Income Tax department wrongfully adjusted ITR refund against pre-CIRP dues without following mandatory IBC procedures

NCLAT held that Income Tax department wrongfully adjusted ITR refund against pre-CIRP dues without following mandatory IBC procedures. The court distinguished between Section 14 (CIRP moratorium) and Section 33 (liquidation moratorium), noting Section 33 only bars new suits but allows continuation of existing proceedings. The department failed to file claims before the liquidator despite public announcement, violating other stakeholders' rights by treating ITR amount as available for adjustment rather than part of liquidation estate. Matter remanded to adjudicating authority to examine quantum of permissible set-off against actual claim entitlement in liquidation proceedings.

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Issues Involved:
1. Legality of the Income Tax Department's adjustment of Income Tax Refund (ITR) against pre-Corporate Insolvency Resolution Process (CIRP) tax dues.
2. Application of moratorium provisions under Sections 14 and 33(5) of the Insolvency and Bankruptcy Code (IBC) during liquidation.
3. Determination of whether the Income Tax Department is a secured creditor with a security interest under Section 245(1) of the Income Tax Act, 1961.
4. Legality of the Income Tax Department's unilateral set-off of ITR during liquidation without filing claims with the Liquidator.

Detailed Analysis:

1. Legality of the Income Tax Department's Adjustment of ITR:
The Appellant argued that the Income Tax Department's adjustment of the ITR amount against pre-CIRP tax dues was improper and should have been part of the liquidation estate. The Appellant relied on Section 36(3)(b) of the IBC, which includes assets not in possession of the Corporate Debtor as part of the liquidation estate, and Section 53 of the IBC for the distribution of liquidation proceeds. The Appellant cited the Tribunal's judgment in Devarajan Raman vs Principal Commissioner Income Tax, asserting that the Income Tax Department did not have the right to adjust past tax demands with tax refunds.

2. Application of Moratorium Provisions:
The Tribunal analyzed Sections 14 and 33(5) of the IBC. Section 14 prohibits the institution and continuation of suits or proceedings against the Corporate Debtor during CIRP. However, Section 33(5) only bars the institution of new suits during liquidation, allowing the continuation of pending suits. The Tribunal concluded that the Respondent was legally entitled to continue with the Income Tax assessment proceedings during liquidation.

3. Determination of Secured Creditor Status:
The Respondent claimed to be a secured creditor under Section 245(1) of the Income Tax Act, 1961, which allows for the set-off of refunds against tax arrears. The Tribunal, however, found that the Income Tax Act does not create a charge or security interest in favor of the Respondent. The Tribunal referred to the Hon'ble Supreme Court's judgment in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd., which clarified that the Income Tax Department could not be considered a secured creditor under the IBC. The Tribunal held that the Adjudicating Authority erred in recognizing the Respondent as having a security interest.

4. Legality of Unilateral Set-Off:
The Tribunal noted that the right of set-off is recognized under Regulation 29 of the Liquidation Regulations, which allows mutual credits and set-off during liquidation. However, the Tribunal emphasized that the Respondent should have filed claims with the Liquidator as per the Liquidation Regulations. The Respondent's unilateral adjustment without filing claims was deemed improper. The Tribunal cited the Sundaresh Bhatt judgment, which held that statutory authorities could determine tax dues but could not enforce recovery during the moratorium period.

Conclusion and Remand:
The Tribunal concluded that while the principle of set-off is permissible during liquidation, the Respondent's unilateral action without filing claims was improper. The matter was remanded to the Adjudicating Authority to re-examine the quantum of set-off against pre-CIRP tax dues versus the Respondent's claim entitlement in the liquidation proceedings. If the set-off exceeded the claim entitlement, the Respondent was to refund the excess amount to the liquidation estate. The appeal was disposed of with parties bearing their own costs.

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