Company wins delay condonation for tax returns under Section 119(2)(b) during insolvency resolution process

Gujarat HC allowed petition challenging CBDT's rejection of delay condonation application under section 119(2)(b) for filing income tax returns for AY 2018-19 and 2019-20. Court held that petitioner company under corporate insolvency resolution process faced genuine hardship, as non-condonation would frustrate NCLT-approved resolution plan allowing carry forward of losses. Finding no lapse by petitioner in filing returns and considering binding nature of resolution plan on tax authorities, HC quashed CBDT's order dated 3.11.2023 and granted condonation of delay.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(i) Whether the respondent authority correctly applied the concept of "genuine hardship" in rejecting the application for condonation of delay in filing income tax returns for Assessment Years 2018-19 and 2019-20 under section 119(2)(b) of the Income Tax Act, 1961.

(ii) Whether the resolution plan approved by the National Company Law Tribunal (NCLT), Ahmedabad, provides for the carry forward and set off of losses of the erstwhile company, and the consequent binding effect of such plan on the Income Tax Department and other stakeholders.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Application of "genuine hardship" in condonation of delay under section 119(2)(b) of the Income Tax Act

Relevant legal framework and precedents: Section 119(2)(b) empowers the tax authority to condone delay in filing returns if sufficient cause is shown. The Court relied on the principle established in the judgment of Shailesh Vitthalbhai Patel Vs Chief Commissioner of Income Tax, which emphasized a liberal, rather than technical, approach in condoning delay to avoid genuine hardship. Additionally, the Apex Court's ruling in Ranka and others Vs Rewa Coal Field Limited was cited, underscoring that delays must be explained with cogent evidence, and each day of delay requires justification.

Court's interpretation and reasoning: The Court noted that the delay in filing returns for the Assessment Years 2018-19 and 2019-20 was occasioned due to the insolvency proceedings initiated against the petitioner company, which resulted in the suspension of the erstwhile management's powers from 12.11.2018. The resolution plan was approved only on 4.9.2020, after which the new management undertook audit and filed the returns belatedly. The Court observed that the petitioner company had no control or opportunity to file the returns timely prior to the resolution plan's approval.

The Court held that the respondent authority failed to appreciate this critical factual matrix and the hardships that would ensue if the delay was not condoned, especially since the resolution plan itself envisaged carry forward and set off of losses. The Court rejected the respondent's technical approach and emphasized the need for a liberal approach to condonation where genuine hardship is evident.

Key evidence and findings: The insolvency proceedings, the moratorium imposed under section 14 of the IBC, the approval of the resolution plan by the Committee of Creditors and the NCLT, the belated audit and filing of returns by the new management, and the specific provisions in the resolution plan allowing carry forward of losses were pivotal facts.

Application of law to facts: The Court applied the principle of liberal construction of section 119(2)(b) to the facts, holding that the delay was not due to any fault of the petitioner but due to circumstances beyond its control. The hardship caused by disallowing the carry forward of losses was a sufficient ground to condone the delay.

Treatment of competing arguments: The respondent contended that the petitioner should have complied with statutory timelines and that the resolution plan's approval binds the petitioner to follow directions given by the NCLT and income tax authorities, implying no scope for condonation. The Court rejected this view, clarifying that the resolution plan envisages carry forward of losses and the petitioner's delay was excusable due to the insolvency process. The Court also distinguished the respondent's reliance on strict time limits and procedural compliance, emphasizing the overriding principle of avoiding genuine hardship.

Conclusion: The Court concluded that the respondent authority erred in rejecting the condonation application on technical grounds and failing to consider the genuine hardship faced by the petitioner. The delay in filing returns for the Assessment Years 2018-19 and 2019-20 was accordingly condoned.

Issue (ii): Binding effect of the resolution plan approved by NCLT and the provision for carry forward and set off of losses

Relevant legal framework and precedents: Section 31 of the Insolvency and Bankruptcy Code, 2016 (IBC) provides that the resolution plan approved by the NCLT shall be binding on the corporate debtor and its employees, members, creditors, guarantors, and other stakeholders, including the Central Government. The resolution plan's terms are thus binding on the Income Tax Department.

Court's interpretation and reasoning: The Court examined the resolution plan's annexure titled "Relief and Concessions," specifically paragraph 9, which expressly provided that the Central Board of Direct Taxes (CBDT) would exempt the corporate debtor from the applicable provisions of section 79 read with section 2(18) of the Income Tax Act upon change in shareholding pursuant to the resolution plan and allow carry forward and set off of brought forward losses as on the effective date.

The Court held that the respondent authority's refusal to allow carry forward of losses and disallowing the same in the final assessment order was contrary to the binding effect of the resolution plan. The Court emphasized that disregarding this provision would frustrate the very purpose of the resolution plan approved by the NCLT.

Key evidence and findings: The resolution plan approved by the NCLT on 4.9.2020, the specific clause in the plan allowing carry forward and set off of losses, and the final assessment order disallowing losses on the ground of delayed filing of returns.

Application of law to facts: The Court applied section 31 of the IBC to hold that the resolution plan's terms are binding on the Income Tax Department and other stakeholders. Since the plan permitted carry forward and set off of losses, the Income Tax Department was obligated to honor this provision, notwithstanding the delay in filing returns, especially when the delay was condoned.

Treatment of competing arguments: The respondent argued that the Income Tax Department was not bound to accept the carry forward of losses as the returns were filed beyond the due date and that the petitioner was required to comply with statutory provisions independently. The Court rejected this argument, underscoring the binding nature of the resolution plan under section 31 of the IBC and the specific relief granted therein.

Conclusion: The Court held that the resolution plan approved by the NCLT provides for carry forward and set off of losses and is binding on the respondent authority. Hence, the losses should be allowed in accordance with the resolution plan and the Income Tax Act.

3. SIGNIFICANT HOLDINGS

"In the matter of condonation of delay where the condonation was to be permitted to avoid genuine hardship, liberal rather than technical approach is expected from the authorities."

"Annexure-5 - Relief and Concessions, more particularly, paragraph 9 provides for carry forward and set off of brought forward losses of the Corporate Debtor as on the Effective Date and thus, the petitioner company has all the right to carry forward losses if any of the previous year and the respondent authority in failing to allow would disregard the entire resolution plan which is binding upon them also."

"If the delay is not condoned in the facts and circumstances of the present case, more particularly, when we do not find any lapse on the part of the petitioner in filing the return of the concerned Assessment Year, very purpose of resolution plan as approved by the NCLT, Ahmedabad would be frustrated and not condoning the delay would amount to genuine hardship."

The Court quashed and set aside the impugned order dated 3.11.2023 rejecting the application for condonation of delay under section 119(2)(b) of the Income Tax Act for Assessment Years 2018-19 and 2019-20. The delay in filing the income tax returns for these years was condoned, and the respondent authority was directed to complete the assessment in accordance with law, allowing carry forward and set off of losses as per the resolution plan.

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