Waterfall mechanism: belated, uncrystallised tax claims do not invalidate approved resolution plans and may reduce pro rata shares.

Where a resolution plan was approved under the insolvency framework, the article explains that the Resolution Professional did not err in declining to admit an income-tax claim that had not been crystallised during CIRP because the RP repeatedly sought assessment orders and the creditor did not pursue available remedies; consequently the approved plan's distribution under the statutory waterfall and priority scheme was not vitiated. The analysis further states that admission of the belated tax claim would have reduced pro rata shares and that, on the record calculations, the creditor received more under the approved plan than it would have if the claim had been admitted.

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Issues: (i) Whether the Resolution Professional erred in not considering/admitting the Income Tax Department's claim during the CIRP; (ii) Whether the non-admission or non-crystallisation of the Income Tax Department's claim resulted in the Department receiving a lesser amount under the approved resolution plan.

Issue (i): Whether the Resolution Professional erred in not considering/admitting the Income Tax Department's claim during the CIRP.

Analysis: The claim submission timeline shows requests by the RP for assessment orders to crystallise the demand and the assessment order was provided to the RP for the first time on 30.05.2024 after the CoC had approved the resolution plan and after the RP had filed the plan approval application. The RP had repeatedly sought supporting assessment orders through emails; the Appellant did not pursue available remedies before the Adjudicating Authority during pendency of the plan approval application despite being informed of the filing. The record does not establish any omission or irregularity by the RP in processing the claim prior to receiving the assessment order; the communication evidence reflects ongoing verification requests.

Conclusion: The Resolution Professional did not err in not admitting the Income Tax Department's claim; no infirmity is found against the RP.

Issue (ii): Whether the non-admission or non-crystallisation of the Income Tax Department's claim resulted in the Department receiving a lesser amount under the approved resolution plan.

Analysis: The approved plan provided a total corpus of Rs. 20 lakhs with Rs. 13.5 lakhs allocated to CIRP costs, leaving Rs. 6.5 lakhs for other creditors. The admitted claims and amounts provided show that government operational creditors received a distribution consistent with Section 53 priority. A hypothetical admission of the IT claim would have increased the category claim pool and proportionately reduced individual shares; computation on record indicates that if the IT claim had been admitted in full the Department's share would have been approximately Rs. 75,000, whereas under the approved plan the Department received Rs. 1.5 lakh.

Conclusion: The non-admission of the claim did not cause the Income Tax Department to receive a lesser amount; the Department received an amount greater than it would have received had the claim been admitted.

Final Conclusion: The impugned order approving the resolution plan contains no legal or factual infirmity warranting interference; the appeal is therefore dismissed.

Ratio Decidendi: Where a resolution plan is approved under the Insolvency and Bankruptcy Code, 2016 and distribution is governed by the waterfall mechanism in Section 53, claims not duly crystallised or admitted during CIRP do not establish error by the Resolution Professional if the RP sought required documents and the creditor failed to pursue available remedies; furthermore, approval of a plan and its distribution within the Section 53 priorities will not be set aside merely because a creditor's belatedly crystallised claim might numerically alter proportional shares.

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