Section 238 IBC 2016: Insolvency Provisions Override Income Tax Dues, Secured Creditors Have Priority

The HC held that under Section 238 of the IBC, 2016, insolvency provisions override the Income-Tax Act, and income tax dues, despite being Crown debts, do not have priority over secured creditors. The court adjourned the appeals sine die, allowing parties to seek further directions after the NCLT either approves a resolution plan or orders winding up of the company. The HC will then decide if the appeals can proceed.

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ISSUES:

Whether appeals filed by the Revenue against orders of the Income Tax Appellate Tribunal can proceed during the moratorium period under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016).Whether assessment and penalty proceedings can continue despite the moratorium imposed under the IBC, 2016.The applicability and precedence of the IBC, 2016 over other statutes, specifically the Income Tax Act, 1961, during the insolvency resolution process.

RULINGS / HOLDINGS:

The appeals filed by the Revenue against the orders of the Income Tax Appellate Tribunal cannot proceed while the moratorium under Section 14 of the IBC, 2016, is in operation, as the moratorium prohibits "the institution of suits or continuation of pending suits or proceedings" against the corporate debtor.The moratorium imposed under Section 14 of the IBC, 2016, applies notwithstanding anything inconsistent contained in any other enactment, including the Income Tax Act, 1961, pursuant to Section 238 of the IBC, 2016.Assessment and penalty proceedings cannot be treated as exceptions to the moratorium; thus, appeals relating to such proceedings are also stayed during the moratorium period.The judgment in Sundaresh Bhatt (Liquidator) of ABG Shipyard v. Central Board of Indirect Tax and Customs, which relates to Customs Act proceedings, is not applicable to appeals before the High Court under the Income Tax Act during the moratorium.

RATIONALE:

The Court relied on the statutory framework of the Insolvency and Bankruptcy Code, 2016, particularly Section 14(1)(a) which mandates a moratorium prohibiting "the institution of suits or continuation of pending suits or proceedings" against the corporate debtor from the insolvency commencement date until the completion of the Corporate Insolvency Resolution Process or liquidation.Section 238 of the IBC, 2016 provides that the Code shall have overriding effect over any other law inconsistent therewith, including the Income Tax Act, 1961.The Court followed the precedent set by the Delhi High Court in Principal Commissioner of Income Tax-6 v. Monnet Ispat and Energy Ltd, upheld by the Supreme Court, which held that appeals by the Revenue cannot proceed during the moratorium period.The Supreme Court's dismissal of the Special Leave Petition emphasized that income tax dues, being crown debts, do not take precedence over the moratorium provisions of the IBC, reinforcing the overriding effect of the Code.The Court distinguished the Sundaresh Bhatt (Liquidator) decision as relating to Customs Act proceedings and not applicable to appeals under the Income Tax Act before the High Court during the moratorium.The Court granted liberty to revive the appeals after the moratorium ceases, i.e., after the NCLT either approves a resolution plan or orders liquidation of the corporate debtor.

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