Income Tax Refund Set-Off During CIRP Moratorium Impermissible: NCLT Mumbai

Skylark Highway Solutions Limited Vs Topworth Infra Private Limited (NCLT Mumbai)

Summary: The Resolution Professional of Topworth Infra Private Limited sought directions against the Income Tax Department for continuing proceedings and adjusting income tax refunds of ₹2,69,60,350 against outstanding demands relating to periods before the Corporate Insolvency Resolution Process (CIRP). The CIRP commenced on 13 November 2019, when a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 was declared. The Department had lodged a claim of ₹209.27 crore, which the Resolution Professional admitted, but it nevertheless issued notices concerning earlier assessment years and appropriated refunds during the moratorium. Despite service of notice, the Department did not appear or file a reply.

The NCLT considered the Supreme Court decisions in Sundaresh Bhatt and S.V. Kondaskar, distinguishing permissible assessment or determination of statutory dues from prohibited enforcement and recovery during the moratorium. It also relied on NCLAT decisions concerning bank debits during moratorium. The Tribunal found that unilateral adjustment of refunds effectively preferred the tax authority over other creditors, depleted assets available for collective resolution and undermined the IBC distribution framework. It held that the post-moratorium demand notices identified in its reasoning contravened Section 14, directed the Department not to pursue recovery during CIRP, and ordered the income tax refunds adjusted during the moratorium to be released forthwith to the Corporate Debtor. IA No. 1365 of 2022 was allowed.

Cases Discussed

• Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs, (2023) 1 SCC 472 (Supreme Court) — Considered for the distinction between determination of statutory dues and prohibited recovery during moratorium.
• Interim Resolution Professional v. ICICI Bank, (2018) 5 SCC Online NCLAT 2193 (NCLAT) — Cited for restoration of money debited from the corporate debtor’s account during moratorium.
• State Bank of India v. Devashish Nanda, Company Appeal (80) (Ins) No. 49 of 2018, order dated 21.03.2018 (NCLAT) — Cited for restraining bank debits during moratorium.
• S.V. Kondaskar v. V.M. Deshpande, (1972) 1 SCC 438 (Supreme Court) — Considered on the authority to determine tax liabilities without enforcing recovery during moratorium.

FULL TEXT OF THE ORIGINAL JUDGMENT/ORDER

1. This application has been filed by the Applicant, the Resolution Professional of Topworth Infra Private Limited (‘the Corporate Debtor’) under Section 14(1) r/w Section 18(1)(f) read with Section 238 of the Insolvency of Bankruptcy Code, 2016 (‘the Code’) for seeking IN Company Petition No. 2231/I&BP/2019 directions to quash the ongoing Income Tax Proceedings for Assessment Year 2011-12 and refund and direction to the Respondent to refund an amount of Rs. 2,69,60,350/- (Rs. Two Crore Sixty Nine Lakh Sixty Thousand Three Hundred Fifty Only) being the Income Tax refund adjusted against demands, pertaining to the period prior to the commencement of the Corporate Insolvency Resolution Process (‘CIRP’) adjusted in violation of Section 14 of the Code and not to proceed with any further Income Tax Proceedings towards outstanding Income Tax demand for the period prior to the commencement of Insolvency Proceedings.

Brief Facts of the Case as stated in the Application and the submissions made by the Applicant:

2. The Applicant submits that on an application filed under Section 9 of the Code by Skylark Highway Solutions Limited, the Operational Creditor, this Tribunal vide order dated 13.11.2019 initiated CIRP against the Corporate Debtor and appointed Ms. Mita Sanghavi as the Interim Resolution Professional (‘IRP’). However, given the inability of Mita Sanghavi to act as the IRP, the Operational Creditor filed an application seeking the appointment of the Applicant as IRP.

3. After the initiation of CIRP and declaration of moratorium under Section 14 of the Code, the Respondent has issued various notices to the Corporate Debtor/the Applicant towards outstanding Income Tax demand for the period prior to the commencement of Insolvency Proceedings. In addition, the Respondent also adjusted the refund amount due to the Corporate Debtor against the previous year’s demand during the moratorium against the Corporate Debtor.

4. The Applicant states that the Respondent has submitted its claim for a sum of Rs. 209.27 Crore and the same was admitted by the Applicant. The admitted claim of Respondent is also part of the Resolution Plan approved by the CoC and under Consideration of this Tribunal.

5. The Applicant further states that the Respondent continues to issue notices pertaining to Assessment Years 2014-15, 2015-16 dated 12.11.2021, 31.03.2022, and 19.04.2022 towards outstanding income tax dues for the period prior to the commencement of CIRP in violation of the provisions of Section 14 and 238 of the Code.

6. It is further stated that the Respondent informed the Respondent that the Corporate Debtor is undergoing CIRP and that Income Tax Proceedings against the outstanding income dues pertaining to period prior to CIRP would be in violation of the provisions of the Code but to no avail hence this application.

Analysis and Decision

7. The Respondent has neither entered appearance despite court notice duly served upon it nor filed any reply. We have heard the Counsel appearing for the Applicant and perused the records.

8. It is observed that CIRP against the Corporate Debtor was initiated on 13.11.2019 and an order of moratorium under Section 14 of the Code was simultaneously declared on the commencement of CIRP. The Respondent has also brought to our notice that the following assessment notices were issued by the Respondent to the Corporate Debtor:

(Before initiation of CIRP)

(After initiation of CIRP)

9. It is the contention of the Applicant that the Respondent cannot proceed with the assessment process during the moratorium, particularly with regard to the period before the initiation of CIRP. Relying on Section 14(a) of the Code, the Counsel for the Applicant contends that the initiation or continuation of suits or proceedings against the Corporate Debtor is prohibited during the moratorium. As per the Notes on Clauses to the Insolvency and Bankruptcy Code Bill, 2015, the moratorium under Section 14 is intended to keep “the corporate debtor’s assets together during the insolvency resolution process and facilitating orderly completion of the processes envisaged during the insolvency resolution process and ensuring that the company may continue as a going concern while the creditors take a view on the resolution of default.” The Hon’ble Supreme Court, in the case of Sundaresh Bhatt, Liquidator of ABG Shipyard vs Central Board of Indirect Taxes and Customs [2023(1) SCC 472], after considering the report of the Insolvency Law Committee dated February 2020 observed:

“From the above, it can be seen that one of the motivations of imposing a moratorium is for Section 14(1) (a), (b), and (c) of IBC to form a shield that protects pecuniary attacks against the Corporate Debtor. This is done in order to provide the Corporate Debtor with breathing space, to allow it to continue as a going concern and rehabilitate itself. Any contrary interpretation would crack this shield and would have adverse consequences on the objective sought to be achieved.”

However, the Apex Court agreed with the ratio laid down in S.V. Kondaskar vs. V.M Deshpande (1972) 1 SCC 438 that the authorities can only take steps to determine the tax, interest, fines, or any penalty which is due. However, the authority cannot enforce a claim for recovery or levy of interest on the tax due during the period of moratorium. It is further observed that the authority could only initiate assessment or reassessment of the duties and other levies and cannot transgress such boundary and proceed to initiate recovery in violation of Sections 14 and 33(5) of the IBC. After such assessment, the authority has to submit its claims in terms of the procedure laid down, in strict compliance with the time periods prescribed under the IBC before the adjudicating authority. The Resolution Professional or the Liquidator, as the case may be, is also IN Company Petition No. 2231/I&BP/2019 empowered to question the legality of the assessment order before the delegated authority.

10. We hold that the demand notices, except four, are plainly in the teeth of Section 14 as they were issued after the declaration of the moratorium. The demand notices are nothing but the initiation of legal proceedings against the Corporate Debtor. Other than submitting the claim as per the procedure laid down under the Code and the Regulations, to facilitate orderly completion of CIRP, the Respondent has no authority to recover the dues from the Corporate Debtor during the CIRP. We, therefore, direct the Respondent to refund the amount of income tax refund adjusted during CIRP.

11. There is another contention that needs to be answered is whether the Respondent authority can set off the refunds during the moratorium declared under Section 14 of the Code. It is pertinent to notice that Section 14 of the Code not only prohibits the commencement and continuation of all legal proceedings against the corporate debtor but also prevents any action to foreclose, recover, or enforce any security interest created by the corporate debtor. This moratorium remains in force till the Tribunal confirms the Resolution Plan approved by the CoC or until the Tribunal passes a liquidation order requiring the assets of the corporate debtor to be gathered and distributed amongst its creditors/stakeholders.

12. The declaration of moratorium under the Code is a protective feature to ensure that all the creditors collectively decide the future of the corporate debtor. Simultaneously, the Resolution Professional is empowered under Section 18 of the Code to take control and custody of any asset for which the Corporate Debtor has ownership rights. Thus, it is clear that the scheme of the Code is to explore the resolution of the corporate debtor by collectively addressing all the creditors through the Resolution Plan. Accordingly, in the present case, a Resolution Plan has already been approved by the CoC at its meeting held on 12.02.2020 and submitted the same for the approval of the Tribunal.

13. The treatment of different classes of creditors in a Resolution Plan as well as in the Liquidation Process are dealt with in detail in the Code. However, the Code has not permitted setoff during CIRP as it can operate as a preference as against other creditors. In the present case, the Respondent, in addition to filing his claim/partial claim before the Applicant exercised a set off by adjusting the tax refunds payable to the Corporate Debtor during the period of moratorium. This not only amounted to a preferential payment to the Respondent but also reduced the total funds available to the other creditors thereby avoiding the distribution priority envisaged under the provisions of the Code.

14. Hon’ble NCLAT in a catena of judgments has held that the creditors cannot exercise setoff during the moratorium. In the case of Interim Resolution Professional vs. ICICI Bank [(2018) 5 SCC online NCLAT 2193], ICICI Bank was ordered to deposit the money it had debited during the moratorium back into the Corporate Debtor’s Account. In another case, State Bank of India vs. Devashish Nanda (Company Appeal (80) (Ins) No. 49 of 2018-order dated 21.03.2018), the Hon’ble NCLAT prevented the Bank from debiting amounts during the moratorium from the Corporate Debtor’s Account.

15. In view of the discussions above, it can be seen that adjustment of the refund amount during the moratorium is against the spirit of the Code and also results in preferential payment to the Respondent. Such setoffs are not permitted during moratoriums as held by the Hon’ble NCLAT in the above cited decisions.

IN Company Petition No. 2231/I&BP/2019 16. Having regard to the above, we are of the view that the demand notices issued after the declaration of the moratorium are plainly in the teeth of Section 14 of the Code and hence, we direct the Respondent not to take any further actions during CIRP to recover the same. Further, no setoffs are permissible during moratoriums, and the amount of income tax refunds payable to the Corporate Debtor, but adjusted during moratorium, are also directed to be released to the Corporate Debtor forthwith. IA No. 1365 of 2022 is allowed in the above terms.