Income Tax Refund Adjustment During IBC Moratorium Invalid: NCLT Mumbai

Ram Ratan Kanoongo Vs DCIT (NCLT Mumbai)

Summary: The National Company Law Tribunal considered two applications filed by the Resolution Professional of PMT Machines Limited seeking release of income tax refunds during the corporate insolvency resolution process (CIRP). Insolvency proceedings had commenced on 22 October 2018, and Ram Ratan Kanoongo was appointed as Interim Resolution Professional and subsequently continued as Resolution Professional.

In the first application, the Resolution Professional challenged the Income Tax Department’s adjustment of ₹1,70,05,107 against demands relating to assessment years 2016-17 through 2019-20. The applicant contended that the adjustment violated Section 14 of the Insolvency and Bankruptcy Code. The Department disputed the factual position concerning the refunds. The Tribunal nevertheless found the adjustment impermissible during the moratorium, particularly because the Department’s claim of ₹296.20 crore had already been admitted by the Resolution Professional.

In the second application, the Resolution Professional sought ₹2,68,93,499 in income tax refunds relating to six assessment years, together with applicable interest under Section 244A of the Income-tax Act. The Department argued that income tax return acknowledgments did not establish entitlement to refunds and pointed to approval of a resolution plan. The Tribunal relied on the principle that creditors cannot independently recover or appropriate amounts belonging to the corporate debtor during the moratorium.

Both applications were allowed. The Tribunal directed the Department to refund the respective amounts within four weeks from uploading of the orders. The decisions relied on Indian Overseas Bank vs. Mr. Dinkar T Venkatsubramaniam, Company Appeal (AT) (Insolvency) No. 267 of 2017, which prohibits recovery and appropriation of corporate debtor funds during an operative moratorium.

Cases Discussed

• Indian Overseas Bank vs. Mr. Dinkar T Venkatsubramaniam [Company Appeal (AT) (Insolvency) No. 267 of 2017] (NCLAT) — Relied upon in both applications for the proposition that, following declaration of a moratorium, a creditor cannot recover or appropriate funds from the corporate debtor’s account towards its own dues.

FULL TEXT OF THE JUDGMENT/ORDER

1. The above I.A. is filed by the Resolution Professional of the Corporate Debtor, M/s. PMT Machines Limited mainly praying the following reliefs;

2) Direct the Respondent to release the refund of income tax amounting to Rs. 1,70,05,107/- alongwith applicable interest under section 244A of the Income-tax Act, 1961 till such time the said refund stands refunded to the account of the Corporate Debtor under the control and management of the Applicant in view of the ongoing Moratorium period.

2. The relevant paras of the above application which are necessary for deciding the same are extracted hereinunder; The CIRP order was passed against the Corporate Debtor by this Tribunal vide its order dated 22.10.2018 and the present Applicant Mr. Ram Ratan Kanoongo was initially appointed as IRP and thereafter confirmed and continued as RP and he is in effective control and administration of the Corporate Debtor since the date of his appointment.

Para 9

The Applicant submits that during the course of the Corporate Insolvency and Resolution Process of the Corporate Debtor which is undisputedly still ongoing, the Applicant being the RP had filed income tax return of the Corporate Debtor bearing PAN No. AAACP4680L, for Assessment Year 2020-21 (AY) claiming a tax refund of Rs. 49,53,970/- (alongwith interest under section 244A of the Income-tax Act). The said income-tax return was filed on 29 October 2020.

Para 10

The Applicant submits that thereafter the Respondent issued an intimation dated 13 May 2020 and 29 March 2021 for AY 2018-19 and AY 2019-20 respectively under section 245 of the Income-tax Act which deals with ‘Set off of refunds against outstanding tax demand’.

Para 11

The Applicant was surprised to find out that the income-tax refund of Rs. 1,70,05,107/- was adjusted against the income-tax demands of assessment years pertaining to prior period before the commencement of insolvency proceedings as tabulated hereunder;

Para 14

The Applicant also submits that he has admitted the claim of the Respondent to the extent of Rs. 296.20 Crores as submitted by the Respondent with the RP.

3. Mr. Kartik Saresa, Deputy Commissioner of Income Tax filed affidavit in reply opposing the above application. The important relevant paras of the reply at paras (iv) and (viii) are extracted hereunder;

Paras (iv)

Briefly stated, the facts of this application are that the applicant is claiming that income-tax refund due to the assessee amounting to Rs. 1,70,05,107/- was adjusted against the income-tax demands of assessment years pertaining to prior period before the commencement of insolvency proceedings. The applicant claims that said adjustment was in violation of section 14 read with section 238 of the Code. The details submitted by the applicant in this regard are reproduced hereunder-

Paras (viii) It can be concluded that the refunds due to the applicant for A.Ys. 2016-17 & 2017-18 were adjusted against outstanding demands prior to the commencement of insolvency. No refund was due to the applicant for A.Y. 2018-19 in the first place and refund of A. Y. 2019-20 was rejected by the bank of the assessee. The Applicant’s submissions in respect of all the four assessment years are factually incorrect.

4. Heard, Mr. Ayush J Rajani Ld. PCA appearing for the Resolution Professional and Mr. Parul Pandya i/b Adv. Swapna Gokhale, counsel appearing for the Income-tax Department.

5. After hearing the submissions of both sides and upon perusing the material available on record, this Bench notes that as rightly contended by the Resolution Professional the Income-tax Department having submitted claim to an extent of Rs. 296.20 crores which was duly admitted by Resolution Professional as an Operational Creditor adjusted the above refund amount of Rs. 1,70,05,107/- refundable to the Corporate Debtor during the period of moratorium which is not legal as per Section 14 of the Code and the action of the Department is highly illegal and high handed more so after admission of their claim by the Resolution Professional.

6. This Bench is of the considered opinion that the above application filed by the Resolution Professional is liable to be allowed in the true letter and spirit of the provision of the IBC and as per the order passed by the Hon’ble NCLAT in the case of Indian Overseas Bank vs. Mr. Dinkar T Venkatsubramaniam [Company Appeal (AT) (Insolvency) 267 of 2017]. The relevant paras of the order reproduced hereinunder;

“5. Having heard learned counsel for the Appellant, we do not accept the submission made on behalf of the appellant in view of the fact that after admission of an application under Section 7 of the “I&B” Code, once moratorium has been declared it is not open to any person including ‘Financial Creditor’ and the appellant bank to recover any amount from the account of the ‘Corporate Debtor’, nor it can appropriate any amount towards its own dues.”

7. Accordingly, the above I.A. is allowed in terms of prayer clause (2) directing the Respondent to refund of an amount of Rs. 1,70,05,107/- as claimed by the Resolution Professional in this application within four weeks from the date of uploading of the order.

8. With the above observations and directions, the above application is allowed and stands disposed of.

1. The above I.A. is filed by the Resolution Professional of the Corporate Debtor, M/s. PMT Machines Limited mainly praying the following reliefs;

2) Direct the Respondent to release the refund of income tax amounting to Rs. 2,68,93,499/- alongwith applicable interest under section 244A of the Income-tax Act, 1961 till such time the said amount is refunded to the account of the Corporate Debtor under the control and management of the Applicant in view of the ongoing Moratorium period.

2. The relevant paras of the above application which are necessary for deciding the same are extracted hereinunder; The CIRP order was passed against the Corporate Debtor by this Tribunal vide its order dated 22.10.2018 and the present Applicant Mr. Ram Ratan Kanoongo was initially appointed as IRP and thereafter confirmed and continued as RP and he is in effective control and administration of the Corporate Debtor since the date of his appointment;

Para 10

The Applicant submits that the present Corporate Debtor bearing PAN No. AAACP4680L, has to receive the following refunds from the Respondent. Table below provides the relevant synopsis.

Para 12

The Applicant also submits that he has admitted the claim of the Respondent to the extent of Rs.269,19,55,214/- [Rs. 269.19 crores] vide claim form dated 29 October 2018 as submitted by the Respondent with the RP.

Para 16.2

The Applicant also refers to provisions of section 247, where Income-tax Act stood amended to give way to the provisions of the Code in view of section 238 of the Code, while it is well settled principle in case any other law and provisions therein to the extent they are inconsistent with that of the Code, the provisions Code shall prevail. It is also important to note that the provisions section 178(6) of Income-tax Act, 1961 were also duly amended to give way to the provisions of the Code. Relevant extract of provisions of section 178 of the Income-tax Act, 1961 is reproduced hereunder;

“178 (6) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force [except the provisions of the Insolvency and Bankruptcy Code, 2016].”

(emphasis supplied)

3. Mr. Kartik Saresa, Deputy Commissioner of Income Tax filed affidavit in reply opposing the above application. The important relevant paras of the reply at paras (iii), (iv) and (v) are extracted hereunder;

Paras (iii) T

he Respondent offers no comments on the applicant’s submissions on facts related to the insolvency of the M/s PMT Machines Limited (hereinafter referred to as the ‘assessee’). The Applicant has submitted that the Resolution process is still ongoing, which may have been true for when this application was filed, but is has come to the knowledge of the Respondent that the Hon’ble Tribunal vide order dated 03.06.2022 has approved a Resolution Plan in respect of the assessee and lifted the moratorium.

Paras (iv)

Briefly stated, the facts of this application are that the applicant is claiming that income-tax refund due to the assessee (M/s PMT Machines Limited) amounting to Rs. 2,68,93,499/- for various assessment years has not been released by the Department. The details submitted by the applicant in this regard reproduced hereunder-

Paras (v)

In support of the claim of these refunds, the applicant has submitted income tax return acknowledgements generated at the time of filing of return. At the outset, it is to submit that the income tax return acknowledgments generated at the time of filing of return do not in any way reflect the amount of refund due to an assesses. It only shows the amount of refund as per the calculation of the assessee. Refund due to an assessee is determined only after the return is processed by the Department and intimation u/s 143(1) is generated or when assessment order is passed if the case was selected for scrutiny.

4. Heard, Mr. Ayush J Rajani Ld. PCA appearing for the Resolution Professional and Mr. Parul Pandya i/b Adv. Swapna Gokhale, counsel appearing for the Income-tax Department.

5. After hearing the submissions of both sides and upon perusing the material available on record, this Bench notes that as rightly contended by the Resolution Professional the above action of the Income-tax Department is against the law laid down by the Hon’ble NCLAT in the case of Indian Overseas Bank vs. Mr. Dinkar T Venkatsubramaniam [Company Appeal (AT) (Insolvency) 267 of 2017]. The relevant paras of the order reproduced hereinunder;

“5. Having heard learned counsel for the Appellant, we do not accept the submission made on behalf of the appellant in view of the fact that after admission of an application under Section 7 of the “I&B” Code, once moratorium has been declared it is not open to any person including ‘Financial Creditor’ and the appellant bank to recover any amount from the account of the ‘Corporate Debtor’, nor it can appropriate any amount towards its own dues.”

6. After hearing both sides and upon relying the above case law, this Bench is of the considered opinion that the above application filed by the Resolution Professional is liable to be allowed.

7. Accordingly, the above I.A. is allowed in terms of prayer clause (2) directing the Respondent to refund an amount of Rs. 2,68,93,499/- as claimed by the Resolution Professional in this application within four weeks from the date of uploading of the order.

8. With the above observations and directions, the above application is allowed and stands disposed of.