2023 (11) TMI 202 - HC - Income Tax

Revenue authorities cannot recover dues predating NCLT-approved resolution plans under IBC Section 31 and 238

Tata Steel Limited Versus Deputy Commissioner Of Income Tax

Delhi HC ruled that revenue authorities cannot recover dues for periods preceding NCLT approval of resolution plan under IBC. Court held that Section 31 ... Revenue entitlement to recover dues for the period which precedes the date of approval of the RP by the NCLT under IBC - Extinguishment of liability as per the approved resolution plan - revenue claims that Section 238 of the 2016 Code does not impede its powers to pursue assessment or reassessment proceedings - HELD THAT:- In cases where no provision is made for claims lodged on behalf of the creditors, or there is failure to lodge a claim with the Resolution Professional, all such claims stand extinguished. This position in law obtains because of the provisions of Section 31 of the 2016 Code, which, inter alia, stipulates that once the RP is approved, it shall be binding on the corporate debtor and its employees, members, and creditors which includes the Central Government, State Government, Local Authority arising under any law for the time being in force, and also on authorities to whom statutory dues are owed. Furthermore, the provision also stipulates that the approved plan will be binding on guarantors and other stakeholders involved in forging the same. Therefore, the submission advanced on behalf of the revenue that it could continue with the assessment/reassessment process concerning the AYs in issue is entirely untenable. A successful applicant whose RP has been approved should not be put in a position where it is called upon to liquidate dues of creditors, including statutory creditors, which were not embedded in the RP. A successful applicant is, in law, provided with a “clean slate”; therefore, dues for the period prior to the date when the RP was approved cannot be recovered. The courts have recognized this principle in more than one case. Whether the provisions of the 2016 Code would override the provisions of the 1961 Act, where inconsistency is found between the two statutes? - When one examines the provisions of Section 238 of the 2016 Code, the underlying purpose of the provision comes through. Section 238 clearly states without any ambiguity that the provisions of the 2016 Code “shall” have effect, notwithstanding anything inconsistent contained in any other law for the time being in force, or any instrument having effect under any such law. Thus, where matters covered by the 2016 Code are concerned [including insolvency resolution of corporate persons] if provisions contained therein are inconsistent with other statutes, including the 1961 Act, it shall override such laws. If such an approach is not adopted, it will undermine the entire object and purpose with which the Legislature enacted the 2016 Code. As decided in Ghanshyam Mishra’s case [2021 (4) TMI 613 - SUPREME COURT] SC held since the subject matter of the proceedings related to claims made by the VAT authorities before the approval of the plan, no purpose would be served in relegating the writ petitioner/appellant to an alternative remedy. The Court made a specific observation which, applies to the instant cases as well: “A party cannot be made to run from one forum to another forum in respect of the proceedings and the claims, which are not permissible in law.” Thus the impugned notice and order are unsustainable in law and, hence, cannot be enforced. Issues Involved:1. Jurisdiction to enforce tax and penalty demands.2. Applicability of the 'clean slate' principle post-Resolution Plan (RP) approval.3. Claims lodged by the Revenue with the Resolution Professional (RP).4. Overriding effect of the Insolvency and Bankruptcy Code (IBC) over the Income Tax Act, 1961.5. Alternative remedies under the Income Tax Act, 1961.Summary:1. Jurisdiction to Enforce Tax and Penalty Demands:The petitioner challenged the notice and order issued by the Revenue under Section 221(1) of the Income Tax Act, 1961, demanding tax and penalty for Assessment Years (AYs) 2001-02, 2009-10, 2010-11, and 2013-14. The petitioner argued that these demands pertain to periods preceding the approval of the Resolution Plan (RP) by the National Company Law Tribunal (NCLT) and thus fall within the ambit of the 'clean slate' principle.2. Applicability of the 'Clean Slate' Principle Post-RP Approval:The petitioner contended that once the RP is approved, all stakeholders, including the Revenue, are bound by its terms. The Revenue is not different from other creditors, and its claims not included in the approved RP stand extinguished. The Revenue, however, argued that it could continue with assessment or reassessment proceedings for the AYs in issue.3. Claims Lodged by the Revenue with the Resolution Professional (RP):The Revenue lodged claims for AYs 2009-10, 2010-11, and 2013-14 but did not include the penalty amount or the claim for AY 2001-02 within the prescribed timeframe. The penalty imposed via order dated 23.04.2018 did not form part of the claims lodged by the Revenue. The court noted that the Revenue had knowledge of the Corporate Insolvency and Resolution Process (CIRP) and lodged claims accordingly, but failed to include all relevant claims within the prescribed timeframe.4. Overriding Effect of the IBC over the Income Tax Act, 1961:The court emphasized that the IBC, being a special enactment, overrides the provisions of the Income Tax Act, 1961, where inconsistencies exist. Section 238 of the IBC makes this clear. The court referenced several judgments, including Ghanshyam Mishra & Sons Pvt. Ltd. v. Edelweiss Asset Construction Co. Ltd., to support this view.5. Alternative Remedies under the Income Tax Act, 1961:The Revenue argued that the petitioner should have taken recourse to remedies available under the Income Tax Act. The court, however, held that a successful resolution applicant should not be burdened with dues not embedded in the RP. The court cited the principle that a successful applicant is provided with a 'clean slate,' and dues for the period before the RP's approval cannot be recovered.Conclusion:The court concluded that the impugned notice and order dated 28.08.2018 and 17.10.2018, respectively, are unsustainable in law and cannot be enforced. However, the parties must abide by the final decision of the Supreme Court regarding AY 2001-02. The writ petition was disposed of accordingly, and the petitioner was directed to file an amended memo of parties.