Income Tax Refund Cannot Be Adjusted Against Tax Dues During IBC Moratorium: NCLT Hyderabad

Krishna Mohan Gollamudi, Resolution Professional for Leo Meridian Infrastructure Projects & Hotels Ltd. Vs Income Tax Department (NCLT Hyderabad)

Summary: NCLT Hyderabad allowed the application filed by Krishna Mohan Gollamudi, Resolution Professional of Leo Meridian Infrastructure Projects and Hotels Ltd., and directed the Income Tax Department to refund ₹1,62,59,631 which had been adjusted against tax dues while the Corporate Debtor was undergoing Corporate Insolvency Resolution Process (CIRP). The CIRP commenced on 09.04.2019 and consequently the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 came into operation. The Income Tax Department had itself lodged a claim of ₹63,59,84,459, which was fully admitted by the then IRP. Nevertheless, income-tax refunds together with applicable interest relating to AYs 2018-19, 2019-20, 2021-22 and 2022-23 were subsequently adjusted by the Department.

The Tribunal noted that the adjusted amount comprised refunds of ₹1,55,16,400 and interest of ₹7,43,234, aggregating to ₹1,62,59,631. The Resolution Professional had requested the Department through notice dated 14.08.2023 and reminders dated 23.08.2023 and 20.09.2023 to release the amount, but no response was received. The Department neither filed a counter nor contested the application.

NCLT held that Section 14 read with Section 238 of the IBC prevents recovery or appropriation of the Corporate Debtor’s assets during the moratorium and gives the IBC overriding effect over inconsistent provisions of other enactments, including the Income-tax Act. The Tribunal also noted that Section 178(6) of the Income-tax Act expressly makes that provision subject to the IBC. Consequently, while assessment proceedings may be finalised and a refund may be determined during moratorium, the tax authority cannot appropriate or adjust that refund towards its own outstanding tax demand.

The Tribunal relied upon Principal Commissioner of Income Tax Vs Monnet Ispat & Energy Ltd., (2018) 18 SCC 786, in which the Supreme Court recognised the overriding effect of Section 238 of the IBC over inconsistent provisions of the Income-tax Act. It also relied upon Indian Overseas Bank Vs Mr. Dinkar T. Venkatsubramanian, Resolution Professional for Amtek Auto Ltd., where NCLAT held that after declaration of moratorium a creditor cannot recover or appropriate amounts from the Corporate Debtor’s account towards its own dues.

NCLT further relied upon ABG Shipyard Vs Central Board of Indirect Taxes and Customs, (2023) 1 SCC 472, under which a statutory authority may assess or determine its dues during the IBC moratorium but cannot enforce recovery in violation of the insolvency process. NCLT held that tax dues constitute “operational debts” and tax authorities are therefore operational creditors who must lodge their claims before the IRP/RP instead of effecting unilateral recovery. Since the Department had already submitted its claim and the claim stood admitted, adjustment of the Corporate Debtor’s refund during moratorium was impermissible. The Department was accordingly directed to refund ₹1,62,59,631 to the Resolution Professional and the application was allowed.

Cases Discussed

• ABG Shipyard Vs Central Board of Indirect Taxes and Customs, (2023) 1 SCC 472 (Supreme Court) — Relied upon. The Supreme Court held that once moratorium operates under the IBC, the statutory authority may assess or determine statutory dues but cannot proceed with recovery through measures inconsistent with the moratorium.
• Principal Commissioner of Income Tax Vs Monnet Ispat & Energy Ltd., (2018) 18 SCC 786 (Supreme Court) — Relied upon. The decision was applied for the overriding effect of Section 238 of the IBC over inconsistent provisions of other enactments, including the Income-tax Act, and the prohibition against recovery during moratorium.
• Indian Overseas Bank Vs Mr. Dinkar T. Venkatsubramanian, Resolution Professional for Amtek Auto Ltd., Company Appeal (AT) (Insolvency) No. 267 of 2017, decided on 15.11.2017 (NCLAT) — Relied upon. NCLAT held that once moratorium has been declared after admission under Section 7 of the IBC, a creditor cannot recover or appropriate any amount from the Corporate Debtor’s account towards its own dues.

FULL TEXT OF THE NCLT JUDGMENT/ORDER

1. This Application has been filed by Mr Krishna Mohan Gollamudi, Resolution Professional (herein after referred as the “RP”) of M/s.Leo Meridian Infrastructure Projects and Hotels Ltd (herein after referred to as the “CD”) underSection 60(5) of the Insolvency & Bankruptcy Code, 2016 r/w rule 11 of the National Company Law Tribunal Rules, 2016 seeking to direct the Respondent herein to process the Income Tax refund inclusive of interest of Rs. 1,62,59,631/- (rupees One Crore Sixty Two Lakhs Fifty Nine Thousand Six Hundred and Thirty One Only) payable to the Corporate Debtor represented by the Applicant herein as adjusted by the Respondent herein.

2. The CD is undergoing CIRP vide order dated 09.04.2019 (Annexure 1). Mr. B. Naga Bhushan was appointed as the Interim Resolution Professional (IRP) and subsequently, Mr. Raj Kumar Ralhan was appointed as the Resolution Professional (RP) whose appointment was 2 IA 1777 of 2023 in CP (IB) No.43/7/HDB/2018 Date of Order: 09.02.2024 confirmed vide order dated 13.06.2019 (Annexure-2). He was replaced by Mr. Krishna Mohan Gollamudi by order dated 17/10/2022 (Annexure-3) passed in IA (IBC) No. 1068 of 2022.

3. In pursuance of Public Announcement dated 25.04.2019, The Income Tax Department (herein after refereed as “Respondent”) lodged a claim for a sum of Rs. 63,59,84,459/- (Rupees Sixty-Three Crores Fifty-Nine Lakhs Eighty-Four Thousand Four Hundred and Fifty-Nine Only) being the amount alleged by the Respondent due from the CD and the said claim was admitted fully by the then IRP, Mr B Naga Bhushan.

4. Recently, it has come to the knowledge of the Applicant that the Income Tax refund along with applicable interest under Section 244A of the Income Tax Act, 1961, owed to the Corporate Debtor has been adjusted by the Respondent, despite the fact that the Corporate Debtor is undergoing CIRP process.

5. The details of the income tax refunds due from the Respondent with applicable interest is elucidated as under:

* Copies of the Orders under Section 143(1) of the Income Tax Act, 1961 are attached as Annexure 6.

6. As per Section 25 of the IBC, once CIRP is initiated, the Applicant being the RP shall have the statutory duty to take control over the assets of the Corporate Debtor, as well as represent and exercise rights for the benefit of the Corporate Debtor. It is claimed that the provisions under Section 178(6) of the Income Tax Act were also accordingly amended to give way to the provisions of the Code.

7. When the Respondent did not desist from adjusting the refunds, the Applicant sent a Notice/Letter dated 14.08.2023 to the Respondent requesting to process the refund amount payable to the Corporate Debtor under Section 244A of the Income Tax Act, 1961 as adjusted within a week of receipt of the notice and thereafter the Applicant sent two other Reminder Notices/Letters dated 23.08.2023 & 20.09.2023, but no response was received till date.

8. Despite notice and opportunity given, the Respondent neither filed any counter nor contested the petition.

9. We have heard learned Counsel for the Applicant and perused the record.

10. The CIRP was started against the Corporate Debtor vide order dated 09.04.2019. In consequence thereof, moratorium under section 14 of IBC was also put in place.

11. When section 14 is read with Section 238 of IBC, it is clear that no tax proceedings under any statute can be initiated once ‘moratorium’ under Section 13(1)(a) of the IBC has been declared by the Adjudicating Authority until the completion of the Corporate Insolvency Resolution Process or approval of the resolution plan under sub-section (1) of section 31 or order for liquidation of the Corporate Debtor under section 33, as the case may be. This is in the context of overriding effect given to the IBC under section 238 and therefore, anything inconsistent contained in any other enactment including the Income Tax Act will be subject to the provisions of the IBC.

12. Provisions under Section 178(6) of the Income Tax Act were also duly amended to give way to the provisions of the IBC. The relevant extract 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.”

13. Despite the order of moratorium, the Respondent has adjusted the income tax refunds along with applicable interest for the assessment years 2018-19, 2019-20, 2021-22 & 2022-23 (Annexure 6 of the application) vide intimation orders issued under section 143(1) of Income Tax Act.

14. However, it is settled law that after admission of an application under Section 7 of the IBC, once moratorium has been declared, it is not open to any person to recover any amount from the account of the Corporate IA 1777 of 2023 in CP (IB) No.43/7/HDB/2018 Date of Order: 09.02.2024 Debtor nor it can appropriate any amount towards its own dues. Hon’ble Supreme Court in  Principal Commissioner of Income Tax v. Monnet Ispat & Energy Ltd., (2018) 18 SCC 786has held that once a moratorium has been enforced, any existing proceeding against the debtor shall stand prohibited. In this context, it is worthwhile to refer to the decision in Indian Overseas Bank versus Mr. Dinkar T Venkatsubramanian Resolution Professional for Amtek Auto Ltd, Company Appeal (AT) (Insolvency) No. 267 of 2017 decided on 15.11.2017 wherein it was held as under:

“Having heard learned counsel for the Appellant, we do not accept the submissions 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 Creditors’ 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”.

15. Here we may also refer to the decision of the Hon’ble Supreme Court inABG Shipyard versus Central Board of Indirect Taxes and Customs (2023)1 SCC 472, , which was a case under the Customs Act, wherein it was held that once moratorium is imposed in terms of Sections 14 or 33(5) of the IBC, the Customs authority only has a limited jurisdiction to assess/determine the quantum of customs duty and other levies. The Customs authority does not have the power to initiate recovery of dues by means of sale/confiscation, as provided under the Customs Act.

16. In view of the law as discussed above, the Respondent was not competent to adjust the refund admissible to the Corporate Debtor. It is very clear that the CIRP was commenced on 09.04.2019 by imposing moratorium under section 14 of IBC and further claims raised by the Respondent were already fully admitted by the then IRP and despite this, the Respondent has adjusted the refund amount contrary to the moratorium order passed by this Authority. Moratorium is for recovery of tax dues but there is no bar on finalization of assessment and issuance of refund arising therefrom. However, the Respondent has recovered/adjusted the refunds due to the CD during the moratorium period. It would be worthwhile to mention that tax dues are in the nature of “operational debts” and therefore tax authorities would fall within the definition of “operational creditor” under the IBC. Being “operational creditor”, it is incumbent on the part of tax authorities to stake their claim before the RP/IRP, which they have already done.

17. As a result, we direct the Respondent to refund the amount of Rs.1,62,59,631/- to the Applicant and therefore, the present application is allowed.