TaxTMI 
TaxTMI 
TaxTMI 
2024 (7) TMI 763
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.... Adjudicating Authority has dismissed I.A. 2968 of 2022 filed by the Appellant-Liquidator seeking return of Income Tax refund amount of two previous assessment years to the liquidation estate of the Corporate Debtor- Sunil Hitech and Engineers Ltd. 2. The Learned Counsel for the Appellant, Shri J. Rajesh making his submissions submitted that the Corporate Debtor was admitted into Corporate Insolvency Resolution Proceedings ('CIRP' in short) on 10.09.2018. Later, the Corporate Debtor was admitted into liquidation by the Adjudicating Authority on 25.06.2019 and the Appellant was appointed as the Liquidator of the Corporate Debtor. Following the appointment as Liquidator, a public announcement was made on 01.07.2019 inviting claims from the creditors in the liquidation process in terms of Regulation 12 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 ('Liquidation Regulations' in short). 3. Submission was made that on vetting the Annual Information Statement ('AIS' in short) of the Corporate Debtor, it came to the notice of the Liquidator that the Corporate Debtor was entitled to receive Income Tax Refund ('ITR' in short) for the A.Y. 2021-2022....
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....ner of set-off as prescribed under Regulation 29 of the Liquidation Regulations. In support of their contention, reliance was placed upon the judgment of Hon'ble Supreme Court in the case of Principal Commissioner of Income Tax Vs Monnet Ispat and Energy Ltd. (2018) 18 SCC 786 which held that Section 238 of IBC over-rides anything inconsistent contained in any other enactment including Income Tax Act, 1961. 7. Further contending that the Respondent-Income Tax Department is an Operational Creditor, it was argued by the Learned Counsel for the Appellant that the Respondent was required to file their claim with the Liquidator in Form D in accordance with Regulation 18 of Liquidation Regulations for recovery of dues in the requisite form and could not have suo-moto adjusted or set-off the ITR amount against past dues. The Respondent was bound to inform the Liquidator regarding any adjustment/set-off being made by them against purported dues. Emphasis was laid on the fact that the Respondent had erred in not filing any claim with the Liquidator despite the Liquidator having invited claim from all stakeholders through public announcement. 8. It is also the contention of the Appellant t....
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....uld not apply. It was also pointed out that as required under Section 245(1) of the Income Tax Act, a notice for set-off was issued to the Corporate Debtor and to that extent there has been no breach of the procedure prescribed for set-off under the Income Tax Act. It was also stated that the setoff was rightly done by the Respondent in accordance with Regulation 37 of Liquidation Regulations. 11. We have duly considered the arguments advanced by the Learned Counsel for both the parties and perused the records carefully. 12. From the facts of the present case, it is clear that the Income Tax Department - Respondent appropriated the ITR amount on 12.11.2021 by adjusting/setting-off the same against pre-CIRP income tax dues. This act of appropriation by way of set-off/adjustment was clearly undertaken after commencement of liquidation proceedings on 25.07.2019. The first question for our consideration is therefore whether such continuation of pending proceedings is permissible after liquidation orders have been passed. 13. To analyse this issue, we may begin with perusing the relevant statutory provisions of moratorium as contained in the IBC during CIRP and during liquidation. 1....
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....ase to have effect from the date of such approval or liquidation order, as the case may be. 15. The provision of moratorium in respect of suits and legal proceedings during liquidation process as contained in Section 33(5) of IBC which appears in Chapter III of Part II of IBC is as extracted hereunder: 33. Initiation of liquidation. (4) On receipt of an application under sub-section (3), if the Adjudicating Authority determines that the corporate debtor has contravened the provisions of the resolution plan, it shall pass a liquidation order as referred to in subclauses (i), (ii) and (iii) of clause (b) of sub-section (1). (5) Subject to section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor: Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority. 16. From a reading of the above statutory provisions, it becomes clear that liquidation process comes into effect upon the failure to come up with a resolution plan or on a resolution plan not being approved by the Adjudic....
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....plies both to the institution of suits or proceedings or the continuation of pending law suits or proceedings against the Corporate Debtor. Thus, to our minds, there is no bar in a suit or a legal proceeding continuing along with liquidation proceedings as pending suits or legal proceeding have not been included within the scope of moratorium under Section 33(5) of IBC. Having come to the above conclusion, we can safely conclude that the Respondent was legally entitled to continue with the Income Tax assessment proceedings during the liquidation process. 19. This brings before us the second set of issues for consideration as to whether the Respondent is a secured creditor having security interest under Section 245 (1) of the Income Tax Act, 1961 and whether there was any infirmity in the suo-motu action of the Respondent in appropriation of the ITR amount and in setting-off the said amount against the tax arrears of pre-CIRP period determined during the liquidation proceedings. As both these issues are closely intertwined, we will endeavour to deal with them together. 20. When we come to the impugned order, we find that the Adjudicating Authority after adverting attention to Regu....
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....such amount is set off,' and refund becomes due to a person, and the Assessing Officer, having regard to the fact that proceedings for assessment or reassessment are pending in the case of such person, is of the opinion that the grant of refund is likely to adversely affect the revenue, he may, for reasons to be recorded in writing and with the previous approval of the Principal Commissioner or the Commissioner; as the case may be, withhold the refund up to the date on which such assessment or reassessment is made." 4.5. From the provisions of Section 245 of the Income Tax Act 1961, find that the Income Tax Department acquires a statutory right to set off the refunds determined in relation to any proceedings against the taxes in arrears under any proceedings. Accordingly, we are of considered view that the Income Tax Department acquires security interest in terms of section 245(1) of lncome Tax Act, 1961, on determination of refund in liquidation proceedings, in terms of section 3(31) of the Code, as section 3(31) also includes charge as well as encumbrances. 4.6. We further find that the Section 245(1) of the Income Tax Act, 1961 mandates prior notice, which is issued by....
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....ty is a secured creditor and entitled to realise security interest. However, we are of the view that this judgement does not assist the Respondent in view of a subsequent judgment of the Hon'ble Supreme Court in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. & Ors. in C.A. No. 7976 of 2019, wherein it has been held that the ratio of the Rainbow Papers supra has to be confined to the facts of that case. In the Rainbow Papers case, the Operational Creditor was held to be a secured creditor on the basis of relevant statutory provisions of Gujarat Value Added Tax, 2003. However, in terms of the provisions of the Income Tax Act including Section 245 thereof, there is no such basis to claim in the case of the Income Tax Department to be a secured Operational Creditor. Further the language of Section 245 (1) of the Income Tax Act does not create any charge or security interest in favour of the Respondent. The creation of a charge by operation of law must be apparent from the express words of the statute. Hence, the Assam Company judgement supra judgment does not come to the aid of the Respondent in the present case. It also flows therefrom that the Adjudicating Authority ....
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....ally permissible under Chapter III Part II of IBC. Hence the Raman judgement does not come to the aid of the Appellant in asserting that set-off was not permissible and the entire ITR amount should have become part of the liquidation asset of the Corporate Debtor. 26. However, what is under contention is whether on completion of assessment proceedings during liquidation, the Respondent-Income Tax Department could avail of the set-off automatically, on its own, by adjusting against pre-CIRP dues. In this regard we may refer to the Sundaresh Bhatt judgment supra wherein the Hon'ble Apex Court has held that while statutory authorities can take steps to determine the tax, interest, fines or any penalty which is due, it cannot enforce a claim for recovery of the tax due during the period of moratorium. Extending the ratio of this judgement, we hold that the Income Tax authority enjoys limited jurisdiction of continuing with assessment proceedings and in determining the quantum of Income Tax dues but does not enjoy the jurisdiction and power to suo motu initiate recovery of dues or execute their claim unilaterally by adjusting the ITR amount with past tax dues. 27. Furthermore, a set-o....