2024 (2) TMI 309 - HC - Insolvency and Bankruptcy

NCLT lacks jurisdiction to declare VAT assessment void ab initio under Section 33(5) IBC

Kerala HC allowed petition challenging NCLT Kochi order that declared VAT assessment as void ab initio under Section 33(5) IBC. Court held NCLT lacks ... Jurisdiction - power of NCLT to declare the VAT / Tax assessment order as void ab initio under Section 33(5) of IBC - HELD THAT:- From the provisions of Section 14 of the IBC it is evident that Section 14 prescribes a moratorium on the initiation of CIRP proceedings and its effects. The Supreme Court, in its judgment in the case of SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD VERSUS CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS [2022 (8) TMI 1161 - SUPREME COURT], after considering the February 2020 Report of the Insolvency Law Committee, held that one of the purposes of the moratorium is to keep the assets of the Corporate Debtor together during the insolvency resolution process and to facilitate orderly completion of the processes envisaged under the Statute. Moratorium under Section 14 is to ensure the curtailing of parallel proceedings and reduce the possibility of conflicting outcomes in the process. Section 14(1)(a), (b) and (c) of the IBC shields and protects against pecuniary attacks against the Corporate Debtor. This is to provide the Corporate Debtor with breathing space to allow it to continue as a going concern and rehabilitate itself. Under Section 238, the provisions of IBC have an overriding effect on any other law for the time being in force or any instrument having effect by virtue of any law - after declaring the moratorium, there is an embargo on enforcing the demand, but there is no embargo under Section 14, read with Section 33(5) of the IBC, for determining the quantum of tax and other levies, if any, against the Corporate Debtor. This Court finds the impugned order passed by the National Company Law Tribunal, Kochi Bench, as preposterous and untenable. The Company Law Tribunal has no power and authority under the IBC to declare an assessment order as void ab initio and non est in law. Such an order only reflects the competence of the persons who are manning such an important Tribunal - The Order shows the lack of basic understanding of the law. Instead of considering the application by the 2nd respondent for permission to file an appeal against the assessment order, the National Company Law Tribunal, Kochi Bench, has assumed the jurisdiction of the Constitutional Court to declare the assessment order as void ab initio. The matter is remitted back to the National Company Law Tribunal, Kochi Bench, to consider and pass an order on the application of the 2nd respondent - Petition allowed by way of remand. ISSUES PRESENTED AND CONSIDERED 1. Whether the adjudicating authority under Section 33(5) of the Insolvency and Bankruptcy Code (IBC) has the power to declare a tax assessment order void ab initio. 2. Whether tax authorities are prohibited during moratorium under Sections 14 and 33(5) of the IBC from determining the quantum of tax and levies, initiating recovery, or both. 3. The scope of interaction between tax proceedings (assessment/recovery) and the moratorium regime under the IBC, including the extent of administrative actions permissible by tax authorities during CIRP/liquidation. ISSUE-WISE DETAILED ANALYSIS Issue 1: Power of Adjudicating Authority under Section 33(5) IBC to Declare an Assessment Void ab Initio Legal framework: Section 33(5) provides that when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor, subject to specified exceptions; Section 238 gives IBC overriding effect over other laws. Precedent treatment: Higher Court authority has held that moratorium restricts recovery actions but permits assessment/determination of taxes; the interim resolution professional/liquidator has procedural rights to question assessments. Interpretation and reasoning: The Tribunal's declaration of an assessment order as void ab initio was treated as an exercise beyond the statutory remit of Section 33(5). The adjudicating authority's powers under Section 33(5) are to regulate institution of suits or proceedings, and to grant prior approval for litigation by the liquidator; they do not include power to annul administrative assessment orders outright. Declaring an assessment non est in law is akin to assuming powers reserved for constitutional courts or appellate fora; such a declaration was characterised as ultra vires and unsupported by the IBC scheme. Ratio vs. Obiter: Ratio - The adjudicating authority cannot declare tax/assessment orders void ab initio under Section 33(5) IBC; such a power is not conferred by the IBC. Obiter - Language criticising the Tribunal's competence and legal understanding is illustrative but not necessary to the legal holding. Conclusions: The adjudicating authority lacked jurisdiction under Section 33(5) to invalidate the assessment order; the impugned order purporting to nullify the assessment is unsustainable and must be set aside. The proper course is remittal for consideration of the application seeking permission to prefer an appeal, without annulling the assessment. Issue 2: Permissible Actions by Tax Authorities during Moratorium - Assessment v. Recovery Legal framework: Section 14 imposes moratorium on institution or continuation of suits or proceedings and on enforcement measures against the corporate debtor during insolvency process; Explanation to Section 14 and Section 33(5) clarify exceptions and cessation of moratorium on liquidation/plan approval; Section 238 accords overriding effect to IBC. Precedent treatment: Authoritative jurisprudence establishes that authorities may determine the quantum of tax, interest or penalties but cannot initiate enforcement/recovery measures that contravene moratorium; the IRP/RP/liquidator has the right to question assessments and to secure assets. Interpretation and reasoning: The moratorium confines tax authorities to assessment/determination functions; activities amounting to initiation of legal proceedings or coercive recovery (e.g., seizure, sale, enforcement) are barred. The statutory scheme preserves the ability to assess dues to permit claim submission under IBC timelines, while protecting the corporate debtor and the insolvency estate from piecemeal enforcement that would frustrate collective insolvency objectives. Ratio vs. Obiter: Ratio - Tax/other authorities may assess/reassess but cannot transgress into recovery or enforcement during moratorium; the IRP/RP/liquidator may contest assessments and secure assets. Obiter - Observations on specific clauses of other statutes are illustrative of the general principle. Conclusions: There is no embargo on determining the quantum of tax and levies during moratorium, but enforcement or recovery proceedings are prohibited. Post-assessment, claims must be submitted in accordance with the IBC procedure and timelines; enforcement must await appropriate authority under the IBC or action by the liquidator with adjudicating authority's approval where applicable. Issue 3: Interaction between IBC Moratorium and Tax Assessment Proceedings - Proper Remedy and Forum Legal framework: The IBC contemplates a centralized, collective resolution/liquidation regime; Section 14 aims to avoid conflicting parallel proceedings; Section 33(5) restricts suits against the corporate debtor in liquidation; procedural mechanisms under the IBC (submission of claims, powers of IRP/RP/liquidator) are the prescribed vehicles for addressing tax claims. Precedent treatment: Prior jurisprudence affirms that while assessment may proceed, challenge/remedy against assessments lies with the IRP/RP/liquidator, and claim adjudication follows IBC processes; authorities cannot claim proprietary enforcement inconsistent with IBC. Interpretation and reasoning: The tribunal's role when confronted with an application for permission to appeal an assessment is to consider the application within the IBC framework, not to exercise plenary powers to nullify assessment orders. Where an assessment is allegedly passed in violation of moratorium through coercive measures, the appropriate steps include (a) the IRP/RP/liquidator questioning legality before the relevant authority, (b) submission of claims under IBC, and (c) seeking adjudicating authority's directions concerning litigation by the liquidator. Declaring assessments void ab initio bypasses those mechanisms and frustrates statutory balance. Ratio vs. Obiter: Ratio - Challenges to assessments must be pursued through the remedies available under the relevant statutes and in consonance with IBC procedures; the adjudicating authority must not usurp functions of appellate or constitutional courts by declaring administrative assessments null without statutory basis. Obiter - Strong language about competence of tribunal members is commentary and not part of the legal holding. Conclusions: The correct remedial pathway is for the liquidator or corporate representative to contest the assessment via available statutory channels and to present claims under the IBC. Adjudicating authorities should confine themselves to their statutory powers under the IBC when dealing with applications related to assessments and refrain from declaring administrative orders void ab initio. Administrative Disposition Where an adjudicating authority has exceeded its statutory jurisdiction by declaring an assessment void, the appropriate relief is to set aside such order and remit the matter for fresh consideration consistent with the IBC scheme, permitting the authority to consider applications (e.g., permission to appeal) without purporting to annul assessments.