2022 (2) TMI 798 - AT - Insolvency and Bankruptcy

CIRP - Carry forward of losses - Resolution Professional has during pendency of approval of the plan issued notice to the Income Tax Authorities but no objection was filed - Adjudicating Authority has disallowed carrying forward of losses on the ground that the liability of the Corporate Debtor has been extinguished - HELD THAT - The Third Proviso of Section 79 sub-clause (b) provides that nothing contained in Section 79 shall apply to a company where a change in the shareholding takes place in a previous year pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner - The amendment in Section 79 of the Income Tax Act, 1961 providing for exception in case of a company where change in shareholding takes place pursuant to Resolution Plan was with purpose and object. Thus, claim of carry forward of losses is not impermissible but can only be granted giving opportunity to the appropriate Income Tax Authority. The benefit of carry forward of losses can be availed by the Appellant subject of opportunity to be given to Income Tax Authority to pass appropriate orders in accordance with Section 79 - the observations made in paragraph 238 and 244 of the order of the Adjudicating Authority need to be deleted and are hereby deleted and the benefit of carry forward losses can be claimed by the Appellant subject to decision by appropriate Income Tax Authority as per Section 79 of the Income Tax Act. It is open for the Appellant to claim benefit of carry forward losses as per Section 79 of the Income Tax Act before appropriate competent Income Tax Authority which shall decide the claim in accordance with law. Appeal disposed off.

Summary

Issues Involved:
1. Observations and directions in paragraphs 238 and 244 of the Adjudicating Authority's order.
2. Carrying forward of losses under Section 79 of the Income Tax Act, 1961.
3. Applicability of Section 238 of the Insolvency and Bankruptcy Code, 2016 to the Resolution Plan.

Issue-wise Detailed Analysis:

1. Observations and Directions in Paragraphs 238 and 244 of the Adjudicating Authority's Order:
The appellant challenged the observations made by the Adjudicating Authority in paragraphs 238 and 244 of the order dated 19.10.2019. The appellant was not aggrieved by the approval of the Resolution Plan but specifically sought the setting aside of these observations. The Tribunal noted that the Adjudicating Authority disallowed the carrying forward of losses on the ground that the liability of the Corporate Debtor had been extinguished (para 238). Additionally, the Adjudicating Authority observed that the overriding effect of Section 238 of the Insolvency and Bankruptcy Code, 2016 would not apply to the Resolution Plan (para 244).

2. Carrying Forward of Losses under Section 79 of the Income Tax Act, 1961:
The appellant contended that the observations regarding the non-availability of the benefit of carrying forward losses were erroneous. The appellant argued that the case was covered by the Third Proviso to Section 79(b) of the Income Tax Act, 1961, which allows for the carry forward of losses if the change in shareholding occurs pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016. The Tribunal referred to its earlier judgment in 'JSW Steel Ltd. vs. Ashok Kumar Gulla & Ors.' which supported the appellant's position. The Tribunal held that the benefit of carrying forward losses could be availed by the appellant, subject to the Income Tax Authority's decision in accordance with Section 79. Consequently, the observations in para 238 were deleted.

3. Applicability of Section 238 of the Insolvency and Bankruptcy Code, 2016 to the Resolution Plan:
The Tribunal addressed the observations in paragraph 244, where the Adjudicating Authority stated that the overriding effect of Section 238 of the Insolvency and Bankruptcy Code, 2016 would not apply to the Resolution Plan. The Tribunal found these observations unnecessary since the Resolution Plan had already been approved after recording compliance with the provisions of the Code and Regulations. Therefore, the observations in paragraph 244 were deemed uncalled for and were deleted.

Conclusion:
The Tribunal concluded that the benefit of carrying forward losses under Section 79 of the Income Tax Act, 1961 could be claimed by the appellant, subject to the appropriate Income Tax Authority's decision. The observations in paragraphs 238 and 244 of the Adjudicating Authority's order were deleted. The rest of the judgment of the Adjudicating Authority remained unchanged. The appeal was disposed of accordingly.