Reassessment Proceedings Initiated Against A Dissolved Succeeded Firm Are Non-Est And Void Ab Initio

ORDER

Udayan Dasgupta, Judicial Member.- This appeal is filed by the Revenue against the order of ld. CIT(A), NFAC, Delhi, passed u/s 250 of the IT Act, 1961, dated 30.12.2024, which has emanated from the order of the AO, passed u/s 143(3) r.w.s. 147 of the Act, dated 12.12.2019.

2. The grounds of appeal taken in Form No. 36 are as follows:

“1 . The Ld. CIT(A) has erred in allowing the appeal of the assessee by holding that re-opening assessment u/s 147 for A.Y. 2012-13 was initiated and concluded in the name of non-existing entity and hence, this whole assessment was void ab-initio, without going through the merits of the additions made in this case.

2. The Ld. CIT(A) has erred in allowing the appeal of the assessee and holding notice issued u/s 148 of the Income-tax Act, 1961 as invalid and illegal by not appreciating the provisions of section 170 of the Income Tax Act, 1961 that the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession and that in the case of succession, reassessment initiated in the case of the predecessor shall be deemed to have been initiated on the successor and as such the notice issued u/s 148 of the Income-tax Act, 1961 is valid and legal.

3. The Ld. CIT(A) has erred in allowing the appeal of the assessee and holding notice issued u/s 148 of the Income-tax Act, 1961 as invalid and illegal by not appreciating the provisions of section 189 of the Income Tax Act, 1961 that whenever any business or profession carried out by a firm is discontinued or a firm is dissolved, assessment of the total income of the firm has to be made as if no such discontinuance or dissolution had taken place, and all the provisions of the Act shall be applicable upon the dissolved firm and as such the notice issued u/s 148 of the Incometax Act, 1961 is valid and legal.

4. The Ld. CIT(A) has erred in allowing the appeal of the assessee and holding notice issued u/s 148 of the Income-tax Act, 1961 as invalid and illegal by not appreciating the fact that while issuing notice u/s 148 on ITBA system, no manual feeding of data is required and that only the PAN and AY is typed in the system and the other fields i.e. Name of the assessee and address of the assessee are automatically fetched by the system as per system data, and as there is no manual intervention/ feeding of name of the assessee on system, therefore, the onus to get its profile updated on system/e filing portal was upon the assessee and the assessee failed to discharge its onus.

5. The Appellant craves leave to add, amend, alter, vary any or all the above grounds of appeal.

6. It is prayed that the order passed by the Ld. CIT(A) may be set aside and that of the AO may be restored. “

3. The facts in brief as arising from the records are that the assessee was a partnership firm (PFAS) constituted vide partnership deed dated 01.04.2009, carrying on business of trading in fabrics and civil construction which was dissolved on 31.12.2011, and with effect from the very next date 01.01.2012 the e business, together with all assets and liabilities, was taken over by a private limited company incorporated under the name and style of M/s Ambey Construction Pvt. Ltd , which is a case of succession governed by Section 47(xiii) of the Act, and the same was recorded in the Takeover Agreement and also duly intimated by the tax auditor in Form 3CB / Form 3CD (Clause 7(b)) of the audit report, wherein the auditor has certified that the balance sheet examined pertained to the financial year ending 31.12.2011 and that the running business of the firm had been taken over by the company w.e.f. 01.01.2012.

4. For the A.Y. 2012-13 the regular assessment order under Section 143(3) dated 30.03.2015 was set aside under Section 263 by the Pr. CIT, Bathinda vide order dated 29.03.2017, pursuant to which a fresh assessment under Section 143(3) r.w.s. 263 was framed on 05.12.2017.

4.1 Meanwhile, the order under Section 263 dated 29.03.2017 for A.Y. 2012-13, travelled to the jurisdictional Tribunal and was quashed by the Amritsar Bench, in Ambey Construction Company v. Pr. CIT [IT Appeal No. 208 (Asr.) of 2017] vide order dated 07.05.2019, on the legal ground that the notice and the order under Section 263 had been issued and passed against a nonexistent firm which had already been dissolved on 31.12.2011 and the consequential assessment order u/s 263/ 143(3) , dated 05.12.2017 was also quashed by the CIT(A), Bathinda.

5. That a similar issue had earlier been decided in the assessee’s own case for A.Y. 2011-12 in Ambey Construction Company v. Asstt. CIT [IT Appeal No. 121 (Asr) of 2017] vide order dated 21.02.2019, wherein this Hon’ble Tribunal held that the notice under Section 148 dated 13.02.2015 issued in the name of the firm ‘M/s Ambey Construction Company’, which was not in existence on the date of issuance of notice(having been dissolved on 31.12.2011), rendered the reassessment unsustainable.

6. In spite of such facts on department record the notice under Section 148 dated 18.03.2019 was once again issued in the name of the dissolved firm ‘M/s Ambey Construction Company’ for A.Y. 2012-13, and completed the reassessment under Section 143(3) r.w.s. 147 vide order dated 12.12.2019 on a total income of Rs. 23.59 crores, (with an addition of Rs. 22.21 crores on the allegation of bogus contract expenditure).

6.1 It is observed by us that the notice u/s 148 dated 18.03.2019 and the assessment dated 12.12.2019 were issued/passed after the aforesaid Tribunal orders dated 21.02.2019 and 07.05.2019.

7. The matter carried in appeal before the Ld First appellate authority has been allowed by the Ld CIT(A) , vide the order dated 30.12.2024, on the legal issue holding that the reopening under Section 147 was initiated and concluded in the name of a non-existent entity and that the entire assessment was therefore void ab initio, (without adjudicating the grounds on merits the same being in fractious).

8. Now the Revenue is in appeal challenging the first appeal order on the grounds contained in the memorandum of appeal in form -36 , and during the appellate proceedings before the tribunal the Ld DR submitted that the validity of the reassessment proceedings in the case of succession of business arising out of dissolution of partnership is to be examined as per provisions of section 170 and section 189 of the Act.

9. The Ld DR further submits that the Act does not treat succession and dissolution as situations where assessment becomes impossible but the section 170 governs cases where a business of one person is succeeded by another and section 189 provides that not withstanding dissolution assessment may be made “as if no such dissolution had taken place”. He further submitted that these provisions are not merely recovery provisions and forms a part of the machinery governing assessment and clarified that section 189 is a substantive provision dealing with assessment of a dissolved firm and for the limited purpose of assessment the AO has to proceed as if no such dissolution had taken place and this aspect of the matter has not been examined by the Ld first appellate authority .

10. Before concluding the Ld DR submitted that both the sections 170 and section 189 are to be considered for assessment of the dissolved firm and should be interpreted in a harmonious manner and both the sections are to operate together and the Ld first appellate authority has simply proceeded on the assumption that the AO was fully aware of the dissolution of the partnership , a finding which according to the Ld DR was unsupported by records.

11. Per contra the Ld AR that the basis on which the impugned order has been passed – namely, that a notice under Section 148 issued in the name of a firm dissolved on 31.12.2011 is void – stands decided in the assessee’s own case by this Hon’ble Tribunal, both in ITA No. 121/Asr/2017 (A.Y. 2011-12, qua Section 148) and in ITA No.208/Asr/2017 (A.Y. 2012-13, qua Section 263). The facts being identical – the same firm, the same dissolution dated 31.12.2011, the same successor company – the principle of judicial consistency and the rule of law require that the same conclusion has to follow.

12. The Ld AR further submitted that the Department’s knowledge of the dissolution stands established on the record from (a) the audit report (Form 3CB/3CD, Clause 7(b)), (b) the takeover Agreement filed in the A.Y. 201112 proceedings, the AO’s own questionnaires dated 02.06.2014 and 06.09.2014 specifically calling upon the assessee to explain the closure/dissolution of the firm, (d) the assessee’s replies confirming the dissolution and takeover, and (e) the two office notes appended to the original assessment record recording that the firm “had the status of firm up to 31.12.2011. thereafter dissolved and converted into company. all assets and liabilities were taken over by the said company,” and the learned CIT(A) has duly recorded these facts at paras (i) and (ii) of the impugned order.

13. The Ld AR further clarified that, the impugned notice dated 18.03.2019 and the assessment dated 12.12.2019 were issued manually and after this Hon’ble Tribunal had already quashed the proceedings for A.Y. 2011-12 (21.02.2019) on the very same ground. Therefore he submitted that the AO was fully aware that the firm did not exist, yet chose to proceed against the dead entity (a nonexistent person) .

14. He further submitted that it is well settled that the issuance of a jurisdictional notice and the framing of an assessment in the name of a non-existent entity is a substantive illegality going to the very root of jurisdiction, and is not a mere procedural irregularity curable under Section 292B of the Act and in support of his contention he relied upon the Hon’ble Supreme Court in Pr. CIT v. Maruti Suzuki India Ltd.  416 ITR 613 (SC) where it has been held that the issuance of a jurisdictional notice and an assessment order in the name of a nonexisting entity is a substantive illegality and not a procedural violation of the nature adverted to in Section 292B and that an assessment framed in the name of an entity that has lost its existence is without jurisdiction and must be set aside.

15. The above principle has been consistently followed, including by the Hon’ble Supreme Court in Dy. CIT v. Sterlite Technologies Ltd.  462 ITR 462 (SC) and ITO v. Abhishek Caplease (P.) Ltd.  461 ITR 263 (SC) and by the Hon’ble Bombay High Court in Vedanta Ltd. v. Asstt. CIT   (Bombay). The conversion of a firm into a company is directly covered byAsstt. CIT v. DLF Cyber City Developers Ltd. [2015]   (Delhi – Trib.) and ACIT v. Neha Enterprises [IT Appeal No. 3666 (Mum.) of 2015, dated 20-12-2017], the latter following the affirmance of CIT v. Spice Infotainment Ltd. by the Hon’ble Supreme Court. The same view obtains in NRP Projects (P.) Ltd. v. Addl. CIT/ITO [2024]  [2025] 478 ITR 690 (Madras), Coffee Day Resorts (MSM) (P.) Ltd. v. Dy. CIT  (Bombay) and Abbott India Ltd. v. ACIT [2023] 152  202 ITD 287 (Mumbai – Trib.).

16. He further referred to the Hon’ble jurisdictional Punjab & Haryana High Court in CIT v. Norton Motors  275 ITR 595 (Punjab & Haryana), that provisions of section 292B , can be invoked only where there is a technical defect or omission, it cannot cure a notice or proceeding that suffers from an inherent lacuna affecting jurisdiction. The defect here – a notice on a person who does not exist – is precisely such an incurable jurisdictional defect and therefore he submitted that the learned CIT(A) has rightly concluded, on the aforesaid factual matrix and binding precedent, that the reopening under Section 147 for A.Y. 2012-13 was “initiated and concluded in the name of a non-existing entity and hence, this whole assessment was void ab initio.”

17. The Ld AR further submitted that Section 170 of the Act is a machinery and recovery provision which determines, in cases of succession, in whose hands the income is to be assessed (the predecessor for the period up to succession, the successor thereafter) and from whom the tax may be recovered.

17.1 However, it does not dispense with, or override, the fundamental jurisdictional requirement that a notice and an assessment must be made upon a person who is in existence in the eye of law. Moreover , it is prospective and operates only on/after its effective date, whereas the impugned notice is dated 18.03.2019 and the assessment 12.12.2019 and lastly it is confined, on its own terms, to a defined “business re-organization”, and in any event presupposes valid proceedings capable of being deemed transposed – it does not breathe life into a notice issued upon, and an assessment framed against, a nonexistent entity.

17.2 He further submitted that, the Hon’ble Supreme Court in Maruti Suzuki (supra) decided the issue under Section 170 read with Section 292B itself, and held – in a succession context – that the jurisdictional notice and assessment in the name of the non-existent entity were void notwithstanding that statutory scheme. The very provision now invoked by the Revenue has thus already been considered and held insufficient to save such a notice. The Revenue’s reliance on Section 170 is therefore not merely misconceived but is foreclosed by the binding authority on which the assessee relies upon.

18. Before concluding the Ld AR submitted that Section 189 applies where a firm is dissolved or its business is discontinued, enabling assessment of the firm’s income “as if no such dissolution. had taken place. ” The present case, however, is not one of dissolution/discontinuance because the firm’s business was not wound up but was taken over and continued by the successor company under section 47(xiii).

19. We have heard the rival submissions and considered the materials on record and we are of the opinion that provisions of section 189 (1) if a firm is dissolved or its business discontinued the AO is empowered to assessee the income as if no such dissolution has taken place (where the law creates a fiction treating the defunct firm as active for purpose of completing assessment) . But , in the instant case there is take over or succession of the PFAS by a company as a going concern and as such the provisions of section 189 will not apply because succession is not discontinuance and in this case the business does not die, but it survives and is actually carried out by the survivor company and is covered by Section 170 of the Act and the said issue is already decided upon by the Hon’ble Apex court in the case of Maruti Suzuki (supra) .

20. As such considering all materials on record and the judicial precedents relied upon , and respectfully following the law laid down by the Hon’ble Apex court in the case of Maruti Suzuki India Ltd.(supra), we are fully in agreement with the view taken by the Ld CIT (A) and we find no merits in the grounds taken by the revenue and we hold that notice u/s 148 being issued on a non existent entity is legally invalid.

21. Since we have decided the legal issue in favour of the respondent assessee and against the revenue, the written submissions filed by the Ld DR on merits of the case are not adjudicated upon.

22. In the result the appeal of the revenue is dismissed being devoid of merits,