VRDV Traders Private Limited Vs Union of India (Telangana High Court)
The Telangana High Court rejected three writ petitions filed by VRDV Traders Private Limited challenging orders passed under Section 148A(b) of the Income Tax Act, 1961, notices under Section 148 and subsequent reassessment proceedings under the Act. The petitions concerned assessment years 2014-15, 2015-16 and 2016-17 and also challenged the proceedings as violative of Article 14 and Article 19 of the Constitution and Section 31 of the Insolvency and Bankruptcy Code, 2016 (IBC).
For assessment year 2014-15, the petitioner had initially received a notice under Section 148 on 29.06.2021. Following the Supreme Court’s decision in Union of India and Others vs. Ashish Agarwal, a fresh notice under Section 148 was issued on 18.05.2022. The Income Tax authorities relied upon trading data received under the project Falcon, which indicated alleged manipulative reversal trades undertaken by the petitioner through its broker, M/s. Expro Securities.
The information reflected, among other things, identical purchase and sale quantities, substantial differences between purchase and sale prices, trades between the same parties and counterparties, very short intervals between purchase and sale transactions, insignificant changes in the underlying scrip compared with changes in buying and selling rates, trading in deep in-the-money and deep out-of-the-money options in thinly traded stocks, and substantial volumes attributable to loss-making entities.
The petitioner had received the notices and submitted a detailed reply dated 18.06.2022, following which the authorities passed an order under Section 148A(d) on 31.07.2022. Similar proceedings followed for assessment year 2015-16. The Court noted that, despite responding to the notices, the petitioner did not refer in its detailed responses to its Corporate Insolvency Resolution Process, the appointment of the Resolution Professional, constitution of the Committee of Creditors or the NCLT’s approval of the resolution plan dated 31.01.2020.
For assessment year 2016-17, however, the petitioner raised the NCLT proceedings and approval of the resolution plan in its response to the Section 148A(b) notice. The petitioner principally contended that, by virtue of Section 31 of the IBC, the resolution plan approved by the NCLT was binding on all stakeholders, including the Central Government and State Governments, and that liabilities allegedly payable to the Income Tax Department stood extinguished after approval of the resolution plan.
The Income Tax Department opposed the petitions, contending that the reassessment proceedings arose from information identifying the petitioner’s transactions as high-risk transactions with potential tax liabilities. The Department also referred to transactions involving alleged shell entities and unexplained reverse trading and submitted that the notices under Section 148A(b) had been issued after the Assessing Officer recorded reasons to believe that income had escaped assessment.
The High Court accepted that the petitioner had undergone CIRP and that the NCLT had approved the resolution plan on 31.01.2020. It observed that, under normal circumstances, upon approval of a resolution plan by the NCLT under the IBC, liabilities due to creditors would stand extinguished in accordance with the resolution plan. However, the Court distinguished between recovery of liabilities covered by the approved resolution plan and reassessment proceedings.
The Court held that while recovery initiated after CIRP and approval of the resolution plan would not be sustainable, the Income Tax Department was not barred from reopening an assessment even after completion of the resolution process and implementation of the resolution plan. It held that the Department could scrutinize transactions to ascertain whether illegal, fraudulent or fake transactions had been undertaken and, where appropriate, initiate proceedings against directors who were responsible for managing the affairs of the business.
The Court relied upon the reasoning in Dishnet Wireless Ltd. vs. Assistant Commissioner of Income-tax (ODS), where it was observed that an approved resolution plan could not be interpreted as preventing the Income Tax Department from passing a fresh assessment order under Section 148 read with Sections 143(3) and 147 of the Income Tax Act.
The High Court further observed that CIRP should not be permitted to operate as a mechanism to overcome alleged misdeeds, misappropriations or illegalities deliberately undertaken to evade tax. In the present case, the Court considered that the allegations concerning transactions with shell companies required verification, scrutiny and enquiry. It emphasised that, at that stage, there was only reopening of assessment based on information received and no assessment order had yet been passed fastening tax liability upon the petitioner.
Accordingly, the High Court rejected the writ petitions, while reserving the petitioner’s right to pursue appropriate remedies under the Income Tax Act. Pending miscellaneous petitions were closed and there was no order as to costs.
FULL TEXT OF THE JUDGMENT/ORDER OF TELANGANA HIGH COURT
Heard Mr. V.Aneesh, learned counsel for the petitioner, and Ms. J.Sunita, learned Junior Standing Counsel for the respondents.
2. The instant three writ petitions have been filed by the petitioner assailing three different orders passed by respondent No.3 under Section 148A(b) of the Income Tax Act, 1961 (briefly ‘the Act’ hereinafter) and the notice dated 31.07.2022 issued by respondent No.3 under Section 148 of the Act along with the subsequent notice dated 02.11.2022 passed by respondent No.4 proposing to complete the assessment under Section 144B of the Act end the subsequent notice issued, and also. challenging all consequential proceedings contending it to be violative of Article 14 and 19 of the Constitution of India and also Section 31 of the Insolvency and Bankruptcy Code, 2016.
3. The instant writ petitions pertain to the same assessee in respect of three different assessment years i.e. 2014-15, 2015-16 and 2016-17. Writ Petition No.1194 of 2023 is in respect of assessment year 2014-15, Writ Petition No.10020 of 2023 is in respect of assessment year 2015-16 and, Writ Petition No.10752 of 2023 is in respect of assessment year 2016-17.
4. So far as the assessment year ft14-15 is concerned, the petitioner was issued with a notice dated 29.06.2021, under Section 148 of the Act intimating the petitioner as regards the decision to propose assess and reassess of the income / loss for the assessment year 2014-15 pertaining to certain incomes chargeable to tax which has escaped assessment within the meaning of Section 147 of the Act. Meanwhile, after the decision of the Hon’ble Supreme Court in the case of Union of India and Others vs. Ashish Agarwal1, a fresh notice was issued on 18.05.2022 to the petitioner under Section 148 of the Act. The reason for issuance of the notice was that, certain manipulative reversal trades emerged from the trading data received under the project Falcon, wherein it was seen that the assessee has undertaken trades through its broker M/s. Expro Securities and, from the said data, it was reflected of the petitioner to have undertaken both sale as well as purchase trades from eight unique contracts and, on further scrutiny, it was also found that there were certain chief characteristics which were reflected from the said transactions like:
(i) Identical purchase and sale quantity
(ii) Huge variation in purchase price and sale price.
(iii) Trades carried out between same party and counter-party i.e. if a client A purchased X qty from a counter-party client B, then A sells X qty to B only.
(iv) Time gap between purchase and sale transactions few seconds and not more than an hour.
(v) Insignificant change in the price of the underlying scrip as compared to the change in buy rates and sell rates.
(vi) Trading separately in deep in-the-money options and deep out-of-the-money options on individual stocks, which were thinly tradea
(vii) The trades by these loss-making entities, in many cases. contribute to 70% to 100% of total traded volume for the contracts on thwe days.
5. Based on the aforesaid suspicious transactions, prima facie, the Income Tax authorities found the petitioner to be indulged in ger crating non-genuine transactions by reversing trading in currency derivatives on ,the BSE / USE during the previous year 2013-14 and believing the income chargeable to tax having escaped assessment, the notices were issued.
6. There is no dispute so far as the petitioner having not received the said notices. Moreover, it also goes to show that the petitioner in fact had responded to the said notices by giving a detailed reply on 18.06.2022 and, it is only thereafter, after a due consideration of his reply, the Income Tax authorities passed the order under Section 148A(d) of the Act on 31.07.2022.
7. Similar, if not identical are the facts so far as assessment year 2015-16 is concerned, wherein the notices issued to the petitioner under Section 148 of the Act was on 13.05.2022, to which also there is no denial of having not received the said notice. To the said notice also, the petitioner submitted a reply on 18.06.2022 and the Income Tax authorities vide its order dated 30.06.2022 passed an order under Section 148A(d) of the Act. Simultaneously, the authorities did issue the notice under Section 148 of the Act on the same day itself i.e. on 30.06.2022. The petitioner thereafter gave a response to the said notice under Section 148 of the Act on 16.08.2022 followed by subsequent notice under clause (b) of Section 148 of the Act on 31.03.2023, followed by the notice under Sub-Section (1) of Section 142 of the Act on 05.04.2023 which has led to the filing of the writ petition.
8. As was the case in the proceedings drawn for the assessment year 201415, in the present case also, the petitioner in fact responded to the notices and submitted a detailed reply on 18.06.2022 and it only thereafter that the Income Tax authorities have passed the impugned order for the assessment year 2015-16. Surprisingly, no reasons have been disclosed either in the instant petitions or in any of the submissions as to why in the two detailed responses filed by the petitioner before the Income Tax authorities for both the assessment years vide their reply of the same day dated 18.06.2022, the petitioner did not refer to the proceedings before NCLT or the petitioner establishment having undergone the Corporate Insolvency Resolution Process (CIRP). It was also not informed to the authorities about the Resolution P.:Ifessional (RP) bring appointed and further constitution of a Committee of Creditors (Co(‘) to evaluate the resolution plans etc. It was also not brought to the notice of the authorities in respect of the NCLT having approved the resolution plan submitted by the successful resolution applicant vide its order dated 31.01.2020. The order of the NCLT approving the resolution plan was dated 31.01.2020, whereas, the response that the petitioner gave to the notice issued by the Income Tax authorities was dated 18.06.2022.
9. Another aspect which needs consideration at this juncture is that, though the proceedings for the assessment year 2014-15 and 2015 16 were initiated in the year 2022, notices having been admittedly received by the petitioner, yet no steps were taken to contest the case so far as its tenability in the light of the petitioner establishment having undergone Corporate Insolvency Resolution Process and the resolution plan having been duly accepted by the NCLT.
10. Similar are the facts in respect of the assessment year 2016-17. The only improvement being that, upon receipt of the notices from the Income Tax authorities on 30.03.2023, under Section 148A(b) of the Act for the assessment year 2016-17, the petitioner responded that they had taken the plea of the proceedings before the NCLT and the approval of the resolution plan and thereafter contended that in view of the order passed by the NCLT, the proceedings before the Income Tax authorities for all previous years prior to approval to the resolution plan having been approved, is not sustainable and the present batch of writ petitions have been filed primarily on the said ground of non-sustainability of the proceedings before the Income Tax authorities.
11. Learned counsel for the petitioner relied upon the following decisions of this Court, in support of his contentions, viz.,
1) Sujana Universal Industries Limited vs. The Union of India represented by its Secretary and Ors.2
2) M/s. Matha Nimishamba Devi Trust vs. The State of Telangana and ors.3
12. Referring to the decisions of this Court on similar set of facts, the learned counsel for the petitioner also contended that the issue raised in the present writ petitions is squarely covered by the judgment of the Hon’ble Supreme Court in the case of Ghanshyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited4 which is the basis on which the judgments have been passed by this High Court as also by many other High Courts.
13. According to the learned counsel for the petitioner, in view of Section 31 of the Insolvency and Bankruptcy Code, the resolution plan which stands approved by the NCLT would be binding on all Corporate Debtors as also the other creditors including the Central Government or any State Government or any local authorities to whom the debt or payment of dues are owed by the petitioner. According to the learned counsel for the petitioner, even if they are liable to make any payment to the Income Tax Department, but now that the resolution plan has been approved by the NCLT, the entire liability if any stands extinguished in view of the Insolvency and Bankruptcy Code having an overriding effect. Thus, the learned counsel for the petitioner prayed for an appropriate relief.
14. According to the learned counsel for the petitioner. once the NCLT approved the resolution plan, its order and the plan approved, gets statutory force and is binding on all the stakeholders to whom the petitioner owe to pay.
15. Per contra, the learned Junior Standing Counsel for Income Tax Department, referring to the Counter filed in one of the v. rit petitions i.e. Writ Petition No.1194 of 2023, contended that it is a case where the respondents intend to reopen the assessment under certain peculiar factual circumstances. According to the learned Junior Standing Counsel, recently the respondents received certain information from the investigating wing whereby it was reflected in the inside portal of the Income Tax Department that the petitioner’s case was identified as a high-risk transaction with potential tax liabilities and it was in these circumstances that respondent No.3 decided to initiate assessment proceedings by issuing notice under Section 148 of the Act.
16. According to the learned Junior Standing Counsel, from the documents which reflected that the petitioner had certain transactions made through Shree Sati Finvest Pvt. Ltd. which is a shell company as per the Departmental database. It was also reflected that the petitioner was dealing with shell entities with certain unexplained reverse trading as per the information received from different investigation dissemination reports. Based upon which, it was the contention of the learned Junior Standing Counsel that all these transactions with shell entities appears to have been carried out for income tax purpose and, as such, there is an escapement of income, based upon which the notice under Section 148A(b) was issued. The said notice was issued after the Assessing Officer had recorded the reasons for him to believe that there was an escapement of income.
17. For all the aforesaid reasons, the learned Junior Sanding Counsel for Income Tax Department, prayed for rejection of the writ petitions.
18. Having heard the contentions putforth on either side and on perusal of records, what is necessary to be appreciated at this juncture is the fact that, undoubtedly the petitioner had undergone the Corporate Insolvency Resolution Process and a resolution plan was put up before the NCLT for approval and NCLT ride its order dated 31.01.2020 had allowed the resolution plan. Under the normal circumstances, upon issuance of an order of approval of the resolution plan by the NCLT under the Insolvency and Bankruptcy Code, all the liabilities that stood due to all the creditors would stand extinguished upon passing of the resolution plan by the NCLT. The said aspect would be applicable in the instant case as well, and the law in this regard is by now well settled, those which have been relied upon by the learned counsel for the petitioner starting from the judgment of the Hon’ble Supreme Court in the case of Ghanshyam Mishra and Sons Private Limited (supra) and those which have been passed by this High Court also.
19. However, what we need to consider at this juncture is, the reasons for which the reopening of the assessment has been proposed and initiated. Going by the information collected, it was found that the petitioner is said to have undertaken both sale as well as purchase trades from at least eight contracts. On further scrutiny certain characteristics were reflected and all these characteristics are what have been reacted in the paragraph No.4 of this order. The authorities found that the transactions inter se between all these eight contracts were of similar nature inasmuch as the quantity purchased and sold were identical. In all the cases, there is huge variation between the purchased price and the sale price. Further, the trades carried out between the same party and the counter party also had similar facts. The time gap between the purchase and sale is very momentary and that it lasts at time for only a few seconds, if not, more than an hour. Likewise, there was insignificant change in the price of the underlying scrip as compared to the changes in buing and selling rates.
20. Similarly another characteristic which was revealed was that of repeated trading in deep in-the-money auctions and deep out-of-the-money auctions on individual stocks which were thinly traded. Based upon these information collected, the authorities found that there are strong reasons to believe that all these fraudulent transactions reflected the illegalities those are going on and the object behind it is to evade payment of tax and the income chargeable to tax roughly amounts to over Rs.3 crores for the assessment year 2024-15.
21. So far as reopening of assessment is concerned, this Court is of the firm view that there is no doubt as regards non-sustainability of a recovery initiated subsequent to the Corporate Insolvency Resolution Process having been initiated and approval of the resolution plan, which is otherwise impermissible. Nonetheless, if the Department wants to have reassessment of the assessment order, the same is not barred under law even after the resolution process having been finalized and the resolution plan having been given effect to.
22. The action of the respondents may be only bad in law in the event if after reopening of the assessment and a fresh assessment is done, the authorities if go in for recovery proceedings. However, the authorities cannot be found fault with if they intend to do scrutiny of the proceedings to ascertain whether there has been any illegal, fraudulent and fake transactions carried out and, if yes, at least appropriate proceedings can be initiated against the director / directors who were then responsible in managing the affairs of the business. Moreover, nowhere does any judgment bar initiation of the proceedings subsequent to the approval of the resolution plan.
23. The reasoning given by this Bench finds support from the judgment of the Madras High Court wherein, in somewhat similar circumstances, in the case of Dishnet Wireless Ltd. vs. Assistant Commissioner of Income-tax (ODS)5 in paragraph No.29 and 34 to 39, it was held as under, viz.,
“29. The Resolution Plan submitted on behalf of the petitioners by the Insolvency Resolution Professional under Section 30(6) of the Insolvency and Bankruptcy Code, 2016 on 21.05.2019 has not contemplated any concession from the Income Tax Department though Notices under Section 148 of the Income Tax Act, 1961 had already been issued during March, 2018.
……………..
34. The provisions of Insolvency and Bankruptcy Code, 2016 (IBC) cannot be interpreted in a manner which is inconsistent with any other law in the time being in force.
35. Therefore, Corporate Insolvency Resolution Plan sanctioned and approved cannot impinge on the rights of the Income Tax Department to pass any fresh Assessment Order under Section 148 read with Sections 143(3) and 147 of the Income Tax Act, 1961.
36. Therefore, the proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) cannot be pressed into service to dilute the rights of the Income Tax Department under the Income Tax Act, 1961 to re-open the assessment under Section 148 of the Income Tax Act. 1961.
37. In my view, the Income Tax Department was not precluded from reopening the assessment completed under Section 143(3) of the Income Tax Act, 1961.
38. Therefore, these Writ Petitions filed by these petitioners have to be dismissed. The Assessment Orders which have been passed pursuant to the interim order dated 27.12.2018 are directed to be given to the respective petitioners by the respondent, within a period of thirty days from the date of receipt of a copy of this order.
39. If the petitioners are so aggrieved by such of those Assessment Orders, the petitioners- have to work out\their Appellate remedy before the Commissioner of Income Tax (Appeals) under Section 246.4 of the Income Tax Act, 1 )61. Since the time for filing appeal would have already expired. liberty is given to the petitioners to file such appeal before the Appellate Commissioner, within a period of thirty days from the date of communication of the Assessments Orders.”
24. Even otherwise what needs to be appreciated is that the Corporate Insolvency Resolution Process should not be permitted to be used as a mechanism to overcome any misdeeds, misappropriations or illegalities deliberately done with an intention to evade tax. In the instant case, the suspicion is there appears to be a large number of transactions and reverse transactions made by the petitioner in the name of shell companies. It is this which needs to be verified, scrutinized and enquired. If everything is genuine and in accordance with law, even if there is tax evasion, the order of NCLT approving the resolution plan would come to the rescue of the petitioner. However, in the case if the apprehension of the Income Tax authorities is found to be true, then the Income Tax authorities cannot be left remediless for taking appropriate action for the so-called mischief, misdeeds, misappropriation or illegality. Therefore, we are of the considered opinion that as of now it is only a case of reopening of the assessment in the light of the information received so far as the petitioner dealing with shell companies with a mala tide intention of evading tax and it is not a case where there has been an assessment order passed fastening tax liability on the petitioner
25. For all the aforesaid reasons, the present writ petitions in its given form, stand rejected reserving the right of the petitioner to take appropriate remedies that are available under the provisions of the Income Tax Act.
26. As a sequel, miscellaneous petitions pending if any, shall stand closed. However, there shall be no order as to costs.
Notes:
1 (2023) 1 Supreme Court Cases 617
2 Order dated 11.03.2024, in W.P.No.24895 of 2023
3 Order dated 11.03.2024, in W.P.No.15124 of 2022
4 (2021) 5CC OnLine SC 313
5 (2022) 139 taxmann.com 493 (Madras)
