2022 (1) TMI 977 - HC - Insolvency and Bankruptcy

Fresh demand of income tax after the Approval of Resolution Plan - Demand of Income Tax Dues after completion of scrutiny process - validity of re-opening the claims which were settled in insolvency proceedings - HELD THAT - The Insolvency and Bankruptcy Code 2016 (IBC) is an act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons partnership firms and individuals in a time bound manner for maximization of value of assets of such persons to promote entrepreneurship availability of credit and balance the interest of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India and for matters connected therewith and incidental thereto. After elaborate discussion in Ghanashyam Mishra case 2021 (4) TMI 613 - SUPREME COURT Supreme Court held that any debt in respect of payment of dues arising under any law for the time being in force including the ones owed to the Central Government or any State Government or any local authority which does not form a part of the approved resolution plan shall stand extinguished. Clarifying further it has been held that once a resolution plan is approved by the adjudicating authority all such claims /dues owed to the State / Central Government or any local authority including the tax authorities who were not part of the resolution plan shall stand extinguished. In the present case it is seen that the date of approval of the resolution plan by the Tribunal is 19.07.2018. For the assessment year 2017-18 the resolution professional on behalf of the corporate debtor had filed the return of income on 07.11.2017. In that return of income the corporate debtor disclosed loss of Rs. 15, 49, 43, 866-00 and claimed refund of Rs. 11, 47, 698-00 on account of TDS. Thus the return was filed prior to approval of the resolution plan. After approval of the resolution plan by the Tribunal on 19.07.2018 Deputy Commissioner of Income Tax CPC Bangalore issued notice dated 02.10.2018 to the corporate debtor stating that there was some arithmetical error in the return of income which needed to be corrected. Corporate debtor i.e. petitioner No.1 found on verification that interest income of Rs. 97, 28, 737-00 was not disclosed under the head income from other sources though it has reduced while computing the income under the head business or profession - petitioner No.1 filed a revised return on 17.10.2018 whereby the loss figure was reduced by the quantum of interest income. Accordingly the loss figure was revised at Rs. 14, 52, 15, 129-00 Rs. 15, 49, 43, 866-00 (-) Rs. 97, 28, 737-00 . Subsequently by letter dated 01.11.2018 petitioner No.1 informed the Deputy Commissioner of Income Tax CPC Bangalore that the arithmetical mistake in the return was rectified in the revised return. It is evident that Income Tax authorities are seeking information for the purpose of making assessment for the assessment year 2017-18 as the return of the corporate debtor (petitioner No.1) has been taken up for scrutiny under CASS. The assessment year 2017-18 (previous year 2016-17) covers the period prior to approval of the resolution plan by the Tribunal on 19.07.2018. Clause 7.5 (c) as extracted and discussed above bars all notices to initiate any proceeding against the corporate debtor in relation to the period prior to the date of the Tribunal s order clarifying that such notices would stand abated. All assessment proceedings relating to the period prior to the completion date would stand terminated with all consequential liabilities being abated. From the tone and tenor of the impugned notices what is evident is that respondents are seeking to pass assessment order under Section 143 (3) of the Act since the case of petitioner No.1 was selected for limited scrutiny under CASS. However the period of the assessment order would be a period covered by the resolution plan - In view of Clause 7.5 (c) of the resolution plan as approved by the Tribunal and in view of the decisions of the Supreme Court in Committee of Creditors of Essar Steel India Limited 2019 (11) TMI 731 - SUPREME COURT and Ghanashyam Mishra 2021 (4) TMI 613 - SUPREME COURT the claim of the Income Tax Department which is outside the resolution plan would stand extinguished. Carry forward of losses and adjustments against future profits - HELD THAT - As and when such carry forward and set off is claimed by the petitioner in future i.e. beyond the period covered by the resolution plan the Income Tax Department would be entitled to verify such claim and pass appropriate order. But for the period covered by the resolution plan it cannot carry out any scrutiny or carry out assessment in respect of the corporate debtor. To that extent the impugned notices cannot be justified. What the resolution plan provides and which is in conformity with the law laid down by the Supreme Court is that on and from the date of approval of the resolution plan by the Tribunal the same would prevail over the claims of the Income Tax Department and such claims which are outside the resolution plan for the period covered by the resolution plan would stand extinguished. The impugned notices seek to initiate assessment proceedings under Section143 (3) of the Act for a period which is squarely covered by the resolution plan as approved by the Tribunal - impugned notices dated 22.09.2019 21.10.2019 and 30.10.2019 being wholly unsustainable in law are hereby set aside and quashed. Petition allowed.

Summary

Issues Involved:
1. Legality of the notices issued by the Income Tax Department for the assessment year 2017-18.
2. Applicability of the Insolvency and Bankruptcy Code (IBC) to the claims of the Income Tax Department.
3. Binding nature of the resolution plan approved by the National Company Law Tribunal (NCLT) on the Income Tax Department.
4. Entitlement of the corporate debtor to carry forward unabsorbed depreciation and accumulated losses.

Issue-wise Detailed Analysis:

1. Legality of the Notices Issued by the Income Tax Department:
The petitioners sought the quashing of notices dated 22.09.2019, 21.10.2019, and 30.10.2019 issued under Sections 143(2) and 142(1) of the Income Tax Act, 1961, arguing that these notices were illegal and non-est post the approval of the resolution plan by the NCLT. The respondents contended that the notices were issued in exercise of their statutory jurisdiction and were necessary to verify the claims of carry forward of accumulated losses and unabsorbed depreciation. However, the court found that the notices pertained to the period before the approval of the resolution plan and were thus not maintainable.

2. Applicability of the Insolvency and Bankruptcy Code (IBC) to the Claims of the Income Tax Department:
The petitioners argued that the Income Tax Department was an operational creditor under Sections 5(20) and 5(21) of the IBC, and as such, their claims were extinguished upon the approval of the resolution plan by the NCLT under Section 31(1) of the IBC. The respondents countered that they were not operational creditors and had no claims against the corporate debtor. The court, however, held that the provisions of the IBC, specifically Section 238, have an overriding effect on other laws, including the Income Tax Act, thereby extinguishing the claims of the Income Tax Department that were not part of the resolution plan.

3. Binding Nature of the Resolution Plan Approved by the NCLT on the Income Tax Department:
The petitioners asserted that the resolution plan, once approved by the NCLT, was binding on all stakeholders, including the Income Tax Department, and extinguished all prior claims. The court referred to Clause 7.5(c) of the resolution plan, which stated that all dues under the Income Tax Act for the period prior to the completion date would stand extinguished, and no reassessment or revision could be initiated post the Tribunal's order. The court upheld this view, citing Supreme Court judgments that reinforced the binding nature of the resolution plan on all creditors, including the tax authorities.

4. Entitlement of the Corporate Debtor to Carry Forward Unabsorbed Depreciation and Accumulated Losses:
The petitioners claimed the right to carry forward unabsorbed depreciation and accumulated losses to set off future tax obligations as provided in Clause 17.7(c) of the resolution plan. The respondents argued that the assessment proceedings were necessary to verify such claims. The court clarified that while the Income Tax Department could verify claims of carry forward and set off for future periods not covered by the resolution plan, it could not initiate assessment proceedings for the period covered by the resolution plan. The court concluded that the impugned notices were unsustainable as they pertained to a period covered by the resolution plan.

Conclusion:
The court set aside and quashed the impugned notices dated 22.09.2019, 21.10.2019, and 30.10.2019, holding them unsustainable in law. The writ petition was allowed, with no order as to costs.