Income Tax Department's set-off of refund against dues during CIRP-liquidation gap violates Section 14 moratorium

The NCLAT held that the Income Tax Department's set-off of Rs. 90.42 lakh tax refund against outstanding dues during the period between CIRP expiry and liquidation order violated the moratorium under Section 14 of IBC. The tribunal ruled that moratorium continues even after CIRP timeline expires until liquidation order is passed, and creditors cannot exercise set-off during this interregnum. Citing Bharti Airtel Ltd judgment, the court emphasized set-off during CIRP violates IBC principles. The respondent was directed to refund the adjusted amount to the liquidator within two weeks and file their claim through proper liquidation process. Appeal allowed.

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Issues Involved:
1. Whether the set-off exercised by the Respondent during the intervening period between the expiry of the CIRP timeline and the passing of the liquidation order violated the provisions of moratorium u/s 14 of the IBC.
2. Whether the Respondent is liable to refund the amount which had been set off against the income tax dues of the Corporate Debtor.

Summary:

Issue 1: Violation of Moratorium Provisions u/s 14 of IBC

The Appellant contended that the Adjudicating Authority failed to appreciate the statutory provisions of IBC by allowing the Respondent to adjust the tax refund received by the Corporate Debtor against outstanding tax dues during the moratorium period. Section 14(4) of the IBC stipulates that the moratorium remains in effect until the completion of the CIRP or until a liquidation order is passed. The CIRP period had ended on 21.12.2020, but the process continued until the liquidation order was passed on 03.10.2022. The Respondent's action to adjust the tax refund on 10.02.2021 violated the moratorium provisions, as the assets of the Corporate Debtor cannot be appropriated by any creditor during this period.

The Respondent argued that the CIRP period had expired on 21.12.2020, and thus, the right to set-off could be exercised during the intervening period before the liquidation order was passed. However, the Tribunal held that the moratorium continues until the liquidation order is passed, and any adjustment of tax refund during this period is not permitted.

Issue 2: Liability to Refund the Set-Off Amount

The Appellant argued that the Respondent, representing the Income Tax Department, cannot be treated as a secured creditor and that the adjustment of tax refund against tax dues was impermissible. The Respondent contended that as a Government authority, it is a secured creditor and is allowed to realize security interest in liquidation proceedings u/s 52 of IBC. However, the Tribunal noted that the option to realize security interests becomes available only after the commencement of liquidation proceedings, which in this case, was on 03.10.2022. The set-off exercise conducted on 10.02.2021 preceded the liquidation order and was therefore impermissible.

The Tribunal referred to the judgment in Bharti Airtel Ltd vs Vijaykumar V. Iyer, which held that set-off against a company undergoing CIRP is violative of the IBC principles. Regulation 29 of the IBBI (Liquidation Process) Regulations, 2016, which allows for set-off, applies only after the liquidation order is passed. The Tribunal also clarified that the judgment in State Tax Officer vs. Rainbow Papers Limited does not apply in this case as the Income Tax Department cannot claim the status of a secured creditor without relevant statutory provisions.

The Tribunal concluded that the Respondent's action to adjust the tax refund reduced the assets available for distribution among other creditors and violated the moratorium. Therefore, the Respondent is liable to refund the amount of Rs. 90,42,174/- to the Corporate Debtor.

Conclusion:

The Tribunal directed the Respondent to refund the sum of Rs. 90,42,174/- to the Liquidator within two weeks and allowed the Respondent to file their claim with the Liquidator for recovery of their dues in terms of the IBBI (Liquidation Process) Regulations, 2016. The appeal was allowed, and the impugned order was set aside.

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