Condonation of delay under s.119(2)(b) granted to preserve resolution plan and company's carry-forward tax losses

HC allowed the petition, holding that condonation of delay under s.119(2)(b) was warranted to prevent genuine hardship. After approval of a resolution plan, the new management discovered unaudited accounts and unfiled returns, promptly audited and filed them; GST registration had been cancelled for non-filing but later restored. Refusal to condone delay would have frustrated the binding resolution plan and defeated the company's right to seek carry-forward of past losses, so the impugned denial was set aside.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the revenue authority correctly applied the concept of "genuine hardship" in refusing condonation of delay under Section 119(2)(b) of the Income Tax Act for filing returns for the relevant assessment years.

2. Whether the resolution plan approved by the adjudicating authority under the Insolvency and Bankruptcy Code provides for carry forward or set off of losses of the erstwhile company such that refusal to condone delay would frustrate the resolution plan and cause genuine hardship.

ISSUE-WISE DETAILED ANALYSIS - Issue 1: Application of "genuine hardship" for condonation of delay under Section 119(2)(b)

Legal framework: Section 119(2)(b) empowers the revenue authority to condone delay in filing returns if sufficient cause or genuine hardship is shown; principles developed by higher courts require a liberal, non-technical approach where genuine hardship is demonstrated.

Precedent treatment: The Court relied on established holdings that condonation of delay to avoid genuine hardship attracts a liberal approach rather than a strict technical one; earlier decisions of the higher courts and this Court have set out that hardship flowing from peculiar factual situations may justify condonation.

Interpretation and reasoning: The Court examined the factual matrix - disruption caused by a fire, initiation of insolvency proceedings, appointment of interim/resolution professional, suspension/restoration of management, pandemic-related operational collapse, inability to prepare and audit books, cancellation and later restoration of GST registration - and found that these interlinked events prevented the filing of timely returns. The Court observed that the petitioner (post-approval management) promptly caused accounts to be audited and returns to be filed once management control and information were available.

Ratio vs. Obiter: Ratio - where delay in filing returns is caused by systemic disruption arising from insolvency processes combined with extraordinary events (e.g., pandemic, suspension of management, failure by insolvency professionals to maintain records), the revenue authority must apply the "genuine hardship" test liberally and may condone delay to give effect to the statutory objective of carrying forward losses, provided there is no lapse attributable to the petitioner post-restoration of control. Obiter - observations on sufficiency of time extensions available under general pandemic relief (e.g., extended due dates) are contextual and do not displace the need to assess factual inability to prepare audited accounts.

Conclusions: The Court concluded that the authority erred in adopting a technical approach and failed to appreciate genuine hardship. Given the demonstrated inability to prepare audited accounts attributable to suspension of management and actions/inactions during insolvency, the delay in filing returns for the assessment years was condoned.

ISSUE-WISE DETAILED ANALYSIS - Issue 2: Effect of approved resolution plan on carry forward/set off of losses and consequence of non-condonation

Legal framework: Insolvency adjudication and approval of a resolution plan vest management and reconfigure rights; taxation law permits carry forward and set off of business losses subject to statutory conditions and proper filing of returns. Administrative action under tax law must, where appropriate, take into account binding orders of the insolvency adjudicator insofar as those affect substantive rights and the purpose of the resolution process.

Precedent treatment: The Court reiterated that revenue authorities should not disregard binding resolution plans approved by the adjudicating authority when such plans affect the ability of a successor management to comply with statutory filing obligations and claim carry forwards.

Interpretation and reasoning: The Court refrained from adjudicating the ultimate availability of losses for carry forward on merits, noting that it was unnecessary to determine whether losses in fact subsist. The central question was whether refusal to condone delay would frustrate the purpose of the resolution plan and thereby cause genuine hardship to the entity that assumed management post-approval. The Court found that non-condonation would effectively negate the practical effect of the resolution plan by denying the successor entity the ability to carry forward losses attributable to the erstwhile company when the failure to file was occasioned by circumstances arising during the insolvency process and by the IRP/Resolution Professional's omission to maintain books and file returns.

Ratio vs. Obiter: Ratio - where an approved resolution plan places a successor management in charge and the predecessor insolvency process prevented preparation/audit of accounts, refusal to condone delay may amount to frustration of the resolution plan and constitute genuine hardship; the taxation authority must not mechanically refuse relief when such refusal undermines the binding adjudicatory scheme. Obiter - the Court did not resolve the substantive question of eligibility for carry forward on merits and left assessment to the statutory process.

Conclusions: The Court held that the revenue authority's rejection failed to consider that non-condonation would frustrate the approved resolution plan and produce genuine hardship. Accordingly, the delay was condoned and the matter was remitted for completion of assessment in accordance with law, leaving substantive entitlement to carry forward/set off to be examined in the assessment proceedings.

DISPOSITIONAL CONCLUSION

The Court quashed the decision refusing condonation under Section 119(2)(b), condoned the delay for filing income-tax returns for the relevant assessment years, and directed the revenue authority to proceed with assessment in accordance with law; costs were not awarded. The decision was grounded on the view that genuine hardship arose from the combined impact of insolvency proceedings, managerial suspension and restoration, failure of insolvency practitioners to maintain books, and pandemic-related disruption, and that refusal to condone would frustrate the purpose of the approved resolution plan.

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