Tax revision notice under Section 263 invalid after Resolution Plan approval extinguishes corporate debtor liabilities, including AY 2020-21

HC allowed the assessee's petition and quashed the notice issued u/s 263 against the insolvent company. Relying on binding SC precedent, the Court held that upon approval of the Resolution Plan on 12.10.2023, all tax liabilities of the corporate debtor stood fully extinguished, including those relating to AY 2020-21. Consequently, the Principal Commissioner had no jurisdiction to initiate revisionary proceedings on 26.01.2025 in respect of an already resolved liability. In view of this complete extinguishment, examination of the merits of the u/s 263 notice was rendered academic.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether, upon approval of a resolution plan under Section 31 of the Insolvency and Bankruptcy Code, 2016, all past tax liabilities (assessed and unassessed) of the corporate debtor stand waived and extinguished, thereby disabling the tax authorities from issuing a notice under Section 263 of the Income Tax Act, 1961 for a period prior to the approval date.

1.2 Whether, in view of such extinguishment of tax liabilities under the approved resolution plan, examination of the merits of the notice issued under Section 263 of the Income Tax Act, 1961 becomes academic and unnecessary.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Effect of approved resolution plan under Section 31 IBC on past tax liabilities and competence to issue Section 263 notice

Legal framework

2.1 The Court considered Section 31(1) of the Insolvency and Bankruptcy Code, 2016, which makes an approved resolution plan binding on the corporate debtor and its creditors, including the Central Government, State Government and local authorities in respect of statutory dues.

2.2 The Court relied on the decisions of the Supreme Court in (i) The Committee of Creditors of Essar Steel Ltd. v. Satish Kumar Gupta and (ii) Ghanshyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd., wherein it was held that upon approval of a resolution plan, all claims not forming part of the plan stand extinguished, including statutory dues, and that the amendment to Section 31 IBC is clarificatory and retrospective.

Interpretation and reasoning

2.3 The approved resolution plan, as extracted by the Court, specifically provided that, with effect from the NCLT approval date, all tax liabilities pertaining to any period prior to and including such date, whether assessed or unassessed, determined or undetermined, including penalties, interest, prosecution and all demands under various provisions of the Income Tax Act (expressly including proceedings under Sections 201, 250, 263, 264, 220(2), and others) "shall stand waived and extinguished".

2.4 The plan further stipulated that no proceedings were to be initiated or continued in respect of such tax liabilities or adverse tax implications for periods prior to the approval date.

2.5 Applying Essar Steel, the Court noted that a successful resolution applicant is entitled to take over the corporate debtor on a "fresh slate" and cannot be confronted with undecided or fresh claims after approval of the resolution plan; all claims must be crystallised and decided in the CIRP.

2.6 Applying Ghanshyam Mishra, the Court noted that: (a) upon approval of the resolution plan, claims provided therein stand frozen and are binding on all stakeholders including governmental authorities; (b) all claims not forming part of the resolution plan stand extinguished; and (c) statutory dues owed to the Central Government, State Governments and local authorities, if not included in the plan, cannot be pursued for the pre-approval period.

2.7 On the combined reading of the resolution plan clauses and the binding Supreme Court precedents, the Court held that all tax liabilities of the corporate debtor for the period prior to the NCLT approval date stood completely extinguished and waived.

2.8 As the impugned notice under Section 263 of the Income Tax Act sought to revise an assessment order pertaining to the assessment year falling within the period prior to the NCLT approval date, the Court held that there was no surviving tax liability or enforceable claim which could form the foundation of such revisionary proceedings.

Conclusions

2.9 The Court concluded that, upon approval of the resolution plan on 12.10.2023, all past tax liabilities of the corporate debtor, assessed or unassessed, stood extinguished in terms of the resolution plan read with Section 31 IBC and the law laid down by the Supreme Court.

2.10 Consequently, there was "no occasion whatsoever" for the respondent to issue the impugned notice under Section 263 of the Income Tax Act on 26.01.2025 in respect of the assessment order for the relevant assessment year.

2.11 On this ground alone, the impugned notice under Section 263 was held unsustainable and was quashed and set aside.

Issue 2 - Necessity to examine the merits of the Section 263 notice after extinguishment of tax liabilities

Interpretation and reasoning

2.12 The petitioner had additionally contended that, even on merits, the notice under Section 263 was bad in law as it was premised on a provision (Section 92BA(i)) which had been omitted from the statute by the Finance Act, 2017, and therefore the original assessment order could not be termed erroneous or prejudicial to the interests of the Revenue.

2.13 The respondent's counsel accepted the legal position regarding extinguishment of tax dues under Section 31 IBC and urged the Court not to enter into the merits of the Section 263 notice in view of such position.

2.14 Having already held that all tax liabilities stood extinguished and that the foundation for the Section 263 proceedings was obliterated, the Court held that consideration of the merits of the impugned notice under Section 263 would be purely academic.

Conclusions

2.15 The Court declined to examine the intrinsic merits or legality of the grounds invoked in the Section 263 notice, holding that such examination was unnecessary once it was found that all related tax liabilities had been extinguished under the approved resolution plan.

2.16 The petition was allowed solely on the ground of extinguishment of tax liabilities under the IBC resolution plan, and the notice dated 26.01.2025 under Section 263 of the Income Tax Act was quashed and set aside, with no order as to costs.

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