Bombay High Court Quashes ₹10.25 Crore GST Demand Against Capital First Post-Merger With IDFC First Bank

The Bombay High Court has quashed a ₹10.25 crore GST demand raised against Capital First Limited post its merger with IDFC First Bank. It held that proceedings initiated against a company that had ceased to exist due to amalgamation are void ab initio and unsustainable in law.

A Division Bench of Justice G.S. Kulkarni and Justice Aarti Sathe observed that despite repeated intimations about the merger, the department continued proceedings against the non-existent entity.

Relying on the Supreme Court's decision in Principal Commissioner of Income Tax, New Delhi v. Maruti Suzuki India Limited, the Court reiterated that “the initiation of assessment proceedings against an entity which had ceased to exist was void ab initio.”

The court noted that once the National Company Law Tribunal (NCLT), Chennai approved the scheme of amalgamation of Capital First Limited, Capital First Home Finance Ltd., and Capital First Securities Ltd. with IDFC First Bank, Capital First Limited ceased to exist in the eyes of law.

It held that, in the facts of the case, the notices and demand proceedings initiated against the erstwhile company were without jurisdiction. The bench also reiterated that participation by the amalgamated entity in the proceedings would not validate an action that was illegal from inception.

The issue before the Court was whether GST authorities could continue tax proceedings and pass demand orders against a company that had already merged with another entity.

The company's GST registration had also been cancelled after the amalgamation. The department sought to justify its actions by relying on Section 87 of the CGST Act, which deals with the tax consequences of certain transactions between companies undergoing amalgamation or merger.

IDFC First Bank told the Court that the NCLT, Chennai, approved the amalgamation by an order dated December 12, 2018. Thereafter, an application was filed for cancellation of Capital First Limited's GST registration. The registration was cancelled by an order dated June 14, 2019.

Despite this, the GST department issued a scrutiny notice seeking an explanation for discrepancies noticed in tax returns on January 4, 2022. It alleged discrepancies in returns filed by Capital First Limited. In response, the bank informed the authorities that the company had already merged and no longer existed.

Subsequently, the department issued a pre-show cause intimation proposing tax liability. This was followed by an audit notice seeking inspection of the erstwhile company's books for FY 2018–19.

The petitioner repeatedly informed the authorities that the proceedings were being conducted against a non-existent entity. It requested that the proceedings either be dropped or transferred to the jurisdictional officer of the amalgamated entity.

However, the authorities proceeded with the audit and issued an audit report recording multiple discrepancies. This was followed by a formal show cause notice asking why tax should not be demanded from Capital First Limited.

By an order dated April 26, 2024, demands of ₹4.40 crore each towards CGST and MGST were confirmed. An IGST demand of ₹1.45 crore was also raised, along with interest and penalty, against the erstwhile company.

Rejecting the department's reliance on Section 87, the Court held that the provision applies where amalgamating companies have transactions with each other during the intervening period between the effective date of merger and the date of the amalgamation order. However, it does not authorize proceedings against a company that has ceased to exist.

Accordingly, the High Court allowed the writ petitions and quashed the impugned demand orders. It clarified that all other contentions available to both parties in law remain open.

For Petitioner: Senior Advocate Prakash Shah with Advocates Jas Sanghavi, Mihir Mehta, Mohit Raval and Vikas Poojary, instructed by PDS Legal.

For Respondent: Additional Government Pleader Jyoti Chavan with Assistant Government Pleader Himanshu Takke in Writ Petition No. 3390 of 2024; Additional Government Pleader Jyoti Chavan with Assistant Government Pleader Amar Mishra in Writ Petition No. 3607 of 2024.