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TMI Blog2024 (7) TMI 763X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eive Income Tax Refund ( ITR in short) for the A.Y. 2021-2022 for an amount of Rs.5.84 cr. and interest thereon amounting Rs.11.46 lakhs. It was also noticed by the Liquidator that the above ITR amount was adjusted on 12.11.2021 by the Respondent against Income Tax demand for A.Y. 2010-2011 for Rs.2.98 cr. and for A.Y. 2011-2012 amounting Rs.2.85 cr. It has also been contended by the Appellant Liquidator that the Corporate Debtor was also entitled to receive ITR of Rs.60.79 lakhs for A.Y. 2020- 2021 and that the said amount had also been adjusted by the Respondent against pre-CIRP Income Tax dues. 4. The Learned Counsel for the Appellant pointed out that the ITR amount could not have been adjusted by the Respondent towards Income Tax dues and that the said amount should have formed part of the liquidation estate of the Corporate Debtor. It was asserted that in terms of Section 36(3)(b) of the IBC, assets which may or may not be in possession of the Corporate Debtor also constitute part of the liquidation estate and hence the ITR amount available with the Respondent did not belong as such to the Respondent but belonged to the stakeholders and therefore should form part of the liquid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. 8. It is also the contention of the Appellant that for the Respondent to make adjustment of the ITR, it should have followed the due process as laid down under the IBC. In support of their contention, the Learned Counsel for the Appellant relied on the judgment of the Hon ble Supreme Court in the matter of Sundaresh Bhatt, Liquidator of ABG Shipyard Vs Central Board of Indirect Taxes and Customs in CA No. 7667 of 2021 wherein it was held that once moratorium is imposed in terms of Section 33(5) of the IBC, the Customs Department enjoyed limited jurisdiction to assess and determine the quantum of tax dues but did not have the power to initiate recovery of those dues. 9. It was further pointed out that merely having a right to set-off does not automatically lead to having a charge over the property. Section 245 of the Income Tax Act does not expressly create a charge or a security interest. The language of Section 245 of the Income Tax Act does not indicate any such charge to have been created. It is also their contention that the finding of the Adjudicating Authority that the right to set-off under Section 245 of the Income Tax Act creates a charge is perverse as it is opposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IBC during CIRP and during liquidation. 14. The relevant excerpts of moratorium on institution or continuation of pending suits or proceedings during CIRP as contained in Section 14 of the IBC which appears in Chapter II of Part II thereof is as follows: 14. Moratorium. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:-- (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority; (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; (c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002); (d) the recovery of any property by an owner or lessor where such propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cating Authority consequent upon which the Adjudicating Authority further passes the liquidation order under Section 33(4) of the IBC. The proviso to Section 14(4) of IBC also clarifies that moratorium ceases to have effect on receipt of approval of resolution plan or on passing of an order of liquidation. In the present facts of the case, on the order of liquidation having been passed, the moratorium placed under Section 14 came to an end. Instead, a fresh moratorium in terms of Section 33(5) of IBC came into place. 17. Thus, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 37 of Liquidation Regulations, Section 3(31) of IBC and Section 245 of the Income Tax Act, 1961 held that the Income Tax Department acquires a statutory right to set off the ITR amount against taxes in arrears under any proceedings. Basis this finding, Adjudicating Authority did not find any infirmity in the action of the Income Tax Department in appropriation of refunds determined during the liquidation proceedings against the tax arrears of pre-CIRP period. The relevant extracts of the impugned order are as placed hereunder: 4. We have heard the Counsel and perused the material available on records. 4.1. We find that the Income Tax Department has appropriated the refunds on 12.11.2021, and the Liquidation proceedings commenced in the case of Corporate Debtor on 25.07.2019, which implies that the refunds were appropriated towards income tax demand due from the Corporate Debtor after commencement of liquidation proceedings. 4.2. Regulation 37 of the IBBl (Liquidation Process) Regulations 2016 provides that A secured creditor who seeks to realize its security interest under section 52 shall intimate the liquidator of the price at which he proposes to realize its secured asset . 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n account of each assessee. Accordingly, we do not find any infirmity in the action of the Respondent in appropriation of refunds determined during the liquidation proceedings against the tax arrears of pre-CIRP period, as such set-off has taken place during the Liquidation proceedings, wherein the right of set-off is available to the Creditors. 21. Assailing the impugned order, it is the case of the Appellant that the action taken by the Respondent to make recovery of Income Tax demand by way of adjustment/set-off of ITR amount by invoking Section 245 (1) of the Income Tax Act, 1961 was beyond the provision of law and hence legally improper. Section 245 could not have been applied in the present case since Section 238 of the IBC endows the IBC with over-riding powers. It is also the case of the Appellant that the recovery of income tax dues, if any, of the Respondent had to abide by the procedure laid down by the IBC in the Liquidation Regulations which the Respondent clearly failed to comply with. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Department had acquired security interest in terms of Section 245 (1) of the Income Tax Act, 1961. 24. We now proceed to answer the adjunct issue as to whether there was any infirmity in the action of the Respondent in appropriation of the ITR amount and in setting-off the said amount against the tax arrears of pre-CIRP period determined during the liquidation proceedings. We have already indicated in the preceding paragraphs that there is no bar in a suit or a legal proceeding continuing along with liquidation proceedings as pending suits or legal proceeding have not been included within the scope of moratorium under Section 33(5) of IBC. The question that arises next is that if the Respondent was legally entitled to continue with the Income Tax assessment proceedings during the liquidation process, does the principle of set-off and the associated accounting principle of netting-of become applicable on the ITR amount determined during the liquidation proceedings. 25. We find that there is no restriction, prohibition or embargo placed by the IBC on the principle of set-off during liquidation proceedings. In fact, the right of set-off is available to the Respondent as maybe not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between parties which results in producing a certain balance sum. The precept of set-off in liquidation proceeding would therefore mean adjusting a smaller claim owed to the Respondent against a still larger claim payable to the Respondent. However, while applying the principle of set-off, it must be kept in mind that no creditor ends up getting share disproportional to their dues. 28. All claimants in the liquidation process are required to stake claims for distribution of proceeds of sale in consonance with Section 53 of IBC. Filing of claims for set-off is also mandated by Liquidation Regulations and cannot be bypassed. Thus, in the present case, for recovery of the tax amount as determined in the assessment proceedings by set-off against ITR, it was also required of the Respondent to submit their claims in terms of the laid down procedure. They are required to file their claim with the Liquidator for recovery of the dues in the requisite form. The Income Tax Department by unilaterally adjusting the ITR amount cannot put itself in a better footing than what is permissible as their claim in the distribution matrix. 29. Thus, while the Adjudicating Authority has been partially co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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