Income-tax proceedings barred for periods before resolution plan implementation; Revenue cannot deny carry-forward losses under s.79(2)(c)
The HC quashed income-tax proceedings against the corporate debtor for periods prior to the Resolution Plan's implementation date (6 May 2023), holding that the approved plan barred initiation or continuation of such proceedings. Relying on the SC precedent in Ghanshyam Mishra and recent HC decisions, the court held Revenue could not examine carry-forward losses where the Principal Commissioner received notice under s.79(2)(c) and made no submissions before NCLT approval; denial of carry-forward losses was impermissible as those losses would have factored into the Resolution Applicant's proposal.
ISSUES PRESENTED AND CONSIDERED
1. Whether assessment proceedings initiated by the Revenue for periods prior to the implementation date of an approved resolution plan may be continued where the resolution plan expressly extinguishes claims not part of the plan.
2. Whether statutory dues of the Central Government (Income-tax) not included in an approved resolution plan remain enforceable or stand extinguished for periods prior to approval under Section 31 of the IBC.
3. Whether the Revenue can, subsequent to approval of a resolution plan, examine and deny carry forward of unabsorbed losses/depreciation by initiating fresh assessment proceedings when no claim was submitted to the Resolution Professional and the Principal Commissioner was given notice during CIRP proceedings.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Continuation of assessment proceedings post-approval of a resolution plan that extinguishes non-plan claims
Legal framework: The Insolvency and Bankruptcy Code, 2016 (IBC) and the approved resolution plan under Section 31; the "clean-slate" principle articulated by the IBC; provisions of the Income-tax Act enabling assessment proceedings for relevant assessment years.
Precedent treatment: The Court follows the interpretation in the Supreme Court decision that when a resolution plan is duly approved, claims not provided for in the resolution plan "shall stand extinguished" and no person is entitled to initiate or continue proceedings in respect of such claims. The Court also relies on subsequent high-court decisions applying the same principle to tax proceedings.
Interpretation and reasoning: The Court reasons that the approved resolution plan, by its express terms and by operation of Section 31 as interpreted by higher authority, precludes initiation or continuation of proceedings in respect of claims arising prior to approval if such claims are not part of the plan. Since the impugned assessment notices relate to periods prior to the implementation date of the resolution plan and the plan expressly bars continuation of such proceedings, the impugned notices are inconsistent with the statutory effect and the plan's terms.
Ratio vs. Obiter: Ratio - approval of a resolution plan under Section 31 freezes claims and extinguishes non-plan claims, thereby precluding continuation or initiation of proceedings in respect of pre-approval periods. The Court applies this principle as binding on the present facts.
Conclusion: The Court concludes that the assessment proceedings relating to periods prior to the implementation date are barred and must be quashed insofar as they relate to claims not included in the resolution plan.
Issue 2 - Extinguishment of statutory dues (Income-tax) not included in the resolution plan
Legal framework: Section 31 of the IBC (and its clarified scope post-2019 amendment), the "clean-slate" principle, and the position of statutory dues owed to the Central Government; relevant provisions of the Income-tax Act for raising demands.
Precedent treatment: The Court follows the Supreme Court's declaration that statutory dues owed to the Central Government, State Government or local authority, if not part of the resolution plan, stand extinguished for periods prior to approval. The Court cites and follows multiple subsequent decisions applying that declaration specifically to Income-tax demands.
Interpretation and reasoning: Relying on the authoritative ratio, the Court interprets statutory dues not included in an approved plan as extinguished. The Court rejects the Revenue's contention that such dues can nevertheless be pursued by way of assessment for the pre-approval period, noting that the clear declaration of law prevents continuation or initiation of proceedings in respect of such dues.
Ratio vs. Obiter: Ratio - statutory dues not included in an approved resolution plan are extinguished for the period prior to approval, and proceedings in respect thereof cannot be continued.
Conclusion: The Court holds that the Income-tax dues for the relevant pre-implementation period, not being part of the approved plan, stand extinguished and the Revenue cannot proceed with assessments to recover them.
Issue 3 - Whether Revenue may examine allowability of carry forward of losses post-approval where no claim was filed with the IRP and statutory notice was served during CIRP
Legal framework: IBC's claims process (submission of claims to the Interim Resolution Professional), Section 79(2)(c) of the Income-tax Act (notice to Principal Commissioner during CIRP), and the principles underlying inclusion of liabilities in the resolution plan (commercial assessment by resolution applicant).
Precedent treatment: Court relies on the line of decisions holding that creditors, including the Revenue, who failed to submit claims during CIRP cannot later revive proceedings as against the corporate debtor for pre-CIRP liabilities that were not included in the plan; decisions cited applied this principle to denial of carry forward and to reassessment notices.
Interpretation and reasoning: The Court reasons that the availability of carry forward losses is a factor likely considered by the resolution applicant when formulating the plan; where the Principal Commissioner received notice during CIRP and did not submit claims or objections, the Revenue cannot be permitted post-approval to reopen or deny the availability of such losses by issuing assessment notices. The Court treats the failure to make submissions in response to statutory notice in CIRP as preclusive of later re-examination for purposes of denying carry forward.
Ratio vs. Obiter: Ratio - post-approval re-examination by the Revenue of carry forward of losses, where the Revenue had an opportunity during CIRP (and did not submit claims), is impermissible if the resolution plan provides extinguishment of non-plan claims; denial of carry forward cannot be effected through post-approval assessment proceedings in such circumstances.
Conclusion: The Court concludes that the Revenue cannot lawfully proceed to deny carry forward of losses by initiating assessment proceedings after approval of the resolution plan where the Revenue failed to make claims or submissions during the CIRP and the plan extinguishes non-plan claims; accordingly, carry forward of losses cannot be denied in the present facts.
Ancillary findings and orders
Legal framework and reasoning: The Court notes that the resolution plan attained finality on appellate consideration and Supreme Court order, reinforcing the binding nature of the plan. The Court observes that notices issued under Sections 143(2), 142(1) and analogous reassessment notices are rendered bad in law where they relate to pre-implementation periods and conflict with the approved plan and the mandatory claims process under the IBC.
Ratio vs. Obiter: Ratio - where the resolution plan expressly prohibits initiation or continuation of proceedings and the plan is final, impugned tax notices relating to pre-plan periods are invalid. Obiter - observations concerning the commercial factors considered by resolution applicants and the practical impact of carry forward losses on valuation.
Conclusion and relief: The Court quashes and sets aside the impugned assessment proceedings for the relevant assessment years insofar as they relate to periods prior to the implementation date and to claims not included in the resolution plan; no order as to costs.
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