2026 (4) TMI 126 - HC - Income Tax

Clean slate principle under insolvency law does not automatically erase income tax liabilities arising during CIRP

Under the Insolvency and Bankruptcy Code, 2016, the clean slate principle was applied only to pre-CIRP claims and not to tax liabilities arising during ... Continuation of income tax proceedings beyond insolvency proceedings - Clean slate theory - tax liability during CIRP - binding effect of approved resolution plan - failure to include statutory dues in the Resolution Plan - condonation of delay in filing return - whether petitioner was entitled to immunity from reassessment and tax liability for AY 2018-2019 on the basis of the approved resolution plan or the clean slate principle? HELD THAT: - The Court held that the demand related to income earned during the period ending 31.03.2018, while the corporate insolvency resolution process had already commenced and the return for that year fell due thereafter. Approved resolution plan itself showed awareness of pending tax compliances and contemplated audit of financials and determination of tax liabilities for the relevant years. NCLT, while approving the plan, did not approve the clauses seeking blanket waiver or extinguishment of tax dues, and instead directed the resolution applicant to seek reliefs before the appropriate forum in accordance with law. On that basis, the Court held that the approved plan could not be construed as granting immunity from tax liability arising during the currency of CIRP. Court further held that the decisions in Committee of Creditors of Essar Steel India Limited Vs. Sathish Kumar Gupta and others 2019 (11) TMI 731 - SUPREME COURT and Ghanashyam Mishra and Sons Private Limited [2021 (4) TMI 613 - SUPREME COURT] concerned pre-CIRP dues, and their ratio could not be extended to liabilities arising during CIRP. [Paras 94, 106, 107, 108, 109] The challenge to the order u/s 148A(d) and the reassessment order for Assessment Year 2018-2019 failed, since no immunity from such tax liability could be claimed under the approved resolution plan. Condonation of delay in filing return - carry forward of losses - claim for belated filing of return and consequential carry forward or set-off of losses - HELD THAT: - The Court held that the resolution applicant had undertaken under the plan to file pending returns after approval of the resolution plan. The NCLT had also recorded that reliefs relating to income-tax compliance and carry forward of losses had to be sought before the appropriate authority. Therefore, without filing the return and without moving an application for condonation under the statutory mechanism, the petitioner could not claim waiver, relief, or set-off of losses for subsequent years. The Court specifically held that the petitioner ought to have approached the Central Board of Direct Taxes u/s 119(2)(b) for condonation of delay in filing the return for Assessment Year 2018-2019. [Paras 99, 102, 103, 104, 105] Relief based on non-filing of returns or carry forward of losses was not available in the writ petition and had to be worked out before the competent authority in accordance with law. Final Conclusion: The writ petition was dismissed. The Court held that tax liability for Assessment Year 2018-2019, arising during the CIRP period, was not extinguished by the approved resolution plan, while any claim for condonation of delay in filing returns or related relief had to be pursued before the competent income-tax authority in accordance with law. Issues: Whether reassessment and assessment proceedings for Assessment Year 2018-19 could be sustained notwithstanding the approved resolution plan under the Insolvency and Bankruptcy Code, 2016, and whether the clean slate principle extinguished the income tax liability arising during the CIRP period.Analysis: The liability in question related to income earned during the previous year 2017-18, when the corporate insolvency resolution process had already commenced. The resolution plan and the information memorandum disclosed pending and unassessed tax matters, and the National Company Law Tribunal did not grant a blanket waiver of statutory tax dues. The clean slate doctrine was held to operate in respect of pre-CIRP claims, but not to erase liabilities or statutory compliances arising during the CIRP period unless they were specifically covered by the approved plan. The petitioner had also not filed the return within time and had not pursued the statutory route for condonation and consequential relief under the Income-tax Act, 1961.Conclusion: The reassessment and consequential assessment were held to be valid, and the petitioner was denied immunity from the tax liability for Assessment Year 2018-19.Ratio Decidendi: The clean slate principle under the Insolvency and Bankruptcy Code, 2016 extinguishes only pre-CIRP claims not included in the resolution plan and does not, by itself, bar assessment or recovery of tax liabilities arising during the CIRP period where the resolution plan does not specifically extinguish them.