Resolution plan approved March 17, 2023 extinguished all tax liabilities; post-approval tax notices and demand orders set aside

The HC held that the Resolution Plan approved on 17.03.2023 extinguished all tax liabilities, assessed and unassessed, for the corporate debtor, so the petitioner could not be saddled with pre-approval tax claims or ineligible input tax credit demands. Relying on the SC principle that a successful resolution applicant must not face undecided claims post-approval, the court found the impugned notices and show-cause orders unlawful. The orders and SCNs were set aside and the petition allowed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether statutory tax demands, show-cause notices and intimation/assessment proceedings relating to periods prior to approval and implementation of a resolution plan under the Insolvency and Bankruptcy Code (IBC) stand extinguished on approval of the resolution plan under Section 31 of the IBC.

2. Whether, for the purposes of carry forward and set-off of losses under Section 79 of the Income Tax Act, the status of the company (widely held/publicly held v. closely held) is to be determined at the time of change in shareholding and whether the Section 79(2)(c) exception (relating to change pursuant to an IBC resolution plan after giving reasonable opportunity to tax authorities) applies.

3. Whether a revenue authority can continue or initiate recovery or adjudication proceedings in respect of statutory dues/claims for periods prior to approval of a resolution plan where the plan does not provide for such claims.

ISSUE-WISE DETAILED ANALYSIS - 1. Extinguishment of pre-plan tax liabilities on approval of resolution plan under Section 31 IBC

Legal framework: Section 31 of the IBC (as amended) makes an approved resolution plan binding on the corporate debtor, its employees, creditors and other stakeholders; the 2019 amendment and judicial interpretations establish that claims not included in an approved resolution plan stand extinguished on approval.

Precedent treatment: The Court followed authoritative Supreme Court pronouncements holding that an approved resolution plan freezes all claims and that statutory authorities (including Central/State/local tax authorities) cannot pursue pre-plan claims not provided for in the plan; such authorities are thereby prevented from saddling the successful resolution applicant with undecided or post-approval "surprise" liabilities.

Interpretation and reasoning: The Court applied the settled doctrine that the purpose of Section 31 is to enable the resolution applicant to start on a "clean slate" and to rely on the list of claims decided during CIRP. Accordingly, any proceedings or demands by tax authorities in respect of periods prior to the approval date are inconsistent with the binding effect and finality of the approved plan unless those claims are part of the plan.

Ratio vs. Obiter: Ratio - An approved resolution plan under Section 31 operates to extinguish proceedings and claims against the corporate debtor arising prior to the approval date to the extent such claims are not provided for in the plan; revenue authorities cannot continue or initiate recovery action for such pre-approval periods. (Followed precedent)

Conclusion: The Court quashed and set aside all impugned orders, notices and show-cause proceedings issued by revenue authorities in respect of periods predating the approval/implementation of the resolution plan; such proceedings are barred by the finality and extinguishment effect of an approved resolution plan under the IBC.

ISSUE-WISE DETAILED ANALYSIS - 2. Applicability of Section 79 (carry forward and set off of losses) vis-à-vis change in shareholding under a resolution plan

Legal framework: Section 79 of the Income Tax Act restricts carry forward and set-off of losses where there is a change in shareholding of companies not widely held; subsection (2)(c) carves out an exception where change takes place pursuant to a resolution plan approved under the IBC, provided reasonable opportunity is afforded to the jurisdictional tax authority.

Precedent treatment: No contradictory precedent was treated as overruling the statutory text; the Court interpreted Section 79 in light of statutory purpose and the specific carved-out exception for IBC-driven shareholding changes.

Interpretation and reasoning: The Court held that the relevant status for applicability of Section 79 is the status of the company immediately before the change in shareholding. If the corporate debtor was a company in which the public are substantially interested (widely held) prior to the takeover under an IBC-approved resolution plan, Section 79 does not apply merely because post-takeover the company becomes closely held. The Court further observed that the Section 79(2)(c) exception contemplates giving reasonable opportunity to the Principal Commissioner/Commissioner, which can be met by verification from assessment records and the procedure followed during CIRP where requisite documents were placed before the tax authorities.

Ratio vs. Obiter: Ratio - Section 79 is inapplicable where, at the time of change in shareholding pursuant to a resolution plan, the company was a widely held/publicly interested company; consequently the corporate debtor remains entitled to carry forward and set off eligible losses in accordance with the Income Tax statute. (Applied statutory interpretation)

Conclusion: The Court held that the corporate debtor, being a subsidiary of a listed company and therefore a company in which the public were substantially interested prior to takeover, was entitled to carry forward its losses post-approval of the resolution plan; the Assessing Officer/Principal Commissioner was directed to verify and allow eligible claims from assessment records, affording the tax department the reasonable opportunity envisaged by Section 79(2)(c).

ISSUE-WISE DETAILED ANALYSIS - 3. Obligation of tax/revenue authorities to issue statutory intimation (Form DRC GST-25) and to avoid coercive action post-approval

Legal framework: GST statutory scheme prescribes modes of intimation, adjudication and recovery; Section 31 IBC and judicial pronouncements impose a bar on continuation/initiation of proceedings for pre-approval claims not part of the resolution plan.

Precedent treatment: The Court relied on the proposition that revenue authorities are bound by the IBC framework and cannot treat a resolution applicant/corporate debtor as liable for pre-plan dues not provided for in the plan; prior authoritative rulings were followed to this effect.

Interpretation and reasoning: Given the extinguishment effect of an approved resolution plan on pre-approval claims, any intimation, show-cause notice, adjudication order or recovery step in respect of such pre-plan periods is impermissible. The mechanism (e.g., issuance of Form DRC GST-25 or personal hearing) does not supplant the effect of extinguishment where the resolution plan has become effective and the claims are not part of it.

Ratio vs. Obiter: Ratio - Revenue authorities must desist from initiating or continuing adjudication or recovery proceedings for periods prior to approval of a resolution plan where the claims are not included in the plan; affected intimation/orders are liable to be quashed. (Followed precedent)

Conclusion: The Court restrained and quashed the impugned GST notices, orders and show-cause proceedings directed at the pre-approval periods and directed removal of corresponding liabilities/proceedings to the extent reflecting against the taxpayer's GST registration insofar as they relate to periods prior to the effective date of the resolution plan.

ADDITIONAL OBSERVATIONS

1. The Court treated the resolution plan's terms (including proposals like reverse merger and carry-forward claims) as dispositive for the purposes of extinguishment and directed the concerned authorities to verify claims from records and grant relief where appropriate, while noting statutory requirements for formal approvals under other laws remain for the resolution applicant to obtain.

2. The Court made no costs order and directed quashing and setting aside of specified orders/notices and any coercive action relating thereto to the extent they concern periods prior to approval/implementation of the resolution plan; no adjudication on merits of underlying tax merits was undertaken beyond the legal effect of the approved plan.

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