2024 (7) TMI 763 - AT - Insolvency and Bankruptcy

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. - Regulation 12 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 - HELD THAT - While moratorium under Section 14 applies to CIRP, Section 33 applies to moratorium in a liquidation process. A close examination of these two statutory provisions would reveal that both these sections are however entirely distinct in their sweep and application. In terms of the language employed in Sections 14 and 33 of IBC, while Section 14 prohibits both institution and continuation of pending suits or proceedings against the Corporate Debtor, Section 33(5) of IBC is only a bar on the institution of new suits during the liquidation process though the proviso to Section 33(5) further provides that if a fresh suit or legal proceeding is to be instituted, the Liquidator is required to obtain specific permission and prior approval of the Adjudicating Authority - though Section 33 contains provisions similar to Section 14 contemplating stay on suits/proceedings during liquidation, however, the reach and gamut of stay under Section 33 differs from Section 14 in that there is no moratorium on continuation of suits/proceedings already instituted earlier. The Respondent not having followed the mandatory procedure prescribed by the IBC acted unlawfully in adjusting the ITR amount without having filed any claim before the Liquidator though the Liquidator had published the public announcement inviting claims from the stakeholders of the Corporate Debtor. It is also canvassed that the ITR amount was part of the liquidation estate of the Corporate Debtor and by wrongful adjustment of the ITR against pre-CIRP income tax dues, the rights of other stakeholders of the Corporate Debtor stood violated. There is no material on record to show that the Adjudicating Authority while passing the impugned order has considered what amount was due to the Respondent in the context of Income Tax pre-CIRP dues for adjustment/set-off of ITR as against what was due to them as their claim under the liquidation proceedings - it is appropriate to remand the matter back to the Adjudicating Authority to examine afresh the quantum of set-off of ITR against pre-CIRP tax dues which has been allowed to the Respondent as against their claim entitlement in the liquidation proceedings. Appeal disposed off.

Summary

Issues Involved:
1. Legality of the Income Tax Department's adjustment of Income Tax Refund (ITR) against pre-Corporate Insolvency Resolution Process (CIRP) tax dues.
2. Application of moratorium provisions under Sections 14 and 33(5) of the Insolvency and Bankruptcy Code (IBC) during liquidation.
3. Determination of whether the Income Tax Department is a secured creditor with a security interest under Section 245(1) of the Income Tax Act, 1961.
4. Legality of the Income Tax Department's unilateral set-off of ITR during liquidation without filing claims with the Liquidator.

Detailed Analysis:

1. Legality of the Income Tax Department's Adjustment of ITR:
The Appellant argued that the Income Tax Department's adjustment of the ITR amount against pre-CIRP tax dues was improper and should have been part of the liquidation estate. The Appellant relied on Section 36(3)(b) of the IBC, which includes assets not in possession of the Corporate Debtor as part of the liquidation estate, and Section 53 of the IBC for the distribution of liquidation proceeds. The Appellant cited the Tribunal's judgment in Devarajan Raman vs Principal Commissioner Income Tax, asserting that the Income Tax Department did not have the right to adjust past tax demands with tax refunds.

2. Application of Moratorium Provisions:
The Tribunal analyzed Sections 14 and 33(5) of the IBC. Section 14 prohibits the institution and continuation of suits or proceedings against the Corporate Debtor during CIRP. However, Section 33(5) only bars the institution of new suits during liquidation, allowing the continuation of pending suits. The Tribunal concluded that the Respondent was legally entitled to continue with the Income Tax assessment proceedings during liquidation.

3. Determination of Secured Creditor Status:
The Respondent claimed to be a secured creditor under Section 245(1) of the Income Tax Act, 1961, which allows for the set-off of refunds against tax arrears. The Tribunal, however, found that the Income Tax Act does not create a charge or security interest in favor of the Respondent. The Tribunal referred to the Hon'ble Supreme Court's judgment in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd., which clarified that the Income Tax Department could not be considered a secured creditor under the IBC. The Tribunal held that the Adjudicating Authority erred in recognizing the Respondent as having a security interest.

4. Legality of Unilateral Set-Off:
The Tribunal noted that the right of set-off is recognized under Regulation 29 of the Liquidation Regulations, which allows mutual credits and set-off during liquidation. However, the Tribunal emphasized that the Respondent should have filed claims with the Liquidator as per the Liquidation Regulations. The Respondent's unilateral adjustment without filing claims was deemed improper. The Tribunal cited the Sundaresh Bhatt judgment, which held that statutory authorities could determine tax dues but could not enforce recovery during the moratorium period.

Conclusion and Remand:
The Tribunal concluded that while the principle of set-off is permissible during liquidation, the Respondent's unilateral action without filing claims was improper. The matter was remanded to the Adjudicating Authority to re-examine the quantum of set-off against pre-CIRP tax dues versus the Respondent's claim entitlement in the liquidation proceedings. If the set-off exceeded the claim entitlement, the Respondent was to refund the excess amount to the liquidation estate. The appeal was disposed of with parties bearing their own costs.