relief to entities moistly, companies going through business reorganizations. 


Presently, there were no mechanism to file a  modified return where there is any merger or de-merger taking place. The only option left is to file a revised return by the amalgamated company or demerged and resulting company. This can be done only if there exists a time limit to file a revised return. Many a time, the orders of reorganization from the Courts come when there is no scope to file even a revised return. In that case, the only option for the assessees’ was to file a revised computation before the  Assessing Officer, if the case is selected in the scrutiny assessment. If the case is not selected for scrutiny, then this option could not be exercised.


Therefore, the introduction of section 170A to allow the entities to file a modified return in case of business organization is indeed a welcome step. This amendment confirms the decision of Dalmia Power Limited vs. ACIT (2019) 420 ITR 339 (SC) in which the Hon’ble Supreme Court held that the consequence of amalgamation is that the amalgamating companies lose their separate identity and cease to exist. The successor is obliged under section 170 to file a revised return to reflect the effect of the amalgamation. The fact that the revised return is filed after the due date specified in section 139(5) is irrelevant as the scheme approved by the NCLT provides for it. The assessee is also not required to seek condonation of delay u/s 119(2)(b).


However, there is one issue with the proposed amendment. The ‘pendency’ of the reorganization is considered from the date of filing of the application for such reorganisation of business before any appropriate court which is different from the ‘appointed date’. The merger or demerger takes retrospective effect from the ‘Appointed Date’ and not from the date of filing the application. Hence, there is a gap in the period between the ‘appointed date’ and the date of application’ which needs to be addressed.


Presently, when tax demand is raised and a demand notice is issued, there are no provisions in the income-tax law that empowers the Assessing Officer to reduce the demand as per the Order of Adjudication Authority under IBC even if the Order reduces the demand or waives off the demand amount. Such demand even not payable, still exists in the records of the income-tax department.


With the introduction of section 156A, the AO can reduce such demand and a revised demand notice will be issued. This will synchronize and align the demand with the Order of the NCLT.


The assessment of the predecessor company in the case of business organization is a vexed issue and is subject to intensive litigation. The insertion of sub-section (2A) to section 170 seeks to legislate that any proceedings on the predecessor shall be deemed to have been made on the successor company. Thus any notice of assessment issued or any order passed, say, in the name of amalgamating company, shall be valid on the amalgamated company and will continue on the amalgamated company. This amendment seeks to overrule the decision of PCIT vs. Maruti Suzuki India Ltd ( 2019) 416 ITR 613 (SC) wherein it was held that issuance of notice and passing an order in name of non-existing company i.e. amalgamating company is a ‘jurisdictional defect’ and not a ‘procedural defect’ curable u/s 292B. Since the notice under Section 143(2) of the Act was issued to a non-existent company the assessment order issued against the amalgamating company was void.



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