IBC proceedings cannot dilute rights of Income Tax Depat to reopen assessment

Dishnet Wireless Limited Vs ACIT (Madras High Court)

THE MADRAS HIGH COURT has ruled that proceedings under the Insolvency and Bankruptcy Code (IBC), 2016 cannot dilute the rights of the Income Tax Department to reopen the assessment under Section 148 of the Income Tax Act, 1961.

BRIEF FACTS:

1. A notice under Section 148 of the Income Tax Act, 1961 for reopening of the assessment was issued against the assessee/petitioner M/s. Dishnet Wireles Limited. Thereafter, a Corporate Insolvency Resolution Plan was submitted by the Insolvency Resolution Professional on behalf of the assessee before proceedings for reopening of the assessment were initiated by the Income Tax Department against the assessee.

2. Against the reassessment proceedings, writ petitions were filed by the assessee before the Madras High Court. The Madras High Court allowed the Income Tax Department to proceed with the reassessment, however, the department was directed to keep the assessment in a sealed cover. After the passing of the said interim order, the NCLT, Mumbai approved the Resolution Plan of the assessee.

3. The assessee M/s. Dishnet Wireless Limited submitted before the Madras High Court that the Income Tax Department was not entitled to proceed further with the reassessment proceedings in view of the definition of ‘claim’ as defined in Section 3(6) of the Insolvency and Bankruptcy Code, 2016.

4. The assessee contended that the Government is a “corporate debtor” and hence, it cannot proceed with the reassessment proceedings since the Corporation Insolvency Resolution Plan had been approved by the NCLT, Mumbai. The assessee averred that all the claims existing prior to the approval of the said Corporate Insolvency Resolution Plan were extinguished. Therefore, the assessee submitted that the Income Tax Department could not proceed further with the reassessment proceedings against the assessee.

5. The Income Tax Department contended that writ petitions were filed by the assessee after a Moratorium under Section 14 of the Insolvency and Bankruptcy Code came into force.

6. The Income Tax Department averred that the said Moratorium did not preclude the Income Tax Department from re-opening the concluded assessment under Section 148 of the Income Tax Act, 1961.

7. The Income Tax Department averred that only a notice under Section 148 of the Income Tax Act had been issued to the assessee before the Resolution Plan was submitted by it under the Insolvency and Bankruptcy Code, and that the assessee’s objections against reopening of the assessment had been overruled by a speaking order. Thus, the Income Tax Department submitted that since the claim of the Income Tax Department had not been had not been crystalized by way of an Assessment Order, therefore, the said claim cannot be said to be extinguished.

8. The Income Tax Department submitted that there is no bar under the law that inhibits the income tax authorities’ power to continue with the reassessment proceedings initiated under Section 148 of the Income Tax Act.

9. Section 31 (1) of the Insolvency and Bankruptcy Code, 2016 provides that if the Adjudicating Authority is satisfied that the Resolution Plan approved by the committee of creditors meets the specified requirements, it shall approve the said Resolution Plan. Section 31(1) also provides that the said Resolution Plan shall be binding on the corporate debtor and its employees, members or creditors, including the Central Government, State Government or any local authority to whom a debt in respect of payment of dues under any law in force is owed.

10. The Court noted that the Supreme Court in the case of Ghanashyam Mishra & Sons (P) Ltd. Vs. Edelweiss Asset Reconstruction Co. Ltd. (2021) had held that the 2019 Amendment to Section 31 of the Insolvency and Bankruptcy Code, 2016 is clarificatory and declaratory in nature and hence, it will have retrospective operation. Thus, the Supreme Court had held that all the dues, including the statutory dues owed to the Central Government, State Government or any local authority, if not a part of the Resolution Plan, shall stand extinguished. The Supreme Court had ruled that no proceeding could be continued in respect of such dues for the period prior to the date on which the adjudicating authority had approved the Resolution Plan under Section 31 of IBC,2016.

11. The Court observed that upon admission of petitions for initiation of corporate insolvency resolution process under Section 7 of the IBC,2016 various important duties and functions are entrusted on the Resolution Professional and the Committee of Creditors (CoC), who are required to deeply scrutinized the Resolution Plans. The Court added that after the CoC approves the plan, the adjudicating authority is required to arrive at a subjective satisfaction that the Resolution Plan conforms to the requirements provided under Section 30(2) of the Insolvency and Bankruptcy Code.

12. The Court noted that the Resolution Plan submitted by the Insolvency Resolution Professional on behalf of the assessee had not contemplated any concession from the Income Tax Department, despite the fact that notices under Section 148 of the Income Tax Act had already been issued to the assessee before the submission of the said Resolution Plan.

13. The Court observed that the Corporate Insolvency Resolution Plan approved under Section 31 of the Insolvency and Bankruptcy Code did not contemplate the assessee’s tax dues under the Income Tax Act. Also, the Court noted that the reassessment proceedings under the Income Tax Act had not been crystallized at the stage of approval of the said Resolution Plan.

14. The Court added that the claims of the Income Tax Department were not considered by the NCLT, Mumbai, while approving the Resolution Plan. Thus, the Court held that the power of the Income Tax Department to initiate reassessment proceedings under Section 148 of Income Tax Act and pass a fresh assessment order cannot be impinged by the said Corporate Insolvency Resolution Plan.

15. The Court ruled that the provisions of Insolvency and Bankruptcy Code cannot be interpreted in a manner which is inconsistent with any other law in the time being in force.

16. Thus, the Court held that the proceedings under the Insolvency and Bankruptcy Code, 2016 cannot dilute the rights of the Income Tax Department to reopen the assessment under Section 148 of the Income Tax Act. Therefore, the Court ruled that the Income Tax Department cannot be precluded from reopening the assessment under the Income Tax Act.

17. The Court, thus dismissed the writ petitions.

18. The Court directed the Income Tax Department to communicate to the assessee the Assessment Orders passed by the Income Tax Department pursuant to the interim orders issued by the High Court.

19. The Court granted liberty to the assessee to file an appeal before the Commissioner of Income Tax (Appeals) against the said Assessment Orders, within thirty days from the date of communication of the Assessment orders.

CONCLUSION:   the Court held that the proceedings under the Insolvency and Bankruptcy Code, 2016 cannot dilute the rights of the Income Tax Department to reopen the assessment under Section 148 of the Income Tax Act. Therefore, the Court ruled that the Income Tax Department cannot be precluded from reopening the assessment under the Income Tax Act.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

2. For easy reference, the details of the name of the petitioner company and the Assessment Years and impugned notices / orders are tabled as follows:-

3. By the impugned Notices, the respondent Income Tax Department has sought to re-open the completed assessment. By the impugned orders, the objections of the petitioners against the re-opening of the assessment vide impugned Notices issued under Section 148 of the Income Tax Act, 1961 are sought to be assailed.

4. The short point that arises for consideration in these Writ Petition is whether the proceeding under Section 148 of the Income Tax Act, 1961 were without jurisdiction since the respective petitioners had voluntarily filed Corporate Insolvency Resolution Process (CIRP) under the provisions of the Insolvency and Bankruptcy Code, 2018 on 28.02.2018 before the “National Company Law Tribunal, Mumbai (“NCLT”) and were admitted on 12.03.2018/19.3.2018 and later ordered?

5. The proceedings for reopening of the Assessment were initiated under Section 148 of the Income Tax Act, 1961 during March 2018 after the respective petitioners had approached the NCLT, Mumbai for Corporate Insolvency Resolution Process (CIRP) voluntarily under Section 10 of the Insolvency and Bankruptcy Code, 2016.

6. These Applications filed by the petitioners were admitted by the NCLT, Mumbai on the following dates:-

7. In the above background, these Writ Petitions were filed on 26.12.2018. Interim orders came to be passed by this Court on 27.12.2018 in these Writ Petitions. In term of the aforesaid interim orders, the respondent, Income Tax Department was allowed to proceed with the assessment but was directed to keep the assessment in a sealed cover.

8. After the aforesaid interim order was passed, the NCLT, Mumbai approved a resolution plan on 09.06.2020. Clause 9.1.16 of the approved resolution plan reads as under:-

9. The learned Senior Counsel for the petitioners submits that the issue is to be decided in the light of the decision of the Hon’ble Supreme Court in Ghanashyam Mishra & Sons (P) Ltd. Vs. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657 which was followed by the Hon’ble Supreme Court in Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta and Others, (2020) 8 SCC 531.

10. In support of these Writ Petitions, the learned Senior Counsel also drew attention to the other Sections in Paragraph Nos.132, 144 & 146 in Ghanashyam Mishra & Sons (P) Ltd. case referred to supra which reads as under:-

“132. The appeal therefore is allowed. The impugned judgment and order dated 6.7.2020 passed by the Allahabad High Court is quashed and set aside. We hold and declare, that the respondents are not entitled to recover any claims or claim any debts owed to them from the Corporate Debtor accruing prior to the transfer date. Needless to state, that the consequences thereof shall follow.”

“144. Insofar as, the judgment authored by Deepak Roshan, J. is concerned, the learned Judge has observed, that since the resolution plan was approved by NCLT on 17.4.2018, 2019 amendment to Section 31(1) of I&B Code would not apply to the said plan. We find, that the finding of the High Court, that the dues owed to the State Government and Central Government would not come within the definition of ‘operational debt’, is incorrect in law in the light of the view that is taken by us. So also the finding, that since the order of NCLT is prior to the date on which Section 31(1) of I&B Code was amended, the provisions of Section 31 would not be applicable, also cannot stand in view of the foregoing observations made by us hereinabove.”

“146. Shri Gurukrishna Kumar, learned Senior Counsel, strenuously argued, that RP/CoC had acted in a fraudulent manner. It is submitted, that though a notice inviting claim was required to be published in local newspapers where the registered office of the Corporate Debtor was situated, the notice was published in the newspaper of Kolkata edition. As per Regulation 6(2)(b) of the 2016 Regulations, the said notice is required to be published in one English and one regional language newspaper with wide circulation at the location of the registered office and corporate office of the Corporate Debtor. Perusal of the record would reveal, that the notice was published in Business Standard and Ananda Bazar Patrika newspapers of the Kolkata edition, which have wide circulation in Ranchi. The corporate office of the Corporate Debtor is at Kolkata whereas its registered office is at Ranchi. In any case, it is to be noticed, that the Forest Department of the State Government had filed intervention application before NCLT as well as NCLAT. When one of the wings of the State Government has approached NCLT and NCLAT, it is difficult to believe, that other organ of the State was not aware about the said proceedings.”

11. The learned Senior Counsel submits that the decision of this Court in M/s.Ruchi Soya Industries Ltd Vs. Union Of India and anr. rendered in W.P.No.31090 of 2015 dated 26.04.2021 is to be distinguished on facts particularly in the light of the decision of the Hon’ble Supreme Court in the above said case.

12. The learned Senior Counsel further submits that the respondents are not entitled to proceed further in the light of the definition of claim as in Section 3(6) of the Insolvency and Bankruptcy Code, 2016.

13. It is submitted that the Government is a “corporate debtor” and therefore cannot proceed further as the Corporation Insolvency Resolution Plan (CIRP) has been approved by the NCLT, Mumbai and has extinguished all the claims pre-existing prior to the approval of the aforesaid Corporation Insolvency Resolution Plan (CIRP).

14. It is submitted that all these issues were considered by the NCLT, Mumbai after the Insolvency Resolution Professional was appointed and after Committee of Creditors approved the plan and since the plan has been approved by the NCLT Mumbai, the respondent Income Tax Department is precluded for proceedings against the petitioner in terms of Section 31 of the Insolvency and Bankruptcy Code, 2016.

15. The learned Senior Counsel also submits that the decision of this Court in M/S.Ruchi Soya Industries Ltd. Union Of India another in W.P.No.31090 of 2015 dated 26.04.2021 has been distinguished by the Division Bench of the Karnataka High Court in Union of India Vs. Ruchi Soya Industries Limited vide order dated 27.05.2021 in W.A.No.2575 of 2018 and therefore submits that there is no necessity to remit the case back to the NCLT, Mumbai for examining whether the claim of the respondent, Income Tax Department was factored before approving the plan.

16. Appearing on behalf of the respondent, the learned Junior Standing Counsel submits that these Writ Petitions were filed after a Moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) came into force. It is submitted that the aforesaid Moratorium did not preclude the Income Tax Department either from re-opening of the concluded Assessment in the exercise of power conferred under Section 148 of the Income Tax Act, 1961.

17. The learned Junior Standing Counsel for the respondents further submits that the claim of the Income Tax Department had not crystalized and therefore the question of extinguishment of any claim which was yet to be articulated in an Assessment Order cannot be said to have been extinguished.

18. The learned Junior Standing Counsel further submits that the Supreme Court in the case of Ghanashyam Mishra & Sons (P) Ltd. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657 which was relied by the learned Senior Counsel for the petitioner, has itself answered the issue against the petitioner in as much as the amount which was due had crystalized before the Resolution Plan was approved.

19. It is submitted that in the facts of the present case, only notice under Section 148 of the Income Tax Act, 1961 has been issued and the objections of the petitioner for reopening of the assessment had been overruled by a speaking order. It is also submitted that the petitioners have an alternate remedy against the Assessment Order that has been permitted to be passed and kept in a sealed cover in terms of the interim order dated 27.12.2018.

20. The learned Junior Standing Counsel drew attention to Section 238 of the Insolvency and Bankruptcy Code, 2016 and submits that there is no bar under the law which inhibits or eclipses the power of the Income Tax Department to continue with the proceedings initiated under Section 148 of the Income Tax Act, 1961.

21. I have considered the arguments advanced by the learned Senior Counsel for the petitioners and the learned Junior Standing Counsel for the respondent Income Tax Department. Arguments in these Writ Petitions are inspired from the decision of the Hon’ble Supreme Court in Ghanashyam Mishra & Sons (P) Ltd. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657.

22. The Hon’ble Supreme Court in Paragraph No.138 in Ghanashyam Mishra & Sons (P) Ltd. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657, held as under:-

138. In the foregoing paragraphs, we have held that the 2019 Amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature and therefore will have a retrospective operation. As such, when the resolution plan is approved by NCLT, the claims, which are not part of the resolution plan, shall stand extinguished and the proceedings related thereto shall stand terminated. Since the subject-matter of the petition are the proceedings, which relate to the claims of the respondents prior to the approval of the plan, in the light of the view taken by us, the same cannot be continued. Equally the claims, which are not part of the resolution plan, shall stand extinguished.

23. The above conclusion was arrived based on the conclusion in Paragraph No.102, wherein the questions framed by the Hon’ble Supreme Court were answered as under:-

Conclusion.

102. In the result, we answer the questions framed by us as under:-

102.1. That once a resolution plan is duly approved by the adjudicating authority under sub-section (1) of Section 31, the claims 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 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 part of the resolution plan.

102.2. The 2019 Amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature and therefore will be effective from the date on which the I&B Code has come into effect.

102.3. 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.

24. In Ghanashyam Mishra & Sons (P) Ltd. Vs. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657, the Hon’ble Supreme Court also held that “The legislative intent of making the resolution plan binding on all the stakeholders after it gets the seal of approval from the adjudicating authority upon its satisfaction, that the resolution plan approved by CoC meets the requirement as referred to in sub-section (2) of Section 30 is that after the approval of the resolution plan, no surprise claims should be flung on the successful resolution applicant. The dominant purpose is that he should start with fresh slate on the basis of the resolution plan approved.”

25. In M/S.Ruchi Soya Industries Ltd. referred to supra, this had given liberty to the petitioner therein to obtain a clarification from the NCLT as to whether the plan included customs duty paid by the petitioner therein on the import under the subject Bill of Entry therein, whereas, in the present case, the documents reveal that the income tax was not under the contemplation of NCLT.

26. Upon admission of petitions under Section 7, there are various important duties and functions entrusted on the Resolution Professional and the Committee of Creditors (COC). The Resolution Professional is required to issue a publication inviting claims from all the stakeholders. He is required to collate information and submit necessary details in the information memorandum. The resolution applicants are required to submit their plans on the basis of the details provided in the information memorandum. The Resolution Plans undergo deep scrutiny by the Resolution Professional as well as Committee of Creditors (COC).

27. Negotiations may be held between Committee of Creditors (COC) and the Resolution Applicant and various modifications may be made so as to ensure that while paying part of the dues of financial creditors as well as operational creditors and other stakeholders, the corporate debtor is revived and is made an on-going concern. After Committee of Creditor (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 Sub-Section (2) to Section 30 of the Insolvency and Bankruptcy Code, 2016.

28. Only thereafter, the adjudicating authority can grant its approval to the plan. It is at this stage that the plan becomes binding on the 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.

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.

30. Corporate Insolvency Resolution Plan approved under Section 31 of the Insolvency and Bankruptcy Code, 2016 (IBC) did not contemplate tax dues under the Income Tax Act, 1961. Further, at the stage, the proceedings under 148 of the Act, 1961 had not crystallized.

31. The objections of the respective petitioners were also not in the light of the voluntary Corporate Insolvency Resolution Proceedings initiated by the petitioners.

32. Since the proceedings under the Code were initiated by the petitioners few days prior to the initiation of the proceedings under Section 148 of the Income Tax Act, 1961, it was incumbent for the petitioners to have ensured proper notice to the Income Tax Department and obtained appropriate concession in Corporate Insolvency Resolution Plan.

33. That apart, claims of the Income Tax Department were not considered by the NCLT, Mumbai, while approving the Resolution Plan and therefore the question of abetment of such rights of the Income Tax Department cannot be countenanced.

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 246A of the Income Tax Act, 1961. 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.

40. These Writ Petitions are dismissed with the observations. No cost. Consequently, connected Miscellaneous Petitions are closed.