2025 (8) TMI 724 - HC - IBC

Income Tax Demand Unenforceable After Approved Resolution Plan Under Section 31(1) IBC

M/s. Sree Metaliks Ltd. Versus Union of India and Ors.

M/s. Sree Metaliks Ltd. Versus Union of India and Ors. - TMI 1. ISSUES PRESENTED and CONSIDERED 1. Whether the impugned assessment order and demand notice issued by the Income Tax Department for Assessment Year 2011-12 can be enforced against a corporate debtor undergoing Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC), especially after approval of a Resolution Plan. 2. Whether the provisions of the IBC, particularly Sections 14 (moratorium), 15 (public announcement), 31(1) (binding effect of resolution plan), and 238 (overriding effect), override conflicting provisions under the Income Tax Act and other laws in respect of pre-CIRP liabilities. 3. Whether the Income Tax Department was required to submit its claim during the CIRP and whether failure to do so results in extinguishment of its claim. 4. Whether the petitioner-company, as the successful resolution applicant under the approved Resolution Plan, is entitled to a 'fresh start' free from pre-CIRP liabilities not included in the plan. 5. Whether the petitioner-company can invoke writ jurisdiction to challenge the assessment order and demand notice despite availability of alternative remedies under the Income Tax Act. 6. Whether the Division Bench erred in dismissing the writ petition without considering the overriding effect of the IBC and binding Supreme Court precedents on the subject. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Enforceability of pre-CIRP tax demands and overriding effect of IBC provisions - Relevant Legal Framework and Precedents: Sections 14 and 15 of the IBC impose a moratorium on suits and proceedings against the corporate debtor from the insolvency commencement date until completion of CIRP. Section 31(1) mandates that the approved Resolution Plan is binding on all stakeholders, including government authorities. Section 238 contains a non-obstante clause establishing the overriding effect of IBC over inconsistent laws. Supreme Court rulings in Duncan Industries and Essar Steel emphasize the primacy of IBC over other statutes and the finality of the resolution plan in extinguishing pre-CIRP claims. - Court's Interpretation and Reasoning: The Court reaffirmed that the moratorium under Section 14 prohibits continuation of proceedings against the corporate debtor during CIRP. The Income Tax Department's claim for AY 2011-12, being a pre-CIRP liability, was subject to the moratorium and required submission as a claim during CIRP. The approved Resolution Plan, binding on all creditors under Section 31(1), extinguished all pre-CIRP liabilities not included therein. Section 238 ensures that these provisions override conflicting provisions in the Income Tax Act or other laws. - Key Evidence and Findings: The Resolution Plan disclosed total statutory dues of Rs.30.71 crores, indicating claims by government authorities were considered. The Income Tax Department did not separately assert its claim outside the CIRP process. The plan was approved by NCLT and upheld by NCLAT, attaining finality. - Application of Law to Facts: Since the tax demand relates to a pre-CIRP period and was not enforced through the insolvency resolution process, it stands extinguished by operation of law. The Income Tax Department cannot enforce the assessment order or demand notice after approval of the Resolution Plan. - Treatment of Competing Arguments: The Income Tax Department argued that alternative remedies under the Income Tax Act exist and the petitioner should have approached appellate forums. The Court held that the IBC's overriding effect and the nature of the challenge (jurisdictional and legal) justified writ jurisdiction despite alternative remedies. - Conclusions: The impugned tax demand is unenforceable against the corporate debtor post-CIRP and approval of the Resolution Plan. The IBC provisions override the Income Tax Act in this context. Issue 3: Obligation of Income Tax Department to submit claims during CIRP and consequences of non-submission - Relevant Legal Framework and Precedents: Section 15 of the IBC mandates public announcement of CIRP and invites claims from creditors, including statutory authorities. Regulation 6 of the Insolvency and Bankruptcy Board of India (IBBI) Regulations requires claims to be submitted in prescribed formats. Supreme Court judgments emphasize that all claims must be submitted and adjudicated during CIRP for finality. - Court's Interpretation and Reasoning: The Court noted that the Income Tax Department, as a government creditor, was required to submit its claim during CIRP. Failure to do so results in the claim being barred from enforcement post-approval of the Resolution Plan. - Key Evidence and Findings: The record does not indicate that the Income Tax Department submitted a separate claim during CIRP. The Resolution Plan accounted for aggregate statutory dues, but the specific tax demand was not enforced thereafter. - Application of Law to Facts: Non-submission of claim by the Income Tax Department during CIRP leads to extinguishment of the claim, barring subsequent enforcement. - Treatment of Competing Arguments: The petitioner argued that the Income Tax Department's failure to submit claims invalidated the demand. The Department did not provide evidence of claim submission. - Conclusions: The Income Tax Department's claim for the assessment year in question is barred due to non-submission during CIRP. Issue 4: Entitlement of successful resolution applicant to a 'fresh start' free from pre-CIRP liabilities - Relevant Legal Framework and Precedents: Section 31(1) of IBC and the Supreme Court's decision in Essar Steel establish that the successful resolution applicant takes over the corporate debtor free from undecided or unclaimed liabilities existing prior to CIRP. This principle prevents 'hydra-headed' claims from undermining the revival effort. - Court's Interpretation and Reasoning: The Court emphasized that the petitioner, as the successful resolution applicant, acquired the corporate debtor on a 'clean slate.' Any pre-CIRP liabilities not included in the approved plan are extinguished and cannot be enforced subsequently. - Key Evidence and Findings: The Resolution Plan was approved and final, transferring management to the petitioner. The tax demand arose prior to CIRP and was not part of the plan. - Application of Law to Facts: The petitioner is entitled to operate free from the impugned tax liability, consistent with the 'fresh start' doctrine. - Treatment of Competing Arguments: The Income Tax Department's attempt to enforce the demand post-approval was rejected as contrary to the IBC's objectives. - Conclusions: The petitioner's entitlement to a 'fresh start' bars enforcement of the pre-CIRP tax demand. Issue 5: Maintainability of writ petition despite availability of alternative remedies - Relevant Legal Framework and Precedents: Generally, availability of alternative statutory remedies precludes writ jurisdiction. However, writ jurisdiction may be invoked where the order is without jurisdiction or where important questions of law arise, especially involving constitutional or overriding statutory provisions. - Court's Interpretation and Reasoning: The Court held that the petitioner's challenge was a jurisdictional and legal question regarding the enforceability of tax demands post-CIRP under the overriding provisions of the IBC. Tax appellate authorities are bound by the Income Tax Act and cannot adjudicate on the IBC's overriding effect. - Key Evidence and Findings: The petitioner did not challenge mere tax calculation but the authority of the tax department to enforce the demand at all. - Application of Law to Facts: The writ petition was maintainable to prevent enforcement of an unlawful demand inconsistent with the IBC. - Treatment of Competing Arguments: The Income Tax Department's reliance on alternative remedies was rejected as insufficient to bar writ jurisdiction in this exceptional context. - Conclusions: Writ jurisdiction was appropriately invoked and the earlier dismissal on this ground was erroneous. Issue 6: Error apparent on the face of the record in the Division Bench's dismissal of the writ petition - Relevant Legal Framework and Precedents: Review jurisdiction under Order XLVII Rule 1 CPC is limited to errors apparent on the face of the record, including glaring omissions or disregard of binding authorities. - Court's Interpretation and Reasoning: The Court found that the Division Bench failed to consider binding provisions of the IBC and authoritative Supreme Court rulings, resulting in a manifest error apparent on the record. The dismissal on the basis of alternative remedies and non-aggrieved status overlooked the overriding effect of the IBC and the nature of the challenge. - Key Evidence and Findings: The Division Bench did not address the moratorium, binding effect of the Resolution Plan, or the 'clean slate' doctrine. - Application of Law to Facts: This omission led to upholding an unenforceable tax demand, causing injustice to the petitioner. - Treatment of Competing Arguments: The Court rejected the Income Tax Department's contention that no error existed. - Conclusions: The review petition was rightly allowed to correct the error apparent on the face of the record.