Mr. Akhileshwar Sharma
Sr. Standing Counsel
Akhileshwar Sharma, Advocate is Sr. Standing Counsel representing the Income Tax Department before the Bombay High Court and the National Company Law Tribunal Mumbai. The author was earlier a member of Indian Trade Service, (1986) and worked in drafting Exim Policy 1997–2002. He resigned in 1998 to pursue separate career. In addition to holding a degree in Law, the author is MA in Political Science and M.Phil in International Studies, both from JNU New Delhi.
Moratorium under Insolvency and Bankruptcy Code, 2016 and Initiation/ Continuation of Assessment Proceedings under the Income-tax Act 1961
The Resolution Professional, appointed by the order of the National Company Law Tribunal routinely writes to the Assessing Officer of the Corporate Debtor attaching a copy of the order passed by the Tribunal admitting the application for initiation of corporate insolvency resolution process in respect of the Corporate Debtor. S/ he also draws attention to a reference to sec 14 of the Insolvency and Bankruptcy Code 2016 in the Order which provides for moratorium for prohibiting any proceedings against the Corporate Debtor. There seems to be some lack of clarity as to whether assessment proceedings under the Income-tax Act 1961 could be initiated/ continued against the Corporate Debtor in the face of declaration of moratorium under Section 14 of the Insolvency and Bankruptcy Code 2016. In this article, the term ‘the corporate debtor’ and ‘the assessee’ are used to mean one and the same entity.
The Insolvency and Bankruptcy Code 2016 (Act No. 31 of 2016) was enacted on 28th May 2016. The provisions of the Insolvency and Bankruptcy Code 2016 overrides other law. Section 238 of the Insolvency and Bankruptcy Code 2016 reads as under:
238. Provisions of this Code to Override Other Laws:
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 possible future conflict, the legislature in its wisdom has also amended the Section 178 ‘Company in Liquidation’ of the Income-tax Act 1961. The Sub-section 6 of the Section 178 of the Income-tax Act 1961 subsequent to amendment [Inserted by the Insolvency and Bankruptcy Code 2016, w.e.f. 01.11.2016] reads as under:
178(6) 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 [Emphasis added]
In view of Section 238 of the Insolvency and Bankruptcy Code 2016 read with Sub-section 6 of Section 178 of the Income-tax Act, 1961, the provisions of the Insolvency and Bankruptcy Code 2016 shall override the provisions of the Income-tax Act 1961.
As per Section 3 (8) of the Insolvency and Bankruptcy Code 2016, ‘corporate debtor’ means a corporate person who owes a debt to any person. The Code provides for initiation of what is called corporate insolvency resolution process (CIRP in short) in respect of such corporate debtor in case of any default committed by it. The Section 6 of the Insolvency and Bankruptcy Code 2016 provides as under:
178. Persons who may initiate corporate insolvency resolution process. – Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under this Chapter. [Chapter II Corporate Insolvency Resolution Process] Section 13 of the Insolvency and Bankruptcy Code 2016 requires that after admission of the application for initiation of CIRP, the Adjudicating Authority shall, by an order, declare a moratorium for the purposes referred to in Section 14 of the Insolvency and Bankruptcy Code 2016. The Central Government has constituted various benches of the National Company Law Tribunal who, under the Code, are the adjudicating authority. The said Section 14 reads 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.
(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.
(3) The provisions of Sub-section (1) shall not apply to:
a. such transaction as may be notified by the Central Government in consultation with any financial regulator;
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.
The order passed by the Adjudicating Authority (National Company Law Tribunal) admitting application for initiation of CIRP declare moratorium and usually reproduce Section 14 of the Code. A resolution professional (liquidator) is simultaneously appointed to conduct the CIRP under the said Order. The resolution professional so appointed routinely writes to the Assessing Officer of the corporate debtor attaching a copy of the order passed by the Tribunal admitting the application for initiation of CIRP in respect of the Corporate Debtor. S/he also draws attention of the Assessing Officer to a reference to Section 14 of the Insolvency and Bankruptcy Code 2016 in the Order which provides for moratorium for prohibiting any proceedings against the Corporate Debtor. There seems to be some lack of clarity as to whether the Assessing Officer in such circumstances is competent to initiate/ continue the assessment proceedings against the corporate debtor.
Section 14 of the Code is widely worded. The true meaning of the term ‘proceedings’ as used in Section 14 (1)(a), ‘the institution of suits or continuation of pending suits or proceedings against the corporate debtor’ is to be ascertained to arrive at any conclusion as to what action under the Income-tax Act 1961 are permissible/ prohibited subsequent to the operation of Section 14 of the Code.
Neither Section 3 Definitions in the Code nor Section 2 Definitions in the Income-tax Act 1961 contain any definition of ‘proceedings’. The term ‘proceeding’ is very wide and is ordinarily used in relation to any action for enforcement of right by an aggrieved party.
There are penal consequences under various sections of the Income-tax Act, 1961. In terms of Section 139 of the Income-tax Act, 1961 every person shall, on or before the due date, furnish a return of his income in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed. Section 234F provides Fee for default in furnishing return within the time prescribed. The corporate debtor, at no stage, is not exempted from filing return of income. A moratorium under Section 14 of the Insolvency and Bankruptcy Code 2016 will not prohibit the Assessing Officer and/ or no leave of the Tribunal is required in initiating action under Section 234F of the Act against the Corporate Debtor for failure to file return of income. There may be similar other instances where moratorium under Section 14 will not prohibit the Assessing Officer to initiate or continue proceedings.
The assessment proceedings under the Income-tax Act 1961 is ordinarily initiated at the behest of an assessee upon filing of return of income by an assessee. At the time of commencement of proceedings, the Assessing Officer is not aware that as to whether on completion of assessment, what will accrue would be a demand or no demand or refund of excess tax paid.
Section 140A of the Income-tax Act 1961 ‘Self-assessment’ casts as obligation upon the Assessee to compute and pay its tax liability. The return of income is computation of income and tax liability by the assessee and a record of payment of tax and claim of refund if any. The assessment proceeding is to verify the correctness of computation made by the assessee, of its total income and tax liability.
The return of income as computed and filed by the assessee may contain refund on account of excess tax paid. However, if the assessment proceeding under the Income-tax Act 1961 is prohibited by the operation of Section 14 of the Code, then it will lead to absurd consequences. The assessee will either not get the refund of excess tax paid on the ground that the assessment proceedings are prohibited and therefore, the correctness of refund claimed by the assessee could not be verified by the Assessing Officer, or the refund may be required to paid to the assessee even without assessment proceedings. This certainly cannot be intended by Section 14 of the Code. A refund cannot be made to the assessee without first completing the assessment proceedings.
The object of moratorium under Section 14 of the Code is to save the corporate debtor from protracted and/ or expensive litigation which would further deteriorate the financial health of the corporate debtor. The initiation/ continuation of assessment proceedings under the Income-tax Act 1961, which may result in accrual of refund to the assesse, will promote the object behind Section 14 of the Code. In view of above, the assessment proceedings under the Income-tax Act 1961 will not be prohibited against the assessee/ corporate debtor despite the operation of moratorium under Section 14 of the Code.
There may be a demand upon the assessee/ corporate debtor pursuant to finalization of assessment proceedings. The Assessing Officer is empowered under the Income-tax Act 1961 to initiate recovery proceedings. However, no recovery proceedings may be initiated/ continued against the assessee/ corporate debtor till the moratorium under Section 14 Code continues.
It is may be noted that Section 14 of the Insolvency and Bankruptcy Code 2016 is in pari materia to Section to 446 of the Companies Act 1956. The Sub-section 1 of Section 446 of the Companies Act 1956 is reproduced below:
446. Suits Stayed on Winding Up Order
(1) When a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of the winding up order, shall be proceeded with, against the company, except by leave of the Court (subsequently substituted by ‘Tribunal’) and subject to such terms as the Court (subsequently substituted by ‘Tribunal’) may impose.
In the case of S.V. Kandeakar vs. V.M. Deshpande & Anr. , [(1972) 1 SCC 438) a Constitution Bench of the Supreme Court, while considering the provisions of Section 446 of the Companies Act, vis-a-vis, the provisions of Section 148 of the Income-tax Act 1961 pertaining to initiation of reassessment proceedings against a company under liquidation, held that, obtaining of leave from Liquidating Court under Section 446 of the Companies Act is not a condition precedent for initiating reassessment proceedings against a Company under liquidation. While elaborately dealing with the provisions of the Income-tax Act 1961 and the terms used in Section 446(1) and (2) of the Companies Act, like, ‘other legal proceedings’, the Supreme Court has observed as follows:
17. Turning now to the Income-tax Act it is noteworthy that Section 148 occurs in Chapter XIV which beginning with Section prescribes the procedure for assessment and Section 147 provides for assessment or re-assessment of income escaping assessment. This section empowers the Income-tax Officer concerned subject to the provisions of Section to 153 to assess or re-assess escaped income. While holding these assessment proceedings the Income-tax Officer does not, in our view, perform the functions of a Court as contemplated by Section 446 (2) of the Act. Looking at the legislative history and the scheme of the Indian Companies Act, particularly the language of S. 446 read as a whole, it appears to us that the expression “other legal proceeding” in Sub-section (1) and the expression “legal proceeding” in Sub-section (2) convey the same sense and the proceedings in both the Sub-sections must be such as can appropriately be dealt with by the winding up court. The Income-Tax Act is, in our opinion, a complete code and it is particularly so with respect to the assessment and re-assessment of income-tax with which alone we are concerned in the present case. The fact that after the amount of tax payable by an assessee has been determined or quantified, its realisation from a company in liquidation is governed by the (Companies) Act because the income-tax payable also being a debt has to rank pari passu with other debts due from the company does not mean that the assessment proceedings for computing the amount of tax must be held to be such other legal proceedings as can only be started or continued with the leave of the liquidation court under Section 446 of the Act.
18. The argument that the proceedings for assessment or re-assessment of a company which is being wound up can only be started or continued with the leave of the liquidation Court is also, on the scheme both of the Act and of the Income-tax Act, unacceptable.
In view of the above, it may be reasonably concluded that during the operation moratorium under Section 14 of the Insolvency and Bankruptcy Code 2016:
a. The Assessing Officer is not prohibited to initiate/ continue the assessment proceedings;
b. Leave of the Tribunal is not required to initiate/ continue the assessment proceedings;
c. On finalization of assessment proceedings, refund if any, shall be paid to the assesse/ Corporate Debtor;
d. On finalization of assessment proceedings, demand if any shall not be enforced.
NOTE: The article contains the personal views of the author. Comments are invited at [email protected]
Source- Taxalogue 3- April to June 2020