2024 (5) TMI 1226 - AT - Insolvency and Bankruptcy

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

Mr. Devarajan Raman Liquidator of M/s Kotak Urja Pvt Ltd Versus Principal Commissioner Income Tax, (Mumbai-1), Deputy Commissioner Income Tax, Deputy Commissioner Income Tax, (Bangalore – 1), Income Tax Department

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 ... Refund claim - adjustment of an income tax refund with outstanding liability - set-off exercised by the Respondent, during the intervening period when the CIRP timeline period had expired and the liquidation order was passed - Violation of Moratorium u/s 14 of IBC or not - HELD THAT:- Merely on completion of permissible CIRP time-period, the CIRP process is completed and the effect of moratorium automatically ceases to exist, irrespective of whether the resolution plan is approved or liquidation order is passed, does not commend here - Even if the CIRP period is over with no resolution plan on the anvil and Adjudicating Authority was yet to pass the liquidation order, the creditor of the Corporate Debtor cannot avail of the benefit of set-off during this interregnum by claiming that moratorium had ceased to exist. Whether the Respondent in the given factual matrix is liable to refund the amount which has been set off against income tax dues? - HELD THAT:- In this case, the set-off exercise undertaken by the Respondent preceded the liquidation orders, hence could not have been allowed by the Adjudicating Authority. It is also strenuously contended that the Income Tax Department cannot claim the status of a secured creditor - reference made to the judgement of the Hon’ble Apex Court in Bharti Airtel Ltd vs Vijaykumar V. Iyer [2024 (1) TMI 187 - SUPREME COURT] wherein after explaining the contours and different meanings that can be ascribed to the term ‘set-off’, it was held that set-off done at the behest of any entity against a company while undergoing CIRP is violative of the basic principles and provisions of IBC. When it is settled law that Regulation 29 of the Liquidation Regulations does not apply to Part II of the IBC, there are no hesitation in holding that Regulation 29 comes into play only after the liquidation order is passed by the Adjudicating Authority and not at any moment earlier than that. Given this position, the Adjudicating Authority committed grave error to hold that moratorium had come to a halt during the period of vacuum from the expiry of the permitted CIRP period till passing of the liquidation order and that the Respondent was entitled to conduct the set-off exercise to realise security interest in terms of Section 52 of the IBC. Admittedly, the Respondent had exercised the set-off by adjusting the tax refunds payable to the Corporate Debtor. This set-off clearly reduced the total kitty of funds available to the other creditors awaiting distribution as per the provisions of the IBC. The assets therefore available for distribution amongst the general body of creditors would thus stand reduced to the extent of the set-off while it would put the Respondent in a more beneficial position - the adjustment of the said amount of Rs 90 lakhs towards tax demands prior to liquidation amounted to a sort of recovery by the Respondent in violation of the moratorium and hence the Respondent is liable to return or pay the adjusted amount to the Corporate Debtor. Hence, this bench is of the considered view that there is a need to refund the amount in question to the Corporate Debtor. The Respondent to refund the sum of Rs. 90,42,174/- which had been set-off against outstanding tax dues of the Corporate Debtor to the Liquidator within two weeks from the date of this order. The Respondent shall have the liberty to file their claim with the Liquidator for recovery of their dues in terms of the IBBI (Liquidation Process) Regulations, 2016 - Appeal allowed. 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 IBCThe 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 AmountThe 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.