2025 (10) TMI 117 - HC - VAT / Sales Tax

Statutory tax demands after CIRP moratorium barred; claims not in resolution process extinguished on plan approval (Section 14 IBC)

HC allowed the petition and quashed the order and notice dated 14-09-2020. Relying on SC precedents, the court held that statutory demands and proceedings ... CIRP - Recovery of Statutory Dues - Demand of interest under the Central Sales Tax Act on a Corporate Debtor, pursuant to institution of CIRP and declaration of moratorium - date on which the petitioner files an application before the Tribunal under Section 10 of IBC - HELD THAT:- The issue need not detain this Court for long or delve deep into the matter. The Apex Court in the case of GHANASHYAM MISHRA AND SONS (P) LIMITED v. EDELWEISS ASSET RECONSTRUCTION COMPANY LIMITED [2021 (4) TMI 613 - SUPREME COURT], considering the entire spectrum of the issue has held that 'On the date of approval of resolution plan by the adjudicating authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan.' In terms of the aforesaid judgment what would emerge is, that the claims of the sales tax authorities would stand extinguished since they had not taken part in the resolution process and had not submitted their claims in the resolution plan. Accordingly, no demand can be made in respect of claims that extinguished. Therefore, the demand notice that forms the fulcrum of lis in Writ Petition No. 15951 of 2021 and all further proceedings taken thereto would all become contrary to the judgments quoted therefore, would lead to their obliteration. What follows from the judgment of the Apex Court in ABG SHIPYARD LIQUIDATOR v. CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS [2022 (8) TMI 1161 - SUPREME COURT] is that the assessment of duties and other levies by the revenue authorities after the declaration of moratorium is restricted to the statement of claims required to be submitted to the resolution professional. The Apex Court in the case of ESSAR STEEL INDIA LIMITED COMMITTEE OF CREDITORS v. SATISH KUMAR GUPTA [2019 (11) TMI 731 - SUPREME COURT] holds that once resolution professional and the prospective resolution applicant are in place, the business of the corporate debtor will start on a fresh slate and, therefore, they must be submitted and decided by the resolution professional. The law now is clear that once a moratorium under Section 14 is declared, the proceedings can happen only before the resolution professional. If the claims are submitted before the resolution professional it could become a part of the resolution plan. There is no jurisdiction to parallelly initiate proceedings and raise a demand. In the light of CIRP becoming moratorium kicking in resolution plan acceptance up to the date of CIRP, all the claims are, therefore, before the resolution professional. If there is no claim registered by the State or the Centre, they would lose the right to demand from the corporate debtor. The order dated 14-09-2020 passed by the 3rd respondent and the notice dated 14-09-2020 issued thereto impugned in Writ Petition No. 15951 of 2021 stand quashed - petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether revenue authorities can initiate or continue assessment and recovery proceedings against a corporate debtor after initiation of CIRP and declaration of moratorium under the Insolvency and Bankruptcy Code (Code). 2. Whether assessment and determination of tax/duty by revenue authorities during the moratorium is limited to submission of claims to the resolution professional, and whether recovery, confiscation or enforcement steps can be taken outside the CIRP process. 3. Whether statutory dues of Central/State authorities that are not submitted and included in the approved resolution plan stand extinguished on approval of the plan, and whether such authorities retain any right to proceed thereafter. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Power of revenue to initiate/continue proceedings after CIRP commencement and moratorium Legal framework: Sections 10, 13, 14, 15, 30 and 31 of the Code establish commencement of CIRP, declaration of moratorium (prohibiting institution or continuation of suits and proceedings and recovery actions), public announcement and claims process, submission and approval of resolution plans, and effect of approval on stakeholders. Precedent Treatment: The Court relied on authoritative pronouncements of the Supreme Court construing the Code to hold that once CIRP is admitted and moratorium declared, creditors (including statutory authorities) are constrained by the moratorium and must pursue claims through the CIRP mechanism; further, on approval of a resolution plan, claims not part of the plan stand extinguished. These precedents were applied and followed. Interpretation and reasoning: The moratorium operates to prohibit initiation or continuation of proceedings against the corporate debtor and to concentrate all claims in the CIRP via the resolution professional. Revenue cannot sidestep moratorium by initiating parallel assessment/recovery outside the CIRP; at best, during moratorium, revenue may determine quantum for the purpose of submitting a claim but cannot enforce or recover outside the CIRP. The statutory scheme and public announcement/claims procedure require revenue to submit claims to the resolution professional within prescribed timelines; failure to do so or failure to have claims included in the approved plan denies the revenue an independent enforcement route thereafter. Ratio vs. Obiter: Ratio - moratorium bars institution/continuation of proceedings and enforcement against the corporate debtor; revenue authority's power during moratorium is limited and does not include recovery/enforcement outside CIRP. Obiter - ancillary observations on policy of fresh slate and commercial certainty supporting the moratorium and plan-binding effects. Conclusions: Proceedings and enforcement actions by revenue authorities after CIRP commencement and during moratorium are impermissible except to the limited extent of assessment for claim-quantification to enable submission to the resolution professional; the revenue must use the CIRP claim process and cannot proceed to recovery/confiscation during moratorium. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Scope of assessment during moratorium and obligation to submit claims Legal framework: Sections 14 (moratorium), 15 (public announcement and claims), 30 (resolution plan content and submission), and 31 (approval of resolution plan and binding effect) of the Code govern the scope of creditor action during CIRP and the requirement to present claims to the resolution professional. Precedent Treatment: The Court applied higher-court rulings that distinguish between the limited jurisdiction to assess/determine quantum of dues and the prohibited power to enforce or recover while moratorium subsists; authorities are to submit claims in accordance with the Code's procedure and within stipulated timelines. Interpretation and reasoning: Revenue may carry out assessment or reassessment only to determine the amount of its claim for submission to the resolution professional; such assessment does not confer a right to enforce recovery, confiscate goods, or impose penalties that effectuate recovery outside CIRP. The resolution professional has the duty and power to receive, verify and include claims in the resolution process; parallel administrative enforcement undermines the Code's scheme and the binding nature of the resolution plan. Ratio vs. Obiter: Ratio - assessment during moratorium is confined to quantification for claim submission; enforcement/recovery actions remain barred. Obiter - emphasis on resolution professional's role to protect value of the corporate debtor and to challenge excessive assessments. Conclusions: Revenue authorities must confine themselves to assessing the amount of dues for the purpose of lodging claims with the resolution professional and cannot effect recovery or confiscation while moratorium or CIRP subsists; the IRP/RP may secure goods and contest assessments but recovery lies only through CIRP processes. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Effect of approval of resolution plan on statutory claims not included therein Legal framework: Section 31(1) binds the resolution plan on the corporate debtor and all creditors, including Central/State/local authorities; the moratorium ceases on approval of the plan as provided in Section 31(3). Precedent Treatment: The Court applied binding precedents holding that on approval of a resolution plan, claims not included in the plan (i.e., not submitted/accepted as part of CIRP) are frozen and extinguished, and stakeholders cannot initiate or continue proceedings in respect of such claims thereafter. Interpretation and reasoning: The purpose of Section 31 and its binding effect is to give the successful resolution applicant a fresh slate and commercial certainty. Statutory dues payable to government authorities fall within the definition of operational debt and thus into the CIRP regime; failure by a statutory authority to submit and have its dues included in the approved resolution plan results in extinguishment of those claims insofar as recovery from the corporate debtor is concerned. The overriding effect of the Code ensures inconsistency with other laws does not permit separate enforcement. Ratio vs. Obiter: Ratio - upon approval of a resolution plan, statutory claims not part of the plan stand extinguished and cannot be pursued against the corporate debtor; the Code's overriding effect precludes inconsistent recovery actions by statutory authorities. Obiter - policy remarks on fairness to the resolution applicant and commercial certainty. Conclusions: Statutory dues not presented and included in the approved resolution plan are extinguished and revenue cannot proceed to demand or recover such dues post-approval; therefore, proceedings and orders of revenue in respect of such frozen/extinguished claims are void and liable to be quashed. COURT'S CONCLUSION AND RELIEF (derived from the above issues) The Court held that the revenue's assessment and enforcement actions undertaken after admission of CIRP and during moratorium, which proceeded to ex-parte assessment and original orders of demand/recovery without adhering to the CIRP claims process and without inclusion in the approved resolution plan, were contrary to the statutory scheme and binding precedents; such proceedings and consequent orders were quashed. The Court applied the doctrine that moratorium confines revenue to claim-submission and that approval of a resolution plan extinguishes pre-plan claims not included in the plan.