2024 (3) TMI 1083 - HC - Income Tax

Validity of reopening of assessment - notice u/s 148 against petitioner company after the approval of the resolution plan for a period prior to closing - liability of previous management - as argued proceedings for assessment year 2013-14, being a period prior to the closing date are non-est and could not have been initiated by the Income-tax Department in view of the resolution plan approved by the NCLT - HELD THAT - Section 148 read with Section 147 of the Act only deals with a situation where any income chargeable to tax has escaped assessment for any assessment year. We are unable to fathom as to how the provisions of Section 148 of the Act can be applied for collection of evidences of third party, ex-promoters etc., and we say this because there are separate provisions under Section 133(6) of the Act in which, such evidences can be collected. We are also unable to understand how the provisions of Section 148 of the Act can be used when the proceedings are not for recovery of tax. During the course of submission, the Learned ASG stated that in view of the legal position as it stands under the Code, once resolution plan has attained finality, new management and company can get the benefit of clean slate principle. While the department does not dispute that such benefit has to go to new management, the Learned ASG further submitted that while department would not go to the new management, this cannot, however, result into direct benefit to the erstwhile Directors to make them go scot-free from their evasions and misdeeds. Therefore, some assessment and fact-finding process is required to be carried out, where erstwhile Directors role is given a closer scrutiny. Even then, in our view, for reasons recorded above, Section 148 read with Section 147 of the Act cannot be applied against the company and the present management. Thus issue of notice under section 148 of the Act to petitioner company after the approval of the resolution plan for a period prior to closing is invalid and bad in law, having been issued contrary to the provisions of the Code and the Resolution Plan. Section 31 of the Code provides that the resolution plan which is approved under the Code is binding on the Corporate Debtor, its employees, members, creditors including the Central Government, State Government and any local authority to whom a debt or a statutory due is owned. Decided in favour of assessee.

Summary

Issues Involved:
The judgment involves challenging a notice issued under section 148 of the Income-tax Act, 1961 for the assessment year 2013-14, rejection of objections for the same assessment year, assessment order passed under section 144 r.w.s. 147, and a penalty notice issued under section 274 r.w.s. 271(1)(c) for the assessment year 2013-14.

Issue 1: Validity of Notice and Proceedings

The petitioner challenged the notice issued by respondent no. 1 under section 148 of the Act for the assessment year 2013-14, post the approval of the resolution plan by the NCLT. The Court held that the notice was invalid and bad in law as it was contrary to the provisions of the Insolvency and Bankruptcy Code, 2016 (the Code). The resolution plan approved under the Code is binding on all parties, including the Central Government, and any dues, including income tax dues, were deemed to be fully discharged and settled for any period prior to the closing date. The Court emphasized that proceedings cannot be initiated contrary to the resolution plan, as it has overriding effect over inconsistent laws.

Issue 2: Extinction of Dues

Referring to the Apex Court's decision in Ghanshyam Mishra & Sons Pvt. Ltd. v/s. Edelweiss Asset Reconstruction Company Ltd, the Court concluded that all dues, including statutory dues owed to the government, not part of the resolution plan, shall stand extinguished. No proceedings in respect of such dues for a period prior to the approval of the resolution plan could be continued.

Issue 3: Modification of Demand

Section 156A of the Act, inserted by the Finance Act, 2022, mandates the modification of demand payable by an assessee if reduced due to an order by the Adjudicating authority under the Code. The Assessing Officer is required to conform to the order and give effect to the resolution plan.

Issue 4: Scope of Reassessment Proceedings

The Court clarified that reassessment proceedings under section 147/148 can only be initiated for bringing to tax income that has escaped assessment. The present management may not be aware of relevant facts for the period sought to be reopened, making the proposed reassessment futile. The revenue can take steps against previous management but not by issuing a notice under section 148, which requires the petitioner's active participation.

Conclusion:
The Court quashed and set aside the notice, objections rejection, assessment order, and penalty notice for the assessment year 2013-14. The petitioner agreed to withdraw the appeal against the assessment order. The judgment kept all rights and contentions of the parties open for further legal actions in accordance with the law.