2024 (9) TMI 371 - HC - Income Tax

Resolution plan approval under Section 31(1) IBC extinguishes all unspecified debts including tax reassessment proceedings

Uttam Galva Metallics Ltd. and Mr. Subodh Karmarkar Versus Assistant Commissioner of Income Tax, Union of India.

Bombay HC quashed reassessment proceedings for AY 2016-17 against a corporate debtor whose resolution plan was approved under IBC. The court held that ... Validity of reassessment proceedings after the approval of a resolution plan under the Insolvency and Bankruptcy Code, 2016 - HELD THAT:- Once a resolution plan is duly approved u/s 31 (1) of the IBC, the debts as provided for in the resolution plan alone shall remain payable and such position shall be binding on, among others, the Central Government and various authorities, including tax authorities. All dues which are not part of the resolution plan would stand extinguished and no person would be entitled to initiate or continue any proceedings in respect of any claim for any such due. No proceedings in respect of any dues relating to the period prior to the approval of the resolution plan can be continued or initiated. Impugned Proceedings and their continuation against the Petitioner-Assessee are wholly misconceived and untenable. The Impugned Proceedings are essentially reassessment proceedings, and that too of AY 2016-17. Evidently, such proceedings pertain to the period prior to the approval of the resolution plan. The outcome of such proceedings, particularly if adverse to the Petitioner-Assessee, would clearly be in relation to tax claims for the period prior to the approval of the resolution plan. The resolution plan came to be approved on May 6, 2020. Any attempt to re-agitate the assessment for AY 2016-17, evidently and squarely, constitutes pursuit of claims for the period prior to even the initiation of the CIRP. The conduct of such proceedings would be directly in conflict with the law declared in Ghanshyam Mishra, which makes it clear that continuation of existing proceedings and initiation of new proceedings that relate to operations prior to the CIRP are totally prohibited after the approval of the resolution plan. Consequently, nothing in the Impugned Proceedings can legitimately survive. Evidently and admittedly, the reassessment proceedings pre-date the CIRP. They would relate to the period prior to the approval of the resolution plan of the Petitioner-Assessee, and therefore stand extinguished. This is why the Supreme Court has clearly ruled that initiation and continuation of proceedings relating to the period prior to the approval of the resolution plan cannot be indulged in. Upon completion of the CIRP, the Petitioner-Assessee has completely changed hands and has begun on a clean slate under new ownership and management. WP Quashed. Issues Involved:1. Validity of reassessment proceedings initiated by the Revenue under the Income-tax Act, 1961 after the approval of a resolution plan under the Insolvency and Bankruptcy Code, 2016.2. Binding nature of the resolution plan on the Revenue and extinguishment of past tax claims.Detailed Analysis:1. Validity of Reassessment Proceedings:The Petitioner-Assessee challenged the reassessment proceedings initiated by the Revenue for the Assessment Year 2016-17 under Sections 148 and 142(1) of the Income-tax Act, 1961. The reassessment notice was issued on March 27, 2021, after the resolution plan had been approved by the National Company Law Tribunal (NCLT) on May 6, 2020. The Petitioner-Assessee argued that after the approval of the resolution plan under Section 31 of the Insolvency and Bankruptcy Code (IBC), all past claims and dues are extinguished. The Revenue contended that the moratorium on proceedings ended with the approval of the resolution plan, allowing them to continue reassessment proceedings.2. Binding Nature of the Resolution Plan on the Revenue:Section 31(1) of the IBC states that once a resolution plan is approved by the NCLT, it is binding on all stakeholders, including the Central Government and tax authorities. The Supreme Court in Ghanshyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited clarified that upon approval of the resolution plan, all claims not part of the plan are extinguished, and no proceedings can be initiated or continued for such claims. The judgment emphasized that the legislative intent is to provide a fresh start for the corporate debtor, free from past claims.Conclusion:The court held that the reassessment proceedings initiated by the Revenue pertain to a period prior to the approval of the resolution plan and are therefore extinguished. The continuation of such proceedings is in direct conflict with the law as declared in Ghanshyam Mishra. The court quashed all notices and communications issued by the Revenue in connection with the reassessment proceedings for AY 2016-17, as they are untenable and misconceived. The court issued a writ of Mandamus directing the cancellation and withdrawal of the impugned notices and closure of all proceedings against the Petitioner-Assessee.Judgment:The writ petition was allowed, and the rule was made absolute in the terms of the prayer clauses, quashing the reassessment notices and proceedings initiated by the Revenue. All pending interim applications were disposed of, and no costs were awarded.