Invocation of revision proceedings after approval of resolution plan not justified: ITAT Ahmedabad

Care Office Equipment Limited Vs PCIT (ITAT Ahmedabad)

ITAT Ahmedabad held that invocation of Revision proceedings under section 263 of the Income Tax Act after approval of the Resolution Plan by NCLT is against the Provisions of Law. Accordingly, revisionary proceedings quashed.

Facts- The assessee is a Company engaged in the business of sale of Computer Hardwares service provides of Bar Code Stickers, Equipments and Printers. For the Asst. Year 2018-19, assessee filed its Return of Income on 30-10-2018 claiming a loss of Rs. 33,88,77,148. The return was processed u/s. 143(1) and then taken for scrutiny assessment. When notice u/s. 142(1) dated 29-03-2019 and others were issued, the assessee failed to response to the notices but ultimately on 01-02-2021 a letter was received from Insolvency Resolution Professional (IRP). Shri Vikash Gautamohand Jain that National Company Law Tribunal vide its order dated 29-05-­2019 passed an order for commencement of Corporate Insolvency Resolution Process (CIRP). As per Section 14(1) of Insolvency and Bankruptcy Code, 2016 (IBC) the order of moratorium shall have effect from the date of such order till the completion of CIRP. Therefore IRP requested the A.O. not to proceed with the assessment further. However the AO sent one more notice U/s. 142(1) notice to the IRP and completed the assessment. AO made adhoc disallowance at 25% of the above expenses namely Rs.14,80,12,245/- is being disallowed as not extended for the purpose of business activity and determined the loss as Rs.19,08,64,903/-.

On perusal of the assessment order, PCIT found that the expenses remained unexplained by the assessee. Thus AO ought to have disallowed the whole of such expenses while finalizing the assessment order. Thus there is short of addition of Rs.44,40,36,735/- which is prejudicial to the interest of Revenue by passing erroneous order.

Conclusion- Jurisdictional High Court in the case of Jyoti Power Corporation Private Limited (Now Known as Ausil Corporation Private Limited) has held that invocation of Revision proceedings after the Resolution Plan is against the Provisions of Law and quashed the Revision proceedings.

Held that respectfully following the above Jurisdictional High Court judgment, we have no hesitation in quashing the Revision order passed by PCIT in the present case. In the result, the appeal filed by the Assessee is allowed.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal is filed by the Assessee as against the revision order dated 30.03.2023 passed by the Principal Commissioner of Income Tax (Appeals)-1, Ahmedabad arising out of the assessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year 2018-19.

2. Brief facts of the case is that the assessee is a Company engaged in the business of sale of Computer Hardwares service provides of Bar Code Stickers, Equipments and Printers. For the Asst. Year 2018-19, assessee filed its Return of Income on 30-10-2018 claiming a loss of Rs. 33,88,77,148. The return was processed u/s. 143(1) and then taken for scrutiny assessment. When notice u/s. 142(1) dated 29-03-2019 and others were issued, the assessee failed to response to the notices but ultimately on 01-02-2021 a letter was received from Insolvency Resolution Professional (IRP). Shri Vikash Gautamohand Jain that National Company Law Tribunal (hereinafter referred as NCLT) vide its order dated 29-05­2019 passed an order for commencement of Corporate Insolvency Resolution Process (CIRP), in CP (IB) No. 602/9/NCLT/AHM/2018. As per Section 14(1) of Insolvency and Bankruptcy Code, 2016 (IBC) the order of moratorium shall have effect from the date of such order till the completion of CIRP. Therefore IRP requested the A.O. not to proceed with the assessment further. However the Assessing Officer sent one more notice U/s. 142(1) notice to the IRP and completed the assessment that the assessee claimed expenditure to the tune of Rs. 59,20,48,980/- as follows:

2.1. Since neither the assessee nor the IRP filed any details called for relating to the above expenditure, the assessing officer made adhoc disallowance at 25% of the above expenses namely Rs.14,80,12,245/- is being disallowed as not extended for the purpose of business activity and determined the loss as Rs.19,08,64,903/-.

3. On perusal of the above assessment order, the Ld. PCIT found that the expenses remained unexplained by the assessee. Thus the Ld. A.O. ought to have disallowed the whole of such expenses while finalizing the assessment order. Thus there is short of addition of Rs.44,40,36,735/- which is prejudicial to the interest of Revenue by passing erroneous order. Therefore a show cause notice dated 14-03-2023 was issued to the assessee.

3.1. The assessee replied that the resolution plan was submitted and approved by NCLT, Ahmedabad vide order dated 20-12-2022 (effective date) and therefore the assessee company was taken over by new management. Further during the assessment proceedings, the Assessing Officer was intimated about the CIRP proceedings with effect from 29-05-2019 and as per Section 14(1) of IBC Code the order of moratorium shall have effect from the date of such order till completion of CIRP. Thus no assessment order ought to have been passed in this case. Therefore the assessment order dated 10-03-2023 passed during the moratorium period is bad in law and required to be set-aside. Therefore the question of revision proceedings against such assessment order is also invalid in law.

4. The above submission was considered by Ld. PCIT, however relying upon Hon’ble Madras High Court judgment in the case of Dishnet Wireless Limited Vs. ACIT in (W.P. No. 34668 of 2018) held that Corporate Insolvency Resolution Plan sanctioned and approved cannot impinge on the rights of the Income Tax Department to pass any fresh order, thereby set-aside the assessment order with a direction to the Assessing Officer to make proper enquiry of the claim of total expenses and pass fresh order and the A.O. should satisfy that decision of NCLT is not barring the A.O. to take further action.

5. Aggrieved against the same, the assessee is in appeal before us raising the following Grounds of Appeal:

1. Ld. Pr. CIT Ahmedabad-1 erred in law and on facts revising an assessment order which is neither erroneous nor prejudicial to the interest of revenue.

2. Ld. Pr. CIT erred in law and on facts holding order erroneous and prejudicial to the interest of revenue on the alleged ground that expenses of Rs. 44,40,36, 735/- out of total expenses claimed of Rs. 59, 20, 48, 980/-was not disallowed by AO in absence of any details with supportive evidence submitted by the appellant.

3. Ld. Pr. CIT erred in law and on facts in revising the order on the alleged ground that AO made ad hoc disallowance of 25% of total expenses whereas he ought to have disallowed whole of expenses which remained unexplained by the appellant.

4. Ld. Pr. CIT erred in law and on facts initiating revisionary proceedings of an order subsequent to final resolution plan approved by NCLT vide order dated 20.12.2022 under IBC code 2016 already brought to the notice of revenue.

5. Ld. Pr. CIT erred in law and on facts revising an assessment order that ought not to have been passed during the moratorium period when the appellant company was under Corporate Insolvency Resolution Process pursuant to NCLT order.

6. Ld. Pr. CIT erred in law and on facts in not appreciating that all the liabilities of Corporate debtor gets extinguished after payment of the dues to the creditors as per resolution plan and other claims including Government/Statutory Authority shall stand extinguished so also contingent/unconfirmed dues after approval of the plan.

7. Ld. Pr. CIT erred in law and on facts not taking into consideration Apex court judgment holding that all claims against Corporate Debtor, except those provided in the resolution plan stand extinguished from the date of the NCLT order.

6. Ld. Sr. Counsel Shri S.N. Soparkar appearing for the assessee submitted that this issue is no more res integra by the judgment of Hon’ble Supreme Court in the case of Ghanashyam Mishra & Sons Pvt. Ltd.-Vs-Edelweiss Asset Reconstruction Company Limited & Ors reported in (2021) 9 SCC 657 wherein the question before the Supreme Court was as to whether any creditor including the Central Government, State Government or any local authority is bound by the resolution plan once it is approved by the adjudicating authority under Sub-Section (1) of Section 31 of IBC? The further question before the Supreme Court was as to whether after approval of the resolution plan by the adjudicating authority, a creditor including the Central Government, State Government or any local authority is entitled to initiate any proceeding for recovery of dues from the corporate debtor, which are not part of the resolution plan approved by the adjudicating authority?

6.1 After elaborate discussion, Hon’ble Supreme Court held that any debt in respect of payment of dues arising under any law for the time being in force including the ones owed to the Central Government or any State Government, or any local authority which does not form a part of the approved resolution plan shall stand extinguished. Clarifying further it has been held that once a resolution plan is approved by the adjudicating authority, all such claims/dues owed to the State/Central Government or any local authority including the tax authorities who were not part of the resolution plan shall stand extinguished.

7. Further as per the “Resolution Plan” approved by NCLT relating to direct taxes is as follows:

“9. All dues under the provisions of Income Tax Act, 1961(“IT Act”), including taxes, duty, penalties, interest, fines, cesses, unpaid TDS/TCS, whether admitted or not, due or contingent, whether part of above claim of Income-tax authorities or not, whether part of Tax due diligence finding or not, asserted or unasserted, crystallized or not crystallized, known or unknown, secured or unsecured, disputed or undisputed, present or future, in relation to any period prior to the Effective Date pursuant to this Resolution Plan, shall stand extinguished by virtue of the order of the NCLT approving this Resolution Plan and the Corporate Debtor and Resolution Applicant shall not be liable to pay any amount against such demand. All assessments/appellate or other proceedings pending in case of the Corporate Debtor, on the date of the order of NCLT relating to the period prior to that date, shall stand terminated and all consequential liabilities, if any, shall be deleted and shall be considered to be not payable by the Corporate Debtor by virtue of the order of the NCLT. All notices proposing to initiate any proceedings against the Corporate Debtor in relation to the period prior to the date of the NCLT order and pending on that date shall be considered deleted and shall not be proceeded against. Post the order of the NCLT, no re-assessment/revision or any other proceedings under the provisions of the IT Act shall be initiated on the Corporate Debtor or Resolution Applicant in relation to period prior to the Effective Date and any consequential demand shall be considered non-existing and as not payable by the Corporate Debtor. Any proceedings which were kept in abeyance in view of insolvency process or otherwise shall not be revived post the order of the NCLT.”

8. Though the Assessing Officer was informed by the IRP about the CIRP and Resolution Plan during the assessment proceedings, the Assessing Officer failed to make any claim before the adjudicating authority before NCLT or IRP by filing appropriate claim from the Income Tax Department. Further the Jurisdictional High Court in the case of Jyoti Power Corporation Private Limited (Now Known as Ausil Corporation Private Limited) Vs. PCIT in Special Civil Application No. 4057 of 2022 held that after approval of resolution plan, all liabilities of all stakeholders including that of Government/Statutory Authority shall stand extinguished. Hence the Revision notice issued U/s. 263 of the Act was quashed. Thus Ld. Senior Counsel pleaded the facts in the present case is also identical with that of the Jurisdictional High Court in the case of Jyoti Power Corporation Private Limited, hence the impugned revision order is liable to be quashed. The case law relied by PCIT of Hon’ble Madras High Court is clearly distinguishable with the facts of the present case.

9. Per contra, Ld. CIT-DR Dr. Darsi Suman Ratnam appearing for the Revenue supported the order passed by PCIT and requested to uphold the same.

10. We have given our thoughtful consideration and perused the materials available on record. It is undisputed fact that during the course of assessment proceedings, the Insolvency Resolution Professional vide its letter dated 01-02-2021 informed the assessing officer about the order dated 29-05-2019 passed by NCLT for commencement of Corporate Insolvency Resolution Process. However the assessing officer has not made any claim on the part of the Income Tax Department before the NCLT. However, State Government VAT Department and GST Department made the respective claim before NCLT. Thus NCLT vide its order dated 20­12-2022 passed the following order:

VIII. As regards to various reliefs and concessions which are being sought, we hereby grant the following reliefs and concessions only as against reliefs and concessions claimed by the resolution applicant:

a) After the payment of the dues to the creditors, as per the resolution plan, all the liabilities of the said stakeholders prior to CIRP against the corporate debtor shall stand permanently extinguished and other claims including Government/Statutory Authority, whether lodged during CIRP or not, shall stand extinguished after the approval of the resolution plan. We further hold that contingent/unconfirmed dues shall also stand extinguished:

b) From the date of this order, all claims against the corporate debtor, except those provided in the resolution plan of the Corporate Debtor stand extinguished.

c) From the date of this order, all encumbrances on the assets of the Corporate Debtor before the plan shall stand permanently extinguished.

10.1. The Hon’ble Supreme Court in the case of Ghanashyam Mishra & Sons Pvt. Ltd. (cited supra) held as follows:

“95. In the result, we answer the questions framed by us as under:

(i) 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;

(ii) x x x x

(iii) 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.”

11. Further the Jurisdictional High Court in the case of Jyoti Power Corporation Private Limited (Now Known as Ausil Corporation Private Limited) (cited supra) held that invocation of Revision proceedings after the Resolution Plan is against the Provisions of Law and quashed the Revision proceedings by observing as follows:

“5.1. Learned advocate Mr. B. S. Soparkar for the petitioner submitted that in view of the settled legal position and in view of resolution plan being approved by order dated 14.10.2021, all past dues of the Income Tax Department got extinguished and therefore, the notice issued under Section 263 of the Act for revising the assessment under Section 263 of the Act for Assessment Year 2017-18 deserves to be quashed and set aside.

5.2. In support of his submissions, he relied upon decision of Hon’ble Supreme Court in the case of Ghanashyam Mishra & Sons Private Limited versus Edelweiss Asset Reconstruction Company Limited & Ors reported in (2021) 9 SCC 657.

6. On the other hand, opposing the petition, learned Senior Standing counsel Mr.Karan Sanghani submitted that the notice issued under Section 263 of the Act was issued by the respondent for revising the demand for the Assessement Year 2017-18. It was submitted that in view of clear statutory provision, the powers of the respondent cannot be curtailed when procedure in accordance with law has been followed. He further submitted that the decision relied upon by the petitioner in case of Ghanashyam Mishra (Supra) is with regard to extinguishment of the claim after approval of resolution plan by NCLT as in the present case, the proceedings under Section 263 of the Act has been initiated and this being not the recovery proceedings, the decision would not be applicable.

7. Considering the submissions made on behalf of both the sides and upon perusal of the record, it is noticed that pursuant to insolvency proceedings initiated under the Code, a resolution plan dated14.10.2021 was approved by the Tribunal under Section 30(6) of the Code. It is also on record that the claim which was lodged by the Deputy Commissioner of Income Tax, Rajkot was verified and admitted in the proceedings before NCLT after consideration of the claim filed by the Additional Commissioner of Income Tax, Rajkot. In the decision of Hon’ble Supreme Court in case of Ghanashyam Mishra (Supra) it is held as under:

“10.2. NCLT found, that by email dated 6.1.2018, EARC had submitted its claim in Form ‘C’ for an amount of Rs.648,89,62,,395/-. In response to the said email, RP sought a clarification, as to whether the corporate guarantee had been invoked by the applicant. RP had not received any response till 21.2.2018 from EARC. Despite repeated requests made by RP, EARC did not respond to the query made by RP. From the record placed before NCLT, it was clear, that EARC had not invoked the corporate guarantee. NCLT therefore posed a question to itself, as to whether an uninvoked corporate guarantee could be considered as matured claim of the applicant. NCLT found, that once the moratorium was applied under Section 14 of I&B Code, EARC was prevented from invoking the corporate guarantee. NCLT further found, that the OMML’s guarantee had not been invoked by EARC till the date of completion of CIRP process and once the moratorium was imposed, it could not invoke the corporate guarantee. NCLT therefore found, that there is no illegality or irregularity in not admitting the claim of EARC.”

8. Thus, in view of above clear provisions of law no person would be entitled to initiate or continue any proceedings in respect of any claim for any dues relating to the period prior to approval of resolution plan. In view of approval of resolution plan, all liabilities of all stakeholders including that of Government/ Statutory Authority shall stand extinguished after approval of the resolution plan. We therefore, deem it appropriate to quash and set aside the notice dated 13.01.2022 issued under Section 263 of the Act. The petition is accordingly allowed. Rule is made absolute. No orders as to cost.”

12. Respectfully following the above Jurisdictional High Court judgment, we have no hesitation in quashing the Revision order passed by PCIT in the present case.

13. In the result, the appeal filed by the Assessee is allowed.

Order pronounced in the open court on 04-12-2024