2025 (4) TMI 1379 - HC - GST

Initiation or continuation of proceedings to create new tax demands against a corporate debtor after the approval of a Resolution Plan by the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC) - HELD THAT - The additional demands made by the first respondent in respect of the assessment years 2012-13 and 2013-14 will operate as roadblocks in implementing the approved Resolution Plan and appellants will not be able to restart the operations of the CD on a clean slate - the demands raised by the first respondent against the CD in respect of assessment years 2012-13 and 2013-14 are invalid and cannot be enforced. The principle is crystal clear that once Resolution Plan has been approved by the NCLT all other creditors are barred from raising their claims subsequently as the same would disrupt the entire resolution process - there are no reason to keep this matter pending and accordingly the impugned Assessment Order passed under Section 74(9) of CGST/UPGST Act 2017 by the Deputy Commissioner Respondent No. 5 as well as the Impugned Demand Notice issued in pursuance to the Impugned Order dated 04.02.2025 passed under Section 74 of the CGST/UPGST Act 2017 against the Petitioner relating to financial year 2017-2018 are quashed. Conclusion - Once the Resolution Plan has been approved by the NCLT all other creditors are barred from raising their claims subsequently as the same would disrupt the entire resolution process. Petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the GST Department can initiate or continue proceedings to create new tax demands against a corporate debtor after the approval of a Resolution Plan by the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC).

(b) Whether the impugned assessment order and demand notice issued under Section 74 of the CGST/UPGST Act, 2017 for the financial year 2017-18, post-approval of the Resolution Plan, are valid and enforceable.

(c) The effect of the moratorium under Section 14 of the IBC on pending or ongoing tax proceedings and assessments by statutory authorities.

(d) Whether the Resolution Applicant can be saddled with new liabilities or claims that were not part of the Resolution Plan approved by the NCLT.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (d): Validity of new tax demands post-approval of the Resolution Plan

Relevant legal framework and precedents: The Insolvency and Bankruptcy Code, 2016 (IBC) governs the CIRP process and mandates a moratorium under Section 14, which prohibits initiation or continuation of legal proceedings against the corporate debtor. Section 31 of the IBC provides that once a Resolution Plan is approved by the NCLT, it binds all stakeholders and must be implemented. The Supreme Court judgments in Ghanshyam Mishra and Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., Vaibhav Goyal & Another v. Deputy Commissioner of Income Tax & Another, and Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Others, have clarified that no new claims or liabilities can be fastened on the corporate debtor or the Resolution Applicant after approval of the Resolution Plan.

Court's interpretation and reasoning: The Court emphasized that the approval of the Resolution Plan by the NCLT creates a "Lakshman Rekha" beyond which no new claims can be raised. The rationale is to provide a "fresh start" to the Resolution Applicant and ensure certainty and finality in the insolvency resolution process. Allowing new claims post-approval would disrupt the resolution process and defeat the objective of the moratorium.

Key evidence and findings: The petitioner had undergone CIRP starting October 10, 2020, and the Resolution Plan was approved on July 19, 2022. The GST Department issued an assessment order and demand notice dated February 4, 2025, relating to the financial year 2017-18, after the approval of the Resolution Plan. The petitioner's counsel submitted that the GST Department was aware of the CIRP and the approval of the Resolution Plan, as the department had filed a claim before the Resolution Professional and had been served notice.

Application of law to facts: The Court applied the binding precedents to hold that the GST Department's action to pass the impugned assessment order and demand notice after the Resolution Plan approval was impermissible. The new tax demand constituted a fresh claim not included in the approved Resolution Plan and thus violated the moratorium and the principles established by the Supreme Court.

Treatment of competing arguments: The GST Department's implied argument that the assessment related to a prior period and thus could be quantified post-approval was rejected as "an argument in sophistry." The Court reasoned that if such an approach were accepted, authorities could indefinitely delay assessments to saddle the Resolution Applicant with unknown liabilities, defeating the purpose of the IBC.

Conclusions: The Court concluded that no new claims or demands can be raised after the Resolution Plan approval and that the impugned assessment order and demand notice are invalid and liable to be quashed.

Issue (b): Validity of impugned assessment order and demand notice under Section 74 of CGST/UPGST Act, 2017

Relevant legal framework and precedents: Section 74 of the CGST/UPGST Act, 2017 deals with the determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by way of an assessment. However, the operation of this provision is subject to the moratorium under the IBC during CIRP.

Court's interpretation and reasoning: The Court held that the issuance of the impugned assessment order and demand notice under Section 74 post-approval of the Resolution Plan is barred by the moratorium and the settled legal position that no new claims can be raised after such approval. The Court relied heavily on the binding precedents which have held that the moratorium under Section 14 of the IBC prohibits such actions and that the Resolution Applicant must be allowed to operate on a clean slate.

Key evidence and findings: The impugned assessment order dated February 4, 2025, and the associated demand notice were issued after the Resolution Plan approval on July 19, 2022. The GST Department had also filed claims before the Resolution Professional, indicating awareness of the insolvency proceedings.

Application of law to facts: The Court applied the moratorium provisions and the Supreme Court's interpretation to quash the impugned assessment and demand notice as they contravened the moratorium and the principle of finality of claims post-Resolution Plan approval.

Treatment of competing arguments: The Court rejected any contention that tax demands relating to prior periods could be quantified and enforced after the Resolution Plan approval, emphasizing that such action would undermine the IBC's objectives.

Conclusions: The impugned assessment order and demand notice under Section 74 of the CGST/UPGST Act, 2017, are quashed as illegal and unenforceable.

Issue (c): Effect of moratorium under Section 14 of IBC on pending or ongoing tax proceedings

Relevant legal framework and precedents: Section 14 of the IBC imposes a moratorium on all legal proceedings against the corporate debtor during CIRP. The Supreme Court has clarified that this moratorium extends to all claims and proceedings, including those by statutory authorities, unless expressly permitted by the Code.

Court's interpretation and reasoning: The Court reiterated that the moratorium is a fundamental principle of the IBC designed to protect the corporate debtor and the Resolution Applicant from harassment and unexpected liabilities. The moratorium ensures that the Resolution Applicant can operate the business without the threat of new claims or proceedings.

Key evidence and findings: The GST Department's initiation and continuation of assessment proceedings post-Resolution Plan approval violated the moratorium. The department had knowledge of the CIRP and had participated in the claims process.

Application of law to facts: The Court found that the moratorium barred the impugned proceedings and that the GST Department's actions were contrary to the statutory moratorium and judicial pronouncements.

Treatment of competing arguments: The Court dismissed any suggestion that the moratorium does not apply to tax assessments or that pending assessments could be finalized post-approval, holding that such a view would defeat the moratorium's purpose.

Conclusions: The moratorium under Section 14 of the IBC prohibits the impugned assessment and demand proceedings, rendering them invalid.

3. SIGNIFICANT HOLDINGS

"Once the Resolution Plan has been approved by the NCLT, all other creditors are barred from raising their claims subsequently, as the same would disrupt the entire resolution process."

"The resolution applicant cannot be saddled with new claims once a resolution plan has been approved."

"Any new liability being fastened after the approval of the Resolution Plan would inherently and palpably be illegal and go beyond the Lakshman Rekha of the Code."

"The underlying principle of the Code is to give a fresh start to the Resolution Applicant. The law cannot be read in a manner wherein the basic structure of the Code is breached by hindering the flow of the same by creation of roadblocks and dams."

"The moratorium provided under Section 14 of the Code prohibits initiation or continuation of legal proceedings, including tax assessments, against the corporate debtor during the CIRP."

"The demands raised by the statutory authorities against the corporate debtor in respect of periods prior to the Resolution Plan approval, if not part of the approved Resolution Plan, stand extinguished and cannot be enforced."

The Court set aside the impugned assessment order dated 04.02.2025 and the demand notice issued under Section 74 of the CGST/UPGST Act, 2017, holding them to be illegal and quashing the same.