Case at a Glance
A private company converted into an LLP in November 2018 and the LLP filed its own return for Assessment Year 2022-23. But because some dividend income was still being reported against the old company’s PAN, the Income Tax Department’s risk system flagged the company as a ‘non-filer’ and issued reassessment proceedings under Sections 148A and 148 against that PAN. A Division Bench of Justices B.P. Colabawalla and Farhan P. Dubash held that a company that had ceased to exist could not earn income or file a return, that the officer ignored the conversion despite being told about it, and that an assessment cannot be reopened merely to verify. The Section 148A notice, the Section 148A(3) order and the Section 148 notice were all quashed.
Aavkar Trade Consultants Pvt. Ltd. converted into the petitioner LLP with effect from 13 November 2018. Requests to surrender the company’s PAN were made in 2019 and 2021, and an application to transfer TDS credits was made in 2023; the case was also transferred to the present jurisdictional officer by a Section 127 order of 21 November 2023. For Assessment Year 2022-23 the LLP filed its return on 3 November 2022, declaring total income of Rs 2,33,41,090, including dividend income of Rs 6,01,071.
The Department’s Risk Management Strategy picked up dividend income of Rs 5,76,429 reported under Section 194 against the old company’s PAN for FY 2021-22 and treated it as a ‘non-filer’ case. A notice under Section 148A(1) dated 26 March 2026 was issued, addressed to the LLP but against the company’s PAN. The LLP replied on 3 April 2026 with the conversion certificate, both PANs, its return, audited accounts, bank statements, Form 26AS and a transaction-wise reconciliation in which 82 of 89 entries matched exactly. Even so, an order under Section 148A(3) and a notice under Section 148, both dated 29 June 2026, were issued against the company’s PAN, saying the reconciliation was incomplete and needed detailed verification. The High Court had stayed the notice on 21 September 2026.
The Key Question Before the Court
Can the Income Tax Department reopen an assessment against the PAN of a company that had already converted into an LLP, on the footing that it is a ‘non-filer’, and can reassessment be used to verify a reconciliation already furnished?
A Non-Existent Assessee and a Reopening for ‘Verification’
The Division Bench held that the company, having converted into an LLP on 13 November 2018, could not earn income or file a return for Assessment Year 2022-23; continued TDS reporting against its PAN did not revive it. The Revenue did not dispute that no valid return could be filed under the company’s PAN, and its counsel explained that the Department’s ITBA system has no facility to transfer or merge proceedings between a predecessor’s and successor’s PAN, offering only to record the pendency against the LLP’s PAN for record purposes. The Court held that the Section 148 notice could not be sustained, and that the proceedings could not simply be shifted to the LLP’s PAN.
The Court further found that the ‘non-filer’ flag rested on an incorrect premise, since the LLP had filed a valid return, and that the Assessing Officer, who knew of the conversion and the transfer requests, had not applied his mind. Quoting the Section 148A(3) order’s call for “detailed verification”, the Court held that an assessment “cannot be reopened merely to undertake verification”. Relying on its earlier decision in S. V. Jadhav v. ITO, (2024) 477 ITR 80 (Bom), it held that an Assessing Officer “cannot indulge in a fishing enquiry”. The proceedings under Sections 148A and 148 were declared bad in law.
What the Court Actually Held
- A company that converted into an LLP in November 2018 ceased to exist; it could not earn income or file a return for AY 2022-23, and TDS reported against its PAN did not revive it, so a Section 148 notice against that PAN cannot be sustained.
- The ‘non-filer’ trigger ignored the LLP’s valid return, and the Assessing Officer, aware of the conversion, failed to apply his mind; the proceedings could not be shifted to the LLP’s PAN.
- An assessment cannot be reopened merely to verify a reconciliation or claim; following S. V. Jadhav v. ITO, the Assessing Officer cannot embark on a fishing enquiry.
- The Section 148A(1) notice, the Section 148A(3) order and the Section 148 notice dated 29 June 2026 were quashed; rule made absolute, no order as to costs.
Why This Judgment Matters
- Many private companies have converted into LLPs, and TDS is often still deducted against their old PANs. This ruling protects successors from automated ‘non-filer’ reopening against a defunct PAN.
- It reinforces that Section 148A is not a tool for verification or roving enquiries when the taxpayer has already explained the transactions.
- It records the Revenue’s own admission that its ITBA system cannot transfer proceedings between predecessor and successor PANs, a practical problem for converted entities.
What Should Advocates Take Away From the Judgment?
For Taxpayers
- After converting a company into an LLP, surrender the old PAN, ask deductors to use the new PAN and apply for transfer of TDS credits, and keep records of each request.
- Reply to a Section 148A notice with the conversion certificate and a transaction-wise reconciliation; it was decisive here.
- A notice issued against a non-existent entity’s PAN can be challenged in a writ petition.
For Counsel
- Argue that the notice is void when issued against the PAN of an entity that no longer exists, and that it cannot be cured by shifting it to the successor’s PAN.
- Where the Section 148A(3) order speaks of ‘verification’, cite S. V. Jadhav v. ITO on the bar against fishing enquiries.
- Point out the officer’s prior knowledge of the conversion to show non-application of mind.
Key Takeaways
- No reassessment against the PAN of a company that has converted into an LLP.
- TDS reported against the old PAN does not revive the defunct company.
- Reopening only to ‘verify’ a furnished reconciliation is a fishing enquiry.
- Section 148A notice, 148A(3) order and Section 148 notice for AY 2022-23 quashed.
Frequently Asked Questions
Can the tax department reopen an assessment against a company that has become an LLP?
Not against the old company’s PAN for a year after conversion, on this ruling. The Bombay High Court held that the company had ceased to exist and could not earn income or file a return, so the notice could not be sustained.
What if TDS is still deducted against the old company’s PAN?
Continued TDS reporting under the old PAN did not revive the company. The LLP had disclosed the income in its own return and furnished a reconciliation, which the Court accepted as showing the ‘non-filer’ flag was wrong.
Can an assessment be reopened just to verify the taxpayer’s explanation?
No. The Court held that an assessment cannot be reopened merely to undertake verification and that the Assessing Officer cannot indulge in a fishing enquiry, following S. V. Jadhav v. ITO.
Conclusion
The ruling exposes a gap between automated risk flags and legal reality. A company that had become an LLP years earlier was treated as a non-filer because of stale TDS data, and the Department pressed on even after the conversion and a detailed reconciliation were placed before it.
Practical takeaway: Converted entities should promptly close out old PANs and TDS mapping; if a reassessment notice still issues against the old PAN, challenge it as one against a non-existent person and as a fishing enquiry.
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