Introduction
A successor in a business reorganisation has to file a modified return for the period between the date of effectivity of the order and the date of issuance of the order of the competent authority approving the business reorganisation. The modified return shall be furnished by the successor within 6 months from the end of the months in which the said order was issued.
1. About
1.1. What is a modified return?
In the scheme of business reorganisation, the affairs of the successor entity go through a complete change from the date such reorganisation takes place. The business reorganisation often occurs from a preceding date because the adjudicating authority, tribunal, or the High Court ('Competent Authority') takes time to approve such a scheme and pass the final order.
Thus, considering the indefinite timeline involved in issuing orders of business reorganisation by the competent authority, the Income-tax Act requires the successor entity to file the modified returns for the period between the date of effectivity of the order and the date of issuance of the final order of business reorganisation.
1.1-1. Meaning of successor
'Successor' means all resulting companies in a business reorganisation, whether or not the company was in existence before such business reorganisation.
1.1-2. Meaning of business reorganisation
'Business Reorganisation' means the reorganisation of business involving the amalgamation or de-merger or merger of business of one or more persons.
The meaning of the business reorganisation for the purpose of this provision should be limited to the corporate entities and not other non-corporate entities. In support of this, it can be submitted that approval from the competent authority is required for the business reorganisation of corporate entities only and not for non-corporate entities. Further, as the meaning of the 'successor' covers only the resulting company, it supports this conclusion.
1.2. Who shall file the modified return?
It is mandatory for the successor to furnish the modified return if the successor has already furnished the return of income under section 139 for the assessment year relevant to the previous year falling between the date of effectivity of the order and the date of issuance of the final order of the competent authority.
1.3. Which return shall be modified?
Every return furnished under section 139 by a successor in a business reorganisation for any assessment year relevant to the previous year to which the order of competent authority applies shall be modified by filing a modified return under this provision.
A successor can file a modified return in respect of the original return, loss return, belated return, revised return, or updated return.
1.4. Modified return can be filed for how many years?
The period for which modified returns would have to be furnished is the period/previous years to which the order of competent authorities applies. Thus, such a period can be more than one previous year covered by the order.
1.5. Which particulars can be included in the modified return?
The modified return shall be furnished in accordance with and limited to the order of competent authorities. Particulars which are not pertaining to the business reorganisation and not emanating from the order of competent authority cannot be included in the modified return. Thus, any error or omission in the previous return cannot be rectified in the modified return. Similarly, any new entry not related to the order of the competent authorities cannot be included in the modified return.
For example, the successor company filed a return of income for the relevant assessment year before the issuance of the order of the High Court approving the amalgamation with another company. The successor co. has omitted to include the long-term capital gains from the sale of immovable property in its return of income. It cannot include such long-term capital gains in the modified return as it is not limited/related to the order of the High Court approving the amalgamation.
1.6. Form and Time limit to file the modified return
The modified return shall be furnished in Form ITR-A electronically under digital signature within 6 months from the end of the month in which the order of competent authority was issued.
It is important to note that this provision applies only where the order of business reorganisation is issued on or after April 1, 2022. Consequently, entities whose business reorganisation schemes were approved by the competent authority before April 1, 2022, do not fall under the purview of this provision. To provide relief to such entities, the CBDT has issued an order under Section 119 enabling the filing of returns with modified particulars for cases where the business reorganisation order was issued on or after 01.06.2016 but before 01.04.2022.
1.7. Assessment based on the modified return
Section 170A(2) codifies the provision relating to the completion of assessment or reassessment previously notified in Rule 12AD[4]. It provides guidance for the completion of assessment proceedings for an assessment year relevant to a previous year to which the order in respect of the business reorganisation applies (hereinafter referred to as "relevant assessment year") based on the modified returns.
1.7-1. Modification of completed assessment
Where the assessment or reassessment proceedings for the relevant assessment year have been completed on the date of furnishing of the modified return, the Assessing Officer shall pass an order modifying the total income of the relevant assessment year determined in such assessment or reassessment, in accordance with such order and taking into account the modified return so furnished.
For example, a company applies to the NCLT for the approval of the amalgamation scheme with effect from the financial year 2021-22. The tribunal approves the scheme in the financial year 2023-24 with effect from 2021-22. The predecessor company filed its return of income for the assessment year 2022-23 and 2023-24. During the assessment proceedings, the Assessing Officer disallowed the payment made by the predecessor company to the successor company under Section 40A(2) on the grounds of being unreasonable or excessive. After the approval of the amalgamation, the successor files a modified return. In the modified return, the transactions that occurred between the predecessor and successor company during the period after applying to the NCLT and before passing of the order have been excluded because the entities became one entity from the date of approving the scheme. In this case, the Assessing Officer will use the income declared in the modified return filed by the successor company to modify the assessment order passed during the earlier assessment proceedings. This modification will be done in accordance with the amalgamation order, which prompted the company to file the modified tax return.
1.7-2. Completion of pending assessment
Where the assessment or reassessment proceedings for the relevant assessment year are pending on the date of furnishing of the modified return, the Assessing Officer shall pass an order assessing or reassessing the total income of the relevant assessment year in accordance with the order of the business reorganisation and taking into account the modified return so furnished.
1.8. Applicable tax rates
Section 170A(3) provides that in an assessment or reassessment made in respect of an assessment year under this section, all other provisions of this Act shall apply, and the tax shall be chargeable at the rate or rates as applicable to such assessment year. However, where provisions of Section 170A contradicts with any provision of the Act, the provision of Section 170A shall prevail. In other words, the alternative or exception provided in Section 170A will take precedence over the general provision set out in the Act.
For example, if the assessment of the assessment year 2020-21 is being taken up pursuant to the filing of a modified return, then the tax rates and relevant provisions applicable to the assessment year 2020-21 shall be applicable, irrespective of the year in which assessment or reassessment is being done. So if Section 80M was not in statute during the relevant period, the benefit of the same could not be provided just because of the fact that the assessment/reassessment is done in the year in which such provision exists.
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