2024 (10) TMI 992 - AT - Income Tax

AO lacks jurisdiction to reopen assessments after NCLT approves resolution plan under Section 238 IBC

McNally Sayaji Engineering Limited Versus Deputy Commissioner of Income Tax, Circle 1 (1), Kolkata

McNally Sayaji Engineering Limited Versus Deputy Commissioner of Income Tax, Circle 1 (1), Kolkata - TMI Issues Involved:1. Deductibility of Management Service Fee and Royalty under Chapter XVII-B of the Income Tax Act, 1961 for AY 2009-10.2. Disallowance of Provision for Freight Charges, Loss Order Provision, and Advisory Fee for AY 2013-14.3. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act, 1961.4. Impact of Corporate Insolvency Resolution Process (CIRP) on pending tax liabilities and appeals.Detailed Analysis:1. Deductibility of Management Service Fee and Royalty for AY 2009-10:The assessee challenged the disallowance of management service fees amounting to Rs. 3,52,76,000 and royalty provision of Rs. 1,02,87,073 under Section 40(a)(ia) of the Income Tax Act, 1961, due to non-deduction of TDS under Chapter XVII-B. The Commissioner of Income Tax (Appeals) upheld the disallowance, arguing that the tax was deductible at source. The assessee contended that since the tax was deducted and deposited within the due date, the deduction should have been allowed either in the assessment year 2009-10 or the subsequent year.2. Disallowance of Provisions and Advisory Fee for AY 2013-14:The assessee contested the disallowance of provision for freight charges (Rs. 46,82,901), loss order provision (Rs. 22,55,642), and advisory fee for the sale of land (Rs. 2,00,000). The CIT(A) disallowed these expenses, stating that they were not allowable under Section 37 of the Act as they were contingent liabilities. The assessee argued that these were actual liabilities and should be considered as revenue expenditure, not capital expenditure, and thus deductible.3. Initiation of Penalty Proceedings under Section 271(1)(c):The assessee opposed the initiation of penalty proceedings under Section 271(1)(c), asserting that it neither furnished inaccurate particulars of income nor concealed any income. The CIT(A) deemed the initiation of penalty proceedings as premature.4. Impact of CIRP on Pending Tax Liabilities and Appeals:During the pendency of the appeals, the assessee company underwent a Corporate Insolvency Resolution Process (CIRP) and was acquired by Tega Group following the approval of the resolution plan by the NCLT. The Tribunal considered whether statutory income-tax liabilities could be extinguished without the notice of insolvency proceedings to the concerned Income-tax Officer. The Tribunal noted that the resolution plan, once approved, binds all stakeholders, including tax authorities, and extinguishes all dues not part of the plan. The Tribunal referenced several judicial pronouncements, including the Supreme Court's decision in Ghanshyam Mishra and Sons Pvt Ltd v. Edelweiss Asset Reconstruction Company Ltd, which established that all claims not included in the resolution plan stand extinguished.The Tribunal concluded that, due to the overriding effect of the Insolvency and Bankruptcy Code, 2016, the pending appellate proceedings could not continue and were dismissed as infructuous. The Tribunal emphasized that the IBC has a prevailing effect over other laws, including the Income Tax Act, and that after the approval of the resolution plan, no proceedings can be initiated or continued against the corporate debtor for liabilities not included in the plan.Conclusion:Both appeals for AY 2009-10 and AY 2013-14 were dismissed as infructuous due to the approval of the resolution plan under the Insolvency and Bankruptcy Code, 2016, which extinguished all claims not part of the plan. The Tribunal ordered that the appeals could not continue in light of the overriding provisions of the IBC.