Impact of Moratorium under section 14 of Insolvency and Bankruptcy Code, 2016 on Income Tax Proceeding
It has become standard procedure for the Resolution Professional, appointed by the order of the National Company Law Tribunal (NCLT) writes a letter to the Assessing Officer of the Corporate Debtor attaching a copy of the order passed by NCLT wherein he inform about the initiation of corporate insolvency resolution process against Corporate Debtors under the provision of Insolvency and Bankruptcy Code, 2016 (the Code). In this letter, he highlighted that in light of section 14 of the Code, moratorium has been declared whereby proceeding against Corporate Debtors before any authority is prohibited. This moratorium has effect till the completion of the corporate insolvency resolution process or approval of resolution plan or passing of order for liquidation of corporate debtors.
It has been found that tax authorities initiate /continue tax proceeding despite the fact that the moratorium under section 13 read with section 14 of the Code has been declared. Therefore, it is relevant to examine the interplay of Insolvency and Bankruptcy Code vis-a-vis of the Income Tax Act and how it impacts the different type of proceeding of the Income Tax Act?
Provision of Insolvency and Bankruptcy Code override the provision of Income Tax Act:-
Provision of Insolvency and Bankruptcy Code override the provision of Income Tax Act can be analyzed in light of section 238 of the Insolvency and Bankruptcy Code read with section 178 of the Income Tax Act.
As per section 238 of the Code “The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law”
In order to avoid any conflict, section 178 of Income Tax Act has amended with effect from 01.11.2016 relevant portion of section 178 of the Income Tax Act is reproduced as under:-
“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”
In view of above, it explicit that section 238 of the Insolvency and Bankruptcy Code read with section 178(6) of the Income Tax Act, the provision of Insolvency and Bankruptcy Code override the provision of Income Tax Act.
In this context, the overriding effect of the provision of Insolvency and Bankruptcy Code over the provision of Income Tax Act has been examined by Hon’ble Delhi High Court in the case of Pr. Commissioner of Income Tax-6, New Delhi Vs. Monnet Ispat & Energy Ltd. observed that the moratorium period under section 14 of the Code announce by NCLT would be applicable to the order ITAT in respect of tax liabilities. In this case Hon’ble High Court stated that it appears to the Court that s. 238 of the Code is categorical that the Code will apply, notwithstanding anything inconsistent therewith contained in any other law for the time being in force. Sec. 14(1)(a) of the Code states, inter alia, that on the ‘insolvency commencement date’, the adjudicating authority shall by order declare moratorium for prohibiting “the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any Court of law, Tribunal, arbitration panel or other authority”. That the Code will prevail over all other statutes inconsistent therewith has been explained in the recent decision date 31st Aug., 2017 of the Supreme Court (Innoventive Industries Ltd vs ICICI Bank).
This case has been travelled up to Supreme Court wherein the order of the Delhi High Court was confirmed by the Supreme Court and observed that “Given Section 238 of the Insolvency and Bankruptcy Code, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment, including the Income-Tax Act. We may also refer in this Connection to Dena Bank vs. Bhikhabhai Prabhudas Parekh and Co. & Ors. (2000) 5 SCC 694 and its progeny, making it clear that income-tax dues, being in the nature of Crown debts, do not take precedence even over secured creditors, who are private persons. We are of the view that the High Court of Delhi, is, therefore, correct in law”.
Further in the case of Unilever Industries Private Limited & Anr. vs Kwality Limited the purpose of moratorium had very aptly delineated by Hon’ble Calcutta High Court which is as under:-
Section 14 of IBC refers to moratorium. The Notes on Clauses in the IBC, 2015 explained the reason for this Section. In short, it is stated that the purpose of moratorium is to keep the corporate debtor’s assets together during the insolvency resolution process and ensure that the company may continue as a going concern while the creditors take a view on resolution of default. It is to obviate the possibility of potentially conflicting outcome of related proceedings and also to ensure that the resolution process is a collective one. The moratorium on initiation and continuation of legal proceeding including debt enforcement action ensures a standstill period during which creditors cannot resort to individual enforcement action which may frustrate the object of the corporate insolvency resolution process. Section 14 also prescribes a period for which the moratorium will be in effect. The Viswanathan Committee (Report of the Bankruptcy Law Reforms Committee, Volume I: Rationale and Design, Chapter 5) mooted the concept of calm period to enable peaceful resolution and focussed attention for resolving the insolvency. The idea behind introduction of moratorium is to preserve the value of the corporate debtor by ensuring that it continues to work as a going concern. The aforesaid report in Clause 5.3.1 has, inter alia, stated that the motivation behind the moratorium is that it is value maximising for the entity to continue operations even as viability is being assessed during the IRP. The Insolvency Law Committee in its report of 2018 took note of the repealed Sick Industrial Companies (Special Provisions) Act, 1986 (SICA) and considered the Notes on Clauses for Section 14 of the Code in order to understand the real intention of this provision. The scope of moratorium was discussed in Clause 5.1 of the said report in which it is stated that the scope of the moratorium is broader than the moratorium in the repealed SICA in two ways – First, under SICA, the actions barred could be instituted or continued with the consent of the BIFR, and second, the language used in Section 22 of SICA clarified that proceedings which affected the assets of the company or for recovery of money etc. were barred.
On a plain reading, Section 14 is wider in its ambit as, firstly, any suit or proceeding cannot be instituted or continued with the consent of the NCLT and secondly, the bar on institution of suits or continuation of pending suits or proceedings against the corporate debtor is on the first blush not linked to the assets of the corporate debtor. The report in Clause 5.2 has stated –
“The notes on clauses for section 14, read as follows (emphasis supplied): “the purposes of the moratorium include keeping the corporate debtor’s assets together during the insolvency resolution process and facilitating orderly completion of the processes envisaged during the insolvency resolution process and ensuring that the company may continue as a going concern while the creditors take a view on resolution of default” and “the moratorium on initiation and continuation of legal proceedings, including debt enforcement action ensures a stand-still period during which creditors cannot resort to individual enforcement action which may frustrate the object of the corporate insolvency resolution process.” Thus, the intent does not appear to be to debar only those suits or proceedings which affect the assets of the corporate debtor, as these appear to be only one of the components that is barred.”
In the same case, it has also been observed by the court “…The purpose of moratorium is to prevent immediate collapse of the corporate debtor and with a view not to render the resolution process nugatory, Section 14 has been introduced in the Code which prohibits institution of suits or continuation of pending suits or proceedings against the corporate debtor. Section 14(1) (d) restrains a third party to initiate any proceeding for recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor. Thus, Section 14 has clearly defined the classes of persons who are restrained from proceeding against the company. The classes of creditors include both secured and unsecured creditors. The statute insulates the corporate debtor against any debt recovery actions which are likely to endanger, diminish, dissipate or seriously affect the assets of the corporate debtor and such protection is to continue during the calm period. The emphasis is on to keep the corporate debtors’ assets together during the insolvency resolution process and facilitate orderly completion of the process envisaged during the insolvency resolution process…”
On perusal of above provisions of income tax and case laws clearly tell us that once an order of moratorium is granted by the NCLT under section 13(1)(a) read with section 14 of the Code, tax proceeding which impact financial health of the Corporate Debtors cannot be initiated.
However, with due respect to the observation of the judiciary, it needs to be mentioned here that there is a natural difference between income tax assessment proceeding and recovery proceeding. The assessment proceeding completed with the aim to give finality to the assessment may not be prohibited by the moratorium. The main object of the moratorium is to restrain proceedings that are in nature of recovery and save the Corporate Debtors from expensive litigation which would further deteriorate the financial health of the Corporate Debtors. The Delhi High Court itself ruled that moratorium provision would apply to “Debt recovery action” against the Corporate Debtor in the case of Power Grid Corporation of India Ltd Vs. Jyoti Structures Ltd.
At the time of commencement of assessment proceeding, the assessing officer is not aware that whether on completion of assessment, what will accrue would be demand or refund of excess tax paid. If there was excess tax paid a refund cannot be made without first complete the assessment proceeding and it will lead to absurd consequences. This certainly cannot be intended by section 14 of the code.
Further, the NCLT direct in the case of Deputy Commissioner of Income Tax Vs. Bhuvan Madan RP for Diamond Power Infrastructure Ltd. & Anr, considering the necessity of the assessment arising out of search proceedings and findings of irregularities by the Corporate Debtor which may have led to huge tax demand on the corporate debtors, in case assessment proceeding of the corporate debtors are carried out otherwise there will be a grave injustice to the interest of the applicant as well as government exchequer. However NCLT directed that tax authorities may file their claim as operational creditors with the resolution professional for examining the claim in accordance with the provisions of the code.
In view of the above, it may be reasonable to conclude that the assessing officer is not prohibited to initiate /continue the assessment proceeding. However, on finalization of assessment proceeding, there may any refund which shall be paid to Corporate Debtor. In case there is any demand upon the Corporate Debtors, no recovery proceeding can be initiate by the assessing officer against corporate debtors till the moratorium under section 14 of the code continues.
Disclaimer: The views expressed in this article are strictly personal view of the author. Neither the view nor the analysis constitutes a legal opinion and are not intended to be an advice. In case of any doubt please discuss with your consultant.