The Insolvency and Bankruptcy Code, 2016 (IBC) streamlines the process minimizing losses and promoting efficient allocation of resources to deal with sick companies. The article provides an analysis of the effect of moratorium on ongoing tax proceedings against the Corporate Debtors (CD).
Tax collection in India, be it income tax, excise tax, GST or any other, is governed by its respective statute. However, the procedure of such collection usually involves an audit of the company, and issuance of show-cause notice (“SCN”) to the auditee/assessee (company), demanding tax if there is a discrepancy between the tax paid and tax owed. The auditee then files a reply to the SCN to the department. Depending on this reply, the Assessing Officer either withdraws the notice, or issues a demand and penalty via its order-in-original. If unresolved, the complaint via appeals, goes through the usual hierarchy of courts as assigned by the particular statute.
Whether a moratorium bars such a proceeding described above was recently considered by the Guwahati High Court in the case of National Plywood Industries Limited v. Union of India and another, the Commissioner of Central Goods and Service Tax, Dibrugarh (“Plywood case”). The writ challenged the imposed demand of INR 1,82,67,651 and penalty of INR 1,82,67,581 on the grounds of moratorium being imposed on the assessee as per section 13 of the IBC. The matter was subsequently remanded by the HC for a fresh consideration examining the question of whether the order of moratorium of the National Company Law Tribunal would cover the proceeding pending before the GST authorities.
Taxes, or statutory dues, are classified as “operational debts” (see Synergies Dooray case), and such debts are allotted a priority in the waterfall mechanism, as per Section 53 of the IBC, when it comes to distribution of proceeds. It therefore becomes important to ascertain what pending tax dues are liable to be paid by the CD. In that respect, the question of what counts as a valid “due” needs to be answered.
While the insolvency process goes on, the IBC in Section 14 provides for a breathing space for the CD in the form of a moratorium. During this period, the council of creditors exercises control over the company through the insolvency professional, and the company is protected from judicial proceedings which could negatively affect the company’s assets. Section 14(1)(a) of the IBC prohibits “institution” and “continuation” of suits, and “execution” of judgements against the CD during this period. The meaning of the term “proceeding” means a prescribed course of action, the ambit of which is governed by the particular statute its used in (see Babu Lal v. Hazari Lal Kishori Lal & Ors. (Supreme Court), 1982 AIR 818, 1982 SCR (3) 94- 29.01.1982 – ). Therefore, any tax proceeding, not laying outside the purview of that provision of should be considered a valid one.
For an analysis of the question raised in the Plymouth case, it may perhaps be helpful to undertake a study of two hypothetical situations, wherein moratorium is invoked at different stages of tax collection, namely the following:
Scenario 1: Moratorium is invoked after the SCN is issued
An SCN, as held in the case of Oryx Fisheries Pvt.Ltd vs Union Of India (Supreme Court), is meant to give the assessee a reasonable opportunity of making their objection against the prospective charges. That being said, it only is a preliminary step in the recovery proceeding which may or may not lead to a recovery against the CD/assessee, which is what Section 14 bars. The Principal Bench of NCLT, in Oriental Bank of Commerce v. M/s Allied Strips Ltd. and Ors., while allowing the application filed by the RP seeking stay of proceedings initiated against the CD (under Income Tax Act, 1961), stated that “It is thus patent that no proceedings by any authority could have been continued or initiated after 16.03.2018 when the moratorium comes into effect.”
As per a previous judicial interpretation of Section 14(1)(a) of IBC by the Apex Court too, the moment an insolvency petition is admitted, the moratorium comes into the effect, and “expressly interdicts institution or continuation of pending suits” against the CD.
Thus, issuance of Income Tax notice against the CD during the moratorium clearly contravenes the provisions of s. 14(1)(a). In any case, the Adjudicating Authority (assessor) cannot move forward with the judicial proceedings following the show cause notice, since the proceeding itself would be hot by the bar under Section 14(1)(a) of IBC. Additionally, the possibility of waste of the judicial order also arises in such a scenario. Hence, if the moratorium is invoked after the SCN is issued, the same shall be hit by the bar under Section 14(1)(a) of IBC.
Scenario 2: Moratorium is invoked after demand of tax is confirmed via order-in-original, but appeal is pending.
A factual matrix similar to this scenario was considered by the Apex Court in the case of Monnet Ispat and Energy Ltd. v. Principal Commissioner of Income Tax in 2018. The challenge was to the applicability of the moratorium to the income tax proceedings against the CD. On the question of what would be construed within “proceedings”, the Court held that “it would include the appeal by the department against the order of the Income tax with respect of the tax liability of the assessee.”
The Apex Court also reiterated Delhi HC’s reasoning of the IBC by the purview of its non-obstante clause in Section 238, staying the proceedings by the Income Tax department until a resolution plan was finalized.
As the case is presently, moratorium not only bars the execution of recovery of confirmed demands of tax, but also the proceedings of confirmation of such recovery. If such demand of tax is not confirmed by a final authority, the proceedings would be barred notwithstanding the forum it is pending in. This raises questions about how setbacks caused in the mechanism of taxation are to be overcome, efficiency of such processes and the loss of tax to the government, keeping in mind that already statutory dues hold a much lower priority when it comes to distribution of proceeds.
Keeping in mind the judicial precedents, the Guwahati HC could have easily put a stop to the tax recovery proceedings in the Plywood case. It would be interesting to see the reasons the Commissioner in its remand order gives to whether these existing regulations on the interplay between tax proceedings and moratorium extends to the GST regime as well.
Synergies Dooray case – https://ibbi.gov.in/webadmin/pdf/whatsnew/2019/Mar/synergies_2019-03-21%2020:40:55.pdf
Oryx Fisheries Pvt.Ltd vs Union Of India (Supreme Court) – https://indiankanoon.org/doc/514236/
Oriental Bank of Commerce v. M/s Allied Strips Ltd. and Ors. – https://www.casemine.com/judgement/in/5acf424618a6810ad6d1c1db
Monnet Ispat and Energy Ltd. v. Principal Commissioner of Income Tax – https://ibclaw.in/case-name/pr-commissioner-of-income-tax-vs-monnet-ispat-and-energy-ltd/