2024 (3) TMI 1083 - HC - Income Tax

Notice under s.148 read with s.147 invalid after approval of resolution plan; clean-slate under s.133(6) protects company

HC held that a notice under s.148 read with s.147 issued to the company after approval of a resolution plan, for a period prior to the closing date, is ... Binding nature of a resolution plan under section 31 of the Insolvency and Bankruptcy Code - priority of the Insolvency and Bankruptcy Code over inconsistent provisions of other laws - extinguishment of pre-closing statutory dues by an approved resolution plan - clean slate principle under the Insolvency and Bankruptcy Code - inapplicability of reassessment provisions to matters extinguished by an approved resolution plan - prohibition on using section 148/147 for collection of third party evidence where proceedings are barred by the resolution plan - obligation of tax authorities to give effect to a resolution plan (modification of demand)Binding nature of a resolution plan under section 31 of the Insolvency and Bankruptcy Code - priority of the Insolvency and Bankruptcy Code over inconsistent provisions of other laws - extinguishment of pre-closing statutory dues by an approved resolution plan - inapplicability of reassessment provisions to matters extinguished by an approved resolution plan - Validity of notices, reassessment order and penalty issued under the Income tax Act in respect of a period prior to the resolution plan's closing date after the plan was approved by the NCLT - HELD THAT: - The Court held that an approved resolution plan is binding on the corporate debtor and governmental authorities and, by virtue of the Code's overriding effect, prevails over any inconsistent provision of other laws. The resolution plan, as approved, treated all pre closing dues including income tax dues as discharged and extinguished. Reliance on the principle in Ghanshyam Mishra & Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd. was noted to the effect that statutory dues not part of the resolution plan stand extinguished and proceedings in respect thereof cannot be continued post approval. Reassessment under Section 148/147 of the Income tax Act is concerned with escaped income and cannot be applied so as to defeat the effect of an approved resolution plan; nor can the department use reassessment provisions as a device to pursue collection or fact finding in respect of pre closing periods where the plan has extinguished those dues. The Court observed that separate statutory powers (for example, to summon third parties or collect evidence) exist and that the Assessing Officer cannot sidestep the Code by issuing notices which require the company (now under new management) to file returns and participate in reassessment proceedings relating to pre closing periods. While the revenue may pursue lawful action against former promoters or third parties, it cannot do so by issuing reassessment notices against the corporate debtor in respect of periods extinguished by the resolution plan. The Court also noted the subsequent statutory provision requiring modification of demand to give effect to an adjudicating authority's order under the Code, as reinforcing the obligation to give effect to resolution plans. [Paras 8, 11]The notice dated 27th February 2021 under section 148, the order dated 6th December 2021 rejecting objections, the assessment order dated 18th February 2022 under section 144 r.w.s. 147 and the penalty notice dated 23rd March 2022 under section 274 r.w.s. 271(1)(c) for Assessment Year 2013-14 are quashed and set aside.Prohibition on using section 148/147 for collection of third party evidence - separate remedies against former promoters and third parties - Whether the revenue may use reassessment proceedings under section 148/147 to investigate or establish liability of erstwhile directors, promoters or third parties once a resolution plan has been approved - HELD THAT: - The Court rejected the department's submission that reassessment proceedings could be used as a vehicle to collect evidence against ex promoters or third parties when the corporate debtor's pre closing dues have been discharged by an approved resolution plan. It recognised the revenue's right to take steps available in law against former management or other persons, but held that such steps cannot take the form of reopening the corporate debtor's pre closing assessment via section 148/147, which would oblige the new management to participate in proceedings rendered futile or barred by the resolution plan. [Paras 11]Revenue may pursue actions against former promoters or third parties by appropriate legal means, but cannot proceed against the corporate debtor under section 148/147 in respect of periods extinguished by the approved resolution plan.Final Conclusion: Proceedings under section 148/147 and consequential penalty proceedings in relation to Assessment Year 2013 14 were quashed as they conflicted with the binding effect of the approved resolution plan under the Insolvency and Bankruptcy Code; the revenue remains free to pursue lawful action against former promoters or third parties, but not by reopening the corporate debtor's pre closing assessments. Issues Involved:The judgment involves challenging a notice issued under section 148 of the Income-tax Act, 1961 for the assessment year 2013-14, rejection of objections for the same assessment year, assessment order passed under section 144 r.w.s. 147, and a penalty notice issued under section 274 r.w.s. 271(1)(c) for the assessment year 2013-14.Issue 1: Validity of Notice and ProceedingsThe petitioner challenged the notice issued by respondent no. 1 under section 148 of the Act for the assessment year 2013-14, post the approval of the resolution plan by the NCLT. The Court held that the notice was invalid and bad in law as it was contrary to the provisions of the Insolvency and Bankruptcy Code, 2016 (the Code). The resolution plan approved under the Code is binding on all parties, including the Central Government, and any dues, including income tax dues, were deemed to be fully discharged and settled for any period prior to the closing date. The Court emphasized that proceedings cannot be initiated contrary to the resolution plan, as it has overriding effect over inconsistent laws.Issue 2: Extinction of DuesReferring to the Apex Court's decision in Ghanshyam Mishra & Sons Pvt. Ltd. v/s. Edelweiss Asset Reconstruction Company Ltd, the Court concluded that all dues, including statutory dues owed to the government, not part of the resolution plan, shall stand extinguished. No proceedings in respect of such dues for a period prior to the approval of the resolution plan could be continued.Issue 3: Modification of DemandSection 156A of the Act, inserted by the Finance Act, 2022, mandates the modification of demand payable by an assessee if reduced due to an order by the Adjudicating authority under the Code. The Assessing Officer is required to conform to the order and give effect to the resolution plan.Issue 4: Scope of Reassessment ProceedingsThe Court clarified that reassessment proceedings under section 147/148 can only be initiated for bringing to tax income that has escaped assessment. The present management may not be aware of relevant facts for the period sought to be reopened, making the proposed reassessment futile. The revenue can take steps against previous management but not by issuing a notice under section 148, which requires the petitioner's active participation.Conclusion:The Court quashed and set aside the notice, objections rejection, assessment order, and penalty notice for the assessment year 2013-14. The petitioner agreed to withdraw the appeal against the assessment order. The judgment kept all rights and contentions of the parties open for further legal actions in accordance with the law.