2024 (1) TMI 352 - AT - Income Tax

Revenue appeal dismissed due to CIRP moratorium under Section 14(1) of Insolvency Code without examining business expense merits

The ITAT Delhi dismissed the Revenue's appeal regarding allowability of business expenses and business loss without examining the merits. The assessee ... Allowability of business expenses and business loss - as submitted business of the assessee was not set up during FY 2009-10 and that the assets were not used by the assessee for the purpose of its business during AY 2010-11 - AR submitted that the assessee company has been admitted to Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code HELD THAT:- On perusal of records, we find that the NCLT in the matter of M/s. Rapid Buildwell Ltd. [2022 (11) TMI 1437 - NATIONAL COMPANY LAW TRIBUNAL NEW DELHI BENCH] has granted moratorium against the institution of proceedings against the corporate debtor by issuing direction as a consequence of the application being admitted, moratorium as envisaged under the provisions of Section 14(1), shall follow in relation to the corporate debtor, prohibiting as per proviso (a) to (d) of the Code However, during the pendency of the moratorium period, terms of Section 14(2) to 14(4) of the Code shall come in force. Pursuant to the aforementioned directions of the NCLT, we dismiss the appeal of the Revenue without going into the merits of the case. Revenue shall be free to institute the appeal after the completion of the CIRP proceedings, if so advised, as per the relevant provisions of the Act, for which the Ld. Sr. DR had no objection. ISSUES PRESENTED AND CONSIDERED 1. Whether the appeal filed by the Revenue against the CIT(A)'s order allowing certain business expenses and depreciation can be heard and decided by the Tribunal after the corporate debtor was admitted to Corporate Insolvency Resolution Process (CIRP) and a moratorium declared under Section 14 of the Insolvency and Bankruptcy Code (Code). 2. Secondary consequential issue considered: whether the Revenue may institute the appeal again after completion of the CIRP proceedings (or once moratorium ceases to operate). ISSUE-WISE DETAILED ANALYSIS Issue 1: Jurisdiction/competence to adjudicate the Revenue's appeal given moratorium under Section 14 of the Code Legal framework: Section 14 of the Code (Moratorium) provides that on the insolvency commencement date the Adjudicating Authority shall declare a moratorium prohibiting (inter alia) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order; transfer, encumbrance or disposal of assets; actions to foreclose or enforce security interests; and recovery of property by an owner or lessor occupied by the corporate debtor. The moratorium remains in force until completion of the CIRP, subject to limited exceptions set out in subsections (2)-(4). Precedent treatment: No prior judicial precedent was relied on or considered in the decision. The Tribunal applied the statutory moratorium provision in the Code directly to the facts; there was no treatment of, distinction from, or overruling of authority recorded. Interpretation and reasoning: The Tribunal noted that the corporate debtor had been admitted to CIRP by the NCLT and a moratorium declared by the Adjudicating Authority. The moratorium expressly prohibits the institution or continuation of proceedings against the corporate debtor, which includes appellate proceedings and execution of orders. On that statutory basis the Tribunal concluded it could not proceed to decide the merits of the Revenue's appeal while the moratorium operated. The Tribunal therefore dismissed the appeal without addressing the substantive questions raised by the Revenue (relating to allowability of expenses and depreciation where business was alleged not to have commenced). Ratio vs. Obiter: The holding that an appellate tribunal must refrain from adjudicating a tax appeal against a corporate debtor during the period of moratorium under Section 14(1) of the Code is ratio decidendi for the order - the operative legal principle applied to dispose of the appeal. Any remarks that the Revenue may re-institute the appeal after completion of CIRP are incidental and procedural (obiter by way of practical direction), insofar as they do not determine the substantive tax issues. Conclusions: The Tribunal concluded it was statutorily prohibited from proceeding with the appeal while the moratorium under Section 14 was in force and therefore dismissed the appeal without deciding the substantive tax issues. Issue 2: Whether the Revenue may re-institute the appeal after completion of CIRP proceedings Legal framework: By operation of Section 14(4) of the Code the moratorium lasts until completion of the CIRP, but ceases if a resolution plan is approved under Section 31 or the corporate debtor is ordered liquidated under Section 33. The moratorium's effect is to suspend institution or continuation of proceedings during that period. Precedent treatment: No authoritative precedent was cited; the Tribunal gave a practical direction consistent with the statutory scheme. Interpretation and reasoning: Because the moratorium prevents continuation or institution of proceedings during CIRP, the Tribunal held that once the CIRP is complete (or the moratorium otherwise ends), the statutory bar will no longer prevent adjudication. Therefore the Revenue is free to pursue the appeal afresh after completion of CIRP proceedings in accordance with the provisions of the Income Tax Act. Ratio vs. Obiter: The statement that the Revenue may institute the appeal after completion of CIRP is a consequential procedural direction and not a determination on the substantive tax issues; it is therefore incidental to the core holding that the moratorium precluded adjudication at this time. Conclusions: The Tribunal dismissed the appeal on account of the NCLT-declared moratorium. The Revenue was given liberty to re-initiate appellate proceedings after the CIRP has concluded or the moratorium has ceased to operate. Cross-references and scope of decision The Tribunal expressly refrained from examining the substantive contentions on whether expenses and depreciation were allowable in the assessment year because the moratorium barred continuation of proceedings; accordingly no findings were made on those substantive tax questions and the earlier orders of the AO and CIT(A) remain unadjudicated by the Tribunal on their merits.