2023 (6) TMI 1281 - AT - Income Tax

Revenue's Appeals Dismissed in Insolvency Case; Claims Extinguished under IBC Section 31

The Revenue's appeals against the Commissioner of Income Tax (Appeals) orders for multiple assessment years were dismissed. The company underwent ... Income tax demands post approval of resolution plan - treatment to remaining demands and liabilities consequent to the NCLT approved Resolution Plan - HELD THAT:- As decided in Ghanshyam Mishra & Sons Pvt. Ltd. Vs. Edelweiss Asset Reconstruction Company Ltd.[2021 (4) TMI 613 - SUPREME COURT] NCLT order approving the Resolution Plan is binding upon the Central Government including the statutory authorities like the Income-tax Department and all claims pertaining to the period prior to the date of order of NCLT stand extinguished. Thus statutory demands of the Revenue stand extinguished consequent to approval of Resolution Plan and vesting of the Management of the company in the hands of Successful Resolution Applicant. The provision of subsection (1) of Section 31 of the IBC and judgment of Hon’ble Supreme Court relied upon by the learned AR leave no doubt that all the claims of Revenue for the period prior to institution of CIRP stand extinguished. Moreover, in the case in hand even demands of Department have been considered, adjudicated and payments have been made to the Income-tax Department consequent to the Resolution Plan. Consequently, appeals of Revenue are left with no merit and the same are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether statutory tax demands and liabilities relating to periods prior to the commencement of Corporate Insolvency Resolution Process (CIRP) are extinguished upon approval of a Resolution Plan by the National Company Law Tribunal (NCLT) pursuant to Section 31(1) of the Insolvency and Bankruptcy Code (IBC). 2. Whether an NCLT-approved Resolution Plan binds statutory authorities, including the revenue department, so as to extinguish or modify pre-CIRP claims of the revenue. 3. Whether outstanding tax demands are required to have been specifically included or adjudicated in the list of claims submitted during CIRP for the extinguishment to operate, and the effect of post-approval payments made pursuant to the Resolution Plan on the revenue's demands. ISSUE-WISE DETAILED ANALYSIS Issue 1: Extinguishment of pre-CIRP statutory tax demands upon NCLT approval of Resolution Plan (legal framework) Legal framework: The insolvency regime provides for moratorium during CIRP and, upon approval of a Resolution Plan under Section 31(1) of the IBC, the plan becomes binding on the corporate debtor, its employees, members, creditors and the Central Government. Precedent Treatment: The Court followed the settled principle that a Resolution Plan approved by the NCLT binds statutory authorities and affects pre-CIRP claims. Interpretation and reasoning: The Tribunal applied Section 31(1)'s binding effect to hold that claims of the revenue relating to periods before initiation of CIRP are extinguished once the Resolution Plan is approved. The presence of the moratorium and vesting of management in the Successful Resolution Applicant were treated as operating to abate or extinguish pre-CIRP demands. Ratio vs. Obiter: Ratio - an NCLT-approved Resolution Plan under Section 31(1) operates to extinguish pre-CIRP statutory demands to the extent provided by the plan and binds the revenue. Conclusion: Pre-CIRP statutory tax demands stand extinguished by approval of the Resolution Plan; such extinguishment justified dismissal of revenue appeals. Issue 2: Binding effect of Resolution Plan on statutory authorities including revenue Legal framework: Section 31(1) renders an approved Resolution Plan binding on specified stakeholders including the Central Government and statutory authorities. Precedent Treatment: The Tribunal accepted authority holding that NCLT approval of a Resolution Plan is binding on the Central Government and statutory bodies and that claims extinguished by the plan cannot be revived by such authorities. Interpretation and reasoning: Given the statutory text and authoritative judicial interpretation, the Tribunal reasoned that the Income-tax Department is bound by the NCLT order approving the Resolution Plan and cannot enforce pre-CIRP demands beyond what the Plan permits. The fact that the Resolution Applicant and NCLT proceedings addressed statutory dues reinforced the binding consequence. Ratio vs. Obiter: Ratio - approval of a Resolution Plan binds statutory authorities and extinguishes or modifies their pre-CIRP claims in accordance with the Plan. Conclusion: The Resolution Plan, as approved by the NCLT, is binding on the revenue and extinguishes the Department's pre-CIRP claims insofar as the Plan so provides. Issue 3: Necessity of inclusion/adjudication of specific revenue claims in CIRP and significance of post-approval payments Legal framework: CIRP requires submission and adjudication of claims; the efficacy of extinguishment depends on the Plan's terms and treatment of claims submitted during the insolvency process. Precedent Treatment: The Tribunal recognized the revenue's entitlement to verification of whether particular demands were part of claims before the NCLT but accepted that where claims were considered and dealt with in the Resolution Plan, the extinguishment principle applies. Interpretation and reasoning: The Tribunal noted that the Revenue did not dispute facts showing that (a) the Revenue's claim appeared in the list of operational creditors, (b) the Resolution Plan disclosed provision for statutory dues, (c) the Resolution Plan was approved, and (d) payments were made to the Income-tax Department pursuant to the Plan. The Revenue's request for verification as to whether particular demands were part of the claim list was acknowledged as a legitimate enquiry, but on the record the departmental claims had been considered and payments effected, demonstrating settlement under the Plan. Ratio vs. Obiter: Part ratio - while extinguishment normally requires that claims be submitted and dealt with in CIRP, where the Plan adjudicates and provides for statutory dues and payments are made pursuant to the Plan, extinguishment follows. Part obiter - procedural points about verification of precise claim inclusion, where not in dispute, do not impede the extinguishment finding. Conclusion: Specific revenue demands need ordinarily to be part of the CIRP claim process to be affected, but where the Plan expressly addresses statutory dues and payments have been made in implementation, the demands are extinguished; consequent departmental appeals lack merit. Consolidated Conclusion The Tribunal concluded that the statutory tax demands relating to periods prior to initiation of CIRP were extinguished by the NCLT-approved Resolution Plan, which is binding on statutory authorities; the revenue's concerns about verification of claim inclusion were noted but found to be satisfied on the record (claims listed, Plan provision for statutory dues, and payments made). Therefore, the revenue appeals were dismissed as devoid of merit.