Demands for the period prior to NCLT Order under Insolvency and Bankruptcy Code – Gross judicial indiscipline – Need for proper SOP
Summary: Numerous tax and departmental authorities, such as GST, Customs, and Income Tax, continue to raise demands for periods prior to orders under the Insolvency and Bankruptcy Code (IBC), despite settled legal positions established by the Supreme Court and various High Courts. These courts, including in notable cases like Essar Steel Ltd. vs. Satish Kumar Gupta and Ghanshyam Mishra vs. Edelweiss ARC, have ruled that demands predating NCLT resolutions are invalid unless the claims were submitted to the resolution professional during insolvency proceedings. Authorities’ disregard for these judgments represents gross judicial indiscipline and a significant violation of judicial precedents. Departments frequently overlook Supreme Court and High Court rulings, resulting in unnecessary litigation and hardship for taxpayers. Standard Operating Procedures (SOPs) issued by CBIC, which clarify that claims not included in a resolution plan are extinguished, are also being ignored. As a result, businesses face ongoing legal disputes, disrupting operations and undermining the government’s objective of enhancing ease of doing business. Stronger enforcement of judicial discipline and updates to economic legislation are needed to prevent further such violations.
1. It is not unusual for the quasi-judicial authorities to pass orders, ignoring the judgements of the higher forums and/or courts and brushing aside the judgements with a simple statement that the facts of the case are different. It is well known that there is gross judicial indiscipline at various levels.
2. Many orders are passed by the departmental authorities, demanding payment of tax and/or reversal of ITC, for the period(s) prior to NCLT Order under Insolvency and Bankruptcy Code (IBC), ignoring the judgements of the Hon ‘ble Supreme Court which are binding on all quasi-judicial and judicial authorities. The judgements of the Hon ‘ble Supreme Court are followed by various High Courts across the Country and demands for the period prior to NCLT Order were set aside and are being set aside. Thereby the legal position on the subject is well settled.
3. However, orders are being passed by the departmental authorities every now and then, in a causal manner without giving reference to the judgements of the Hon ‘ble Supreme Court and High Courts, which is in gross violation of judicial discipline.
4. Before referring to the various orders set aside by High Courts/Supreme Court, it is beneficial to refer to the observations of the Hon ‘ble Supreme Court in the cases Committee of Creditors of Essar Steel Ltd. Vs. Satish Kumar Gupta and Ors. [Civil Appeal No.8766-67 of 2019]; and Ghanshyam Mishra and Sons Vs. Edelweiss ARC [Civil Appeal No.8129 of 2019] wherein it was held that demands cannot be raised for the period prior to NCLT Order, unless and until the claim is made before the Resolution Professional during the insolvency proceedings.
5. Hon’ble Supreme Court, in the case of Committee of Creditors of Essar Steel Ltd. v. Satish Kumar Gupta and Ors. Civil Appeal 8766-67 of 2019, at para 67 the judgement, appreciating the importance and the true intent sought to be achieved by implementing IBC, has again reiterated as under:
“… A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully takes over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows what has to be paid in order that it may take over and run the business of the corporate debtor.”
6. Hon’ble Supreme Court in the case of Ghanshyam Mishra and Sons v. Edelweiss ARC (Civil Appeal 8129 of 2019) (“Ghanshyam Mishra Judgement”) has held as under:
“86. … After CoC approves the plan, the Adjudicating Authority is required to arrive at a subjective satisfaction, that the plan conforms to the requirements as are provided in subsection (2) of Section 30 of the I&B Code. Only thereafter, the Adjudicating Authority can grant its approval to the plan. It is at this stage, that the plan becomes binding on Corporate Debtor, its employees, members, creditors, guarantors and other stakeholders involved in the resolution Plan. The legislative intent behind this is, to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any surprise claims. If that is permitted, the very calculations on the basis of which the resolution applicant submits its plans, would go haywire and the plan would be unworkable.”
“CONCLUSION
95. In the result, we answer the questions framed by us as under:
(i) That once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of Section 31, the claim as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of the resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not a part of the resolution plan;
…
(iii) Consequently, all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued.”
7. The judgements of the Hon ‘ble Supreme Court in the above cases are very clear that the department(s) i.e., Customs, Central Excise, Service Tax, VAT, GST etc., are not permitted to initiate any proceedings for the period prior to NCLT Order, unless and until they have lodged claims for the relevant periods before the Resolution Professional and the same are part of resolution plan.
8. However, various revenue authorities like Central GST, State GST, Central Excise, State VAT, Service Tax, Customs, Income tax are raising demands for the periods prior to NCLT Order ignoring the settled judicial position in the matter. Departmental authorities have been raising demands without any discussion on the judgements of the Hon ‘ble Supreme Court and High Court, in gross violation of judicial discipline.
9. Number of cases are being reported in tax journals on the subject, wherein revenue departments have been raising demands for the periods prior to NCLT Order, ignoring the judicial discipline and High Courts have been setting aside such demands.
10. Tax payers are forced to approach high courts and get the illegal orders quashed, which is resulting in waste of time and money. In the process they are put into lot of agony, with the indifferent and irresponsible attitude of the departmental authorities.
11. In this context, it is also not out of place to list out some of the cases wherein the demands prior to NCLT order are set aside by the various High Courts.
(i) In the case of M/s.EMCO Limited Vs. The Joint Commissioner of State Tax [2024-VIL-282-TEL], Hon ‘ble High Court of Telangana has set aside the demands raised under Section 73 of the State GST Act, as they are not part of the Resolution Plan. The High Court followed the judgement of the Hon ‘ble Supreme Court in the case of Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited and Gujarat High Court in the case of KRBL Limited v. State of Gujarat – [2023-VIL-987-GUJ] and held that the demands raised are without jurisdiction and therefore deserve to be set aside/quashed.
(ii) In the case of THE COMMISSIONER OF CUSTOMS Vs PATANJALI FOODS LTD (FORMERLY RUCHI SOYA INDUSTRIES LTD) [2022-TIOL-1328-HC-AHM-CUS], the Hon ‘ble Gujarat High Court has followed the judgements of the Hon ‘ble Supreme court in the cases of Ghanshyam Mishra and Essar Steel, and dismissed the appeal filed by the department, by observing as under –
11. In view of above provisions which clarifies that upon completion of corporate insolvency resolution process, even liability of corporate debtor for an offence committed earlier would cease and hence the appellant department cannot proceed further with the present appeal in absence of any claim lodged with the Resolution Professional during the insolvency resolution process before the NCLT.
(iii) In the case of DALMIA CEMENT (BHARAT) LTD. Versus UNION OF INDIA (2023) 10 Centax 190 (Bom.) [22-08-2023], the Hon ‘ble Bombay High Court has held that in case no claims were made before the approval of the resolution plan, the claims get extinguished and cannot be raised at a later date:
12. Thus from the aforesaid discussion it becomes clear that the impugned orders seek to undertake recovery of the amounts with regard to which no claim was made by the respondents Operational Creditor in proceedings under the I & B Code, 2016. In view of the decision in Ghanashyam Mishra And Sons (supra) said claims would stand extinguished and are not liable to be pursued further. The challenge as raised is thus liable to be upheld.
(iv) EMC Limited Vs. The State of Rajasthan [2023-VIL-68-RAJ];
(v) Electrosteel Steels Limited Vs. The State of Jharkhand. [2022-VIL-41-JHR];
(vi) The National Sewing Thread Company Ltd Vs. Deputy Commissioner of Income Tax and Ors – [2024-TIOL-1135-HC-DEL-IT];
(vii) OCL Iron and Steel Ltd Vs. Union of India – WP(C) 8316/2024 – High Court of Delhi;
(viii) Observations of the Andhra Pradesh High Court in the case of Patanjali Foods Limited Vs. The Asst. Commissioner ST FAC and others [WP No.28529/2023] needs specific mention, as the High Court has set aside the demand raised for the period prior to NLCT. The observations are reproduced hereunder:
11. In the circumstances, it must be held that the liability of the petitioner, arising out of the AP VAT Act or the GST Act stands extinguished to the extent of its liability up to 4th September, 2019.
12. The contention of the learned Government Pleader for Commercial Taxes that the order of NCLT is not binding on the State of Andhra Pradesh in view of Section 88 of the GST Act would have to be negatived in as much as Section 238 of the Insolvency and Bankruptcy Code provides for a non-obstante clause overriding all other laws.
13. The further contention of the learned Government Pleader for Commercial Taxes that the order would not be binding as no notice had been given to the State of Andhra Pradesh prior to passing of the said order would also have to be negatived as such the plea only, can be taken for setting aside the said order. It must be held that as long as the said order holds, it would not be open for any person, who is bound by the order, to contend that such an order is not binding.
It is important to note that the Hon ‘ble High Court held that the department cannot be argue that they have no specific intimation about insolvency proceedings, once the order is passed by NCLT, it is binding on all, including the revenue departments, since the provisions of IBC override the all other Acts.
12. The State and Central GST departments, Customs, Income-tax departments are raising demands for the periods prior to NCLT Order in a routine matter, without any reference to settled legal position, in view of the judgements of the Hon ‘ble Surpeme Court and High Courts. CGST department is not bothered about CBIC circular also, while it is common for the SGST department to ignore the CBIC instructions on the plea that they are not bound by them.
13. CBIC has issued Standard Operating Procedure (SOP) vide Instruction No.1083/04/2022-CX9 dated 23.05.2022 in respect of Insolvency and Bankruptcy Code (IBC). It is mentioned in Para 2 of the Instruction that the claims lodged by the Customs and GST departments are not admitted as they are not filed in time and consequently the claims are extinguished. It is also observed that authorities then litigate rejection of the claims, despite the settled position that no claims can be raised once the plan is approved. Therefore, the legal position is clarified by CBIC that the claims which are not admitted as a part of resolution plan get extinguished, on approval of resolution plan by NCLT. Para of the instruction is reproduced hereunder:
2. A timeline of 90 days from the insolvency commencement date is available for filing of claims. However, it has been observed that there is an inordinate delay in filing of claims by Customs and GST authorities. This leads to their claims not being admitted and extinguished once a resolution plan is approved. It is also observed that the authorities then litigate on the rejection of each claims, despite the settled position that no claims can be raised once the plan is approved and no demands can be raised on the resolution applicant who has taken over the company through such a resolution plan.
14. It is very much clear from the above that in case the claims were not lodged and thereby do not form part of resolution plan admitted by NCLT, such claims get extinguished on approval of resolution plan. No claims can be raised by the authorities once the resolution plan is approved.
15. However, in many cases, the instructions are not followed. The working of the departments is resulting in big “Uneasiness in doing business”, as against the Government’s policy of encouraging or improving “Ease of doing business”.
16. It will be highly appreciated, if the suitable provisions are inserted in GST Act/Rules and other economic legislations that no proceedings can be initiated for the period prior to NCLT Order, which can restrict the departmental authorities from raising demands mercilessly, ignoring the settled legal position.
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