Introduction: The recent decision by the Income Tax Appellate Tribunal (ITAT) Delhi in the case of DCIT vs. Rapid Buildwell Ltd. has significant implications. The appeal, directed against the Commissioner of Income Tax (Appeals), relates to the Assessment Year 2010-11. The primary grounds of contention include the allowance of expenses and depreciation claimed by the assessee. Let’s delve into the details of the case.
Detailed Analysis: The assessee, engaged in property rental and maintenance, filed its return for AY 2010-11, declaring a substantial loss. However, the Assessing Officer (AO) later observed that unabsorbed depreciation had been incorrectly allowed. The AO reopened the case and, in 2016, reduced the loss to nil, disallowing both depreciation and business loss.
On appeal, the Commissioner of Income Tax (Appeals) overturned these disallowances, prompting the Revenue to approach the ITAT. The grounds of appeal mainly question the legitimacy of claimed expenses and depreciation, raising concerns about the commencement of the assessee’s business.
During the hearing, it came to light that the assessee had been admitted to Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code 2016. The ITAT took cognizance of the National Company Law Tribunal’s order granting moratorium against proceedings concerning the corporate debtor.
Conclusion: In light of the NCLT’s order and the ensuing moratorium, the ITAT, without delving into the merits of the case, dismissed the Revenue’s appeal. The decision underscores the impact of insolvency proceedings on tax matters and highlights the interplay between taxation and corporate insolvency.
It’s noteworthy that the Revenue retains the option to reinstitute the appeal post the completion of CIRP proceedings. This case serves as a reminder of the complexities arising at the intersection of tax laws and insolvency regulations.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal filed by the Revenue is directed against the order dated 16.08.2018 of the Ld. Commissioner of Income Tax (Appeals) -XXV, New Delhi (“CIT(A)”) pertaining to Assessment Year (“AY”) 2010-11.
2. The Revenue has taken the following grounds:-
“1. That on facts and in the circumstances of the case, the Ed. CITIA) has erred in allowing other expenses for Rs. 136,48,632/ claimed by the assessee and thus is unjust, arbitrary, and against the facts as the business of assessee has not commenced in the year under consideration, therefore, no expenses as claimed, is allowable to the assessee as per the Income Tax Act.
2. That on facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing depreciation for Rs. 3,28,61,126/- claimed by the assessee and thus is unjust, arbitrary, and against the facts as the business of assessee has not commenced in the year under consideration, therefore, no depreciation as claimed by the assessee, is allowable to the assessee as per the Income Tax Act.
3. That the Ld. CIT(A), while holding that business has commenced since 2005 failed to appreciate that why the impugned claims of other expenses and depreciation under the head PGBP have been made in the A.Y. 2010-11 for the first time and not earlier.
4. That under the facts and circumstances of the case the Ld. CIT(A) failed to appreciate that the other expenses and depreciation have been claimed for the first time in the A.Y. 2010-11 only to get setoff of losses so generated against the income from lease accruing from the subsequent Assessment Year(s) and the whole exercise is a colourable device to evade taxes.”
3. Briefly stated, the assessee is engaged, interalia in the business of renting and maintenance of immovable properties. The assessee filed its return of income for AY 2010-11 on 08.10.2010 which was subsequently revised on 21.01.2011, declaring loss of Rs. 4,65,09,758/-. The Ld. Assessing Officer (“AO”) accepted the returned loss and completed the assessment under section 143(3) of the Income Tax Act, 1961 (the “Act”) vide order dated 28.03.20 13. Subsequently, the Ld. AO noticed that unabsorbed depreciation amounting to Rs. 3,28,61,126/- has been wrongly allowed to the assessee. The case of the assessee was reopened by issuing notice under section 148 of the Act. The Ld. AO proceeded to pass the order under section 147 dated 26.12.20 16 reducing the loss to nil after disallowing the depreciation claimed amounting to Rs. 3,28,61,126/- and business loss of Rs. 1,36,48,632/- claimed by the assessee for the relevant AY on the ground that business of the assessee was not set up during FY 2009-10 and that the assets were not used by the assessee for the purpose of its business during AY 2010-11. Since the business of the assessee is held not to have been set up the expenses incurred shall also not be allowable and hence even the business loss shall be disallowed.
4. On appeal filed by the assessee, the Ld. CIT(A) deleted the aforementioned disallowances made by the Ld. AO.
5. Aggrieved, the Revenue is in appeal before the Tribunal and all the grounds relate thereto.
6. At the outset of the hearing, the Ld. AR submitted that the assessee company has been admitted to Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code 2016 (“Code”) vide the order of the Hon’ble National Company Law Tribunal (“NCLT”) on 11.2022 and Mr. Devrajan Raman has been appointed as the Interim Resolution Professional (“IRP”) and public announcement has been made in Financial Express (English) and Jansatta (Hindi) Newspaper on 23.11.2022 regarding the admission of the corporate debtor to the CIRP. It was therefore prayed that the matter may be adjourned sine-die pending the completion of the CIRP proceedings.
7. On perusal of records, we find that the NCLT vide its order dated 21.11.2022 in Company Petition No. IB-522/ND/2022 in the matter of M/s. Rapid Buildwell Ltd. has granted moratorium against the institution of proceedings against the corporate debtor by issuing direction at para 14 of its order as under:-
“14. As a consequence of the application being admitted, moratorium as envisaged under the provisions of Section 14(1), shall follow in relation to the corporate debtor, prohibiting as per proviso (a) to (d) of the Code. However, during the pendency of the moratorium period, terms of Section 14(2) to 14(4) of the Code shall come in force.”
8. Section 14 of the Code states as under:-
“14. Moratorium. –
(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely: –
(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;
(b) transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest therein,
(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);
(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor. [Explanation.-For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, a licence, permit, registration, quota, concession, clearance or a similar grant or right given by the Central Government, State Government, local authority. sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license or a similar grant or right during moratorium period;
(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.
(2A) Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances 1 Ins. as may be specified.]
(3) The provisions of sub-section (1) shall not apply to
(a) such transactions, agreements or other arrangement as may be notified by the Central Government in consultation with any financial sector regulator or any other authority:]
(b) a surety in a contract of guarantee to a corporate debtor.
(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:
Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be”
9. Pursuant to the aforementioned directions of the NCLT, we dismiss the appeal of the Revenue without going into the merits of the case.
10. The Revenue shall be free to institute the appeal after the completion of the CIRP proceedings, if so advised, as per the relevant provisions of the Act, for which the Ld. Sr. DR had no objection.
11. In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 8th November, 2023.