2025 (7) TMI 907 - HC - Income Tax

Gujarat HC quashes Section 148 reassessment notice against dissolved company citing complete tax liability extinguishment under resolution plan

AMW Auto Component Limited Versus Assistant Commissioner Of Income Tax ACIT Circle Gandhidham.

Gujarat HC quashed reassessment notice under Section 148 issued against dissolved company. Court held that upon approval of resolution plan, all tax ... Reassessment proceedings against company dissolved/insolvent - HELD THAT:- As evident that all tax liabilities, assessed and unassessed under the Income Tax Act, 1961 “shall stand waived and extinguished”. As relying on Edelweiss Asset Reconstruction Company Ltd. [2021 (4) TMI 613 - SUPREME COURT] and Essar Steel Ltd. [2019 (11) TMI 731 - SUPREME COURT] it is clear that on the complete extinguishment of all tax liabilities of the Corporate Debtor upon the approval of the Resolution Plan on 31.03.2025, there could be no occasion whatsoever for the respondents to issue the impugned notice under Section 148 of the Act on 31.03.2025. In such view of the matter, the merits of the impugned notice under Section 148 of the Act have become academic and need not be ventured into by this Court. Resultantly, the petition succeeds and the impugned notice under Section 148 of the Act is hereby quashed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court in this matter are:(a) Whether the issuance of a notice under Section 148 of the Income Tax Act, 1961, after the approval of a Resolution Plan under the Insolvency and Bankruptcy Code, 2016 (IBC Code), is legally valid, given that the Resolution Plan provides for the waiver and extinguishment of all tax liabilities prior to the approval date;(b) Whether the tax dues, both assessed and unassessed, including penalties, interest, prosecution risks, and other related liabilities, stand extinguished upon approval of the Resolution Plan under Section 31 of the IBC Code;(c) The extent and effect of the binding nature of the Resolution Plan on the Corporate Debtor, creditors, and government authorities, particularly concerning outstanding tax liabilities;(d) The applicability of the Supreme Court precedents regarding the finality and extinguishment of claims upon approval of a Resolution Plan under the IBC Code;(e) Whether the Court should examine the merits of the impugned notice under Section 148 of the Income Tax Act, or whether such examination is rendered academic in light of the extinguishment of tax liabilities.2. ISSUE-WISE DETAILED ANALYSISIssue (a) & (b): Validity of Section 148 notice post-IBC Resolution Plan approval and extinguishment of tax duesThe legal framework governing this issue primarily involves the Insolvency and Bankruptcy Code, 2016, specifically Section 31, which mandates that once a Resolution Plan is approved by the Adjudicating Authority (NCLT), it becomes binding on the Corporate Debtor and all stakeholders including government authorities. The Resolution Plan in this case explicitly provides for the waiver and extinguishment of all unassessed and assessed tax liabilities, penalties, prosecution risks, and related dues for the period prior to the approval date.The Court examined the Resolution Plan's provisions, which unequivocally stated that 'any Tax liabilities pertaining to a period prior to and Including the NCLT Approval Date... shall be deemed to be extinguished and written off with effect from the NCLT Approval Date.' Further clauses confirmed the waiver of penalties, prosecution risks, and outstanding TDS demands. The Plan also ensured that benefits and incentives previously available to the Corporate Debtor would continue despite change of ownership, and no proceedings could be initiated for liabilities prior to the approval date.The Court relied heavily on authoritative Supreme Court decisions interpreting Section 31 of the IBC Code. In the landmark case concerning the Committee of Creditors of Essar Steel Ltd., the Supreme Court held that once a Resolution Plan is approved, all claims not part of the Plan stand extinguished and no further claims can be raised by any party. The Court emphasized that allowing unresolved claims post-approval would undermine the finality and certainty essential to the insolvency resolution process.Similarly, in the case of Edelweiss Asset Reconstruction Company Ltd., the Supreme Court reiterated that the 2019 amendment to Section 31 is clarificatory and retrospective, confirming that all claims not included in the approved Resolution Plan stand extinguished. The Court held that no proceedings can be initiated or continued in respect of such claims, including statutory dues owed to government authorities.Applying these principles, the Court found that the issuance of the impugned notice under Section 148 of the Income Tax Act, after the approval of the Resolution Plan which extinguished all tax liabilities, was legally untenable. The tax liabilities had ceased to exist as per the binding Resolution Plan and the IBC Code provisions, rendering the notice invalid.Issue (c): Binding nature of the Resolution Plan on government authorities and stakeholdersThe Court noted that Section 31(1) of the IBC Code explicitly provides that the Resolution Plan shall be binding on the Corporate Debtor, its employees, members, creditors, including the Central Government, State Governments, local authorities, guarantors, and other stakeholders. The Resolution Plan's effect is comprehensive, covering all dues arising under any law for the time being in force.The Court highlighted the detailed provisions of the Resolution Plan which not only waived and extinguished tax liabilities but also clarified that no proceedings could be initiated for any past period liabilities, including those arising from withholding tax compliance, penalties under various sections of the Income Tax Act, and adverse tax implications under related party transactions or write-offs of trade payables.This binding effect was underscored by the Court as essential to providing certainty and finality to the insolvency resolution process, protecting the successful resolution applicant from unforeseen liabilities and enabling the Corporate Debtor to continue operations on a 'fresh slate.'Issue (d): Applicability of Supreme Court precedents on finality and extinguishment of claimsThe Court extensively relied on the Supreme Court's rulings in the Essar Steel and Edelweiss cases, which are authoritative pronouncements on the interpretation of Section 31 of the IBC Code. These judgments clarify that the Resolution Plan, once approved, conclusively determines the claims against the Corporate Debtor, freezing and extinguishing all claims not included in the Plan.The Court observed that these precedents establish that statutory dues, including tax liabilities, are subject to the same extinguishment if not incorporated in the Resolution Plan. This interpretation ensures that the resolution process is not undermined by subsequent claims or notices issued by authorities.Issue (e): Merits of the impugned notice under Section 148 of the Income Tax ActGiven the binding effect of the Resolution Plan and the extinguishment of tax liabilities, the Court held that the merits of the impugned notice under Section 148 of the Income Tax Act became academic and did not require examination. The issuance of the notice was held to be without jurisdiction and contrary to the binding Resolution Plan.The Court therefore quashed and set aside the impugned notice dated 31.03.2025 under Section 148, granting relief to the petitioner accordingly.3. SIGNIFICANT HOLDINGSThe Court's crucial legal reasoning is encapsulated in the following verbatim excerpt from the judgment:'On the complete extinguishment of all tax liabilities of the Corporate Debtor upon the approval of the Resolution Plan on 31.03.2025, there could be no occasion whatsoever for the respondents to issue the impugned notice under Section 148 of the Act on 31.03.2025. In such view of the matter, the merits of the impugned notice under Section 148 of the Act have become academic and need not be ventured into by this Court.'Core principles established include:- The Resolution Plan approved under Section 31 of the IBC Code is binding on the Corporate Debtor and all stakeholders, including government authorities, and conclusively determines the liabilities of the Corporate Debtor.- All tax liabilities, assessed or unassessed, including penalties, prosecution risks, and related dues, pertaining to the period prior to the approval of the Resolution Plan, stand waived and extinguished as per the Plan and the IBC Code.- Post-approval, no proceedings can be initiated or continued against the Corporate Debtor for claims not included in the Resolution Plan, ensuring finality and certainty in the insolvency resolution process.- Notices or proceedings issued under tax laws after the approval of the Resolution Plan that seek to recover extinguished liabilities are invalid and liable to be quashed.Final determination on the issues:The Court quashed and set aside the impugned notice issued under Section 148 of the Income Tax Act, holding that it was invalid in light of the extinguishment of tax liabilities pursuant to the approved Resolution Plan under the IBC Code. The Court declined to examine the merits of the notice, as the legal effect of the Resolution Plan rendered such inquiry unnecessary.