The Government by the IBC amendment Act 2020 has inserted a new Section 32 A in the I&B Code to provide for immunity to the Corporate Debtor (Company) from offences committed in the past (Prior to the date of the Resolution Order). It has also been clarified that the provisions of the I&B Code will have an overriding effect on all other Acts. Therefore, the Corporate Debtor and its new management, subject to certain conditions, gets immunity from all offences committed in the past by the Corporate Debtor and or by its old directors/managers/officers in their capacity as representative of the Corporate Debtor. The important issue then, that arises for consideration is, do old directors of the Corporate Debtor also enjoy this immunity? The question being asked is, if the Corporate Debtor can’t be prosecuted, can the directors (Old) be prosecuted for the offence of the company without prosecuting the Company (Corporate Debtor)? To examine this question the provisions of Section 32A of the I&B Code which grants immunity needs to be looked into.
Section 32 A, Liability for prior offences etc.
32A. (1) Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not—
(a) a promoter or in the management or control of the corporate debtor or a related party of such a person; or
(b) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court:
Provided that if a prosecution had been instituted during the corporate insolvency resolution process against such corporate debtor, it shall stand discharged from the date of approval of the resolution plan subject to requirements of this sub-section having been fulfilled
Provided further that every person who was a “designated partner” as defined in clause (j) of section 2 of the Limited Liability Partnership Act, 2008, or an “officer who is in default”, as defined in clause (60) of section 2 of the Companies Act, 2013, or was in any manner in charge of, or responsible to the corporate debtor for the conduct of its business or associated with the corporate debtor in any manner and who was directly or indirectly involved in the commission of such offence as per the report submitted or complaint filed by the investigating authority, shall continue to be liable to be prosecuted and punished for such an offence committed by the corporate debtor notwithstanding that the corporate debtor’s liability has ceased under this sub-section.
(2) No action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the corporate insolvency resolution process of the corporate debtor, where such property is covered under a resolution plan approved by the Adjudicating Authority under section 31, which results in the change in control of the corporate debtor to a person, or sale of liquidation assets under the provisions of Chapter III of Part II of this Code to a person, who was not—
(i) a promoter or in the management or control of the corporate debtor or a related party of such a person; or
(ii) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court.
For the purposes of this sub-section, it is hereby clarified that,—
(i) an action against the property of the corporate debtor in relation to an offence shall include the attachment, seizure, retention or confiscation of such property under such law as may be applicable to the corporate debtor;
(ii) nothing in this sub-section shall be construed to bar an action against the property of any person, other than the corporate debtor or a person who has acquired such property through corporate insolvency resolution process or liquidation process under this Code and fulfils the requirements specified in this section, against whom such an action may be taken under such law as may be applicable.
(3) Subject to the provisions contained in sub-sections (1) and (2), and notwithstanding the immunity given in this section, the corporate debtor and any person who may be required to provide assistance under such law as may be applicable to such corporate debtor or person, shall extend all assistance and co-operation to any authority investigating an offence committed prior to the commencement of the corporate insolvency resolution process
A plain reading of Section 32A reproduced above, makes it clear that its intended objectives are twofold: (i) the corporate debtor / its assets are ring fenced from any liability arising out of an offence committed prior to or during Corporate Insolvency Resolution Process (CIRP), (ii) no protection is afforded to the persons in default who were associated with the corporate debtor and involved in the commission of the offence.
The Hon’ble Supreme Court while deciding the constitutional validity of Section 32 A in the case of Manish Kumar vs. Union of India also concurred with this view and interpreted the newly inserted Section 32 A as under,
“ Thus, the combined reading of the various limbs of sub-Section (1) would show that while, on the one hand, the corporate debtor is freed from the liability for any offence committed before the commencement of the CIRP, the statutory immunity from the consequences of the commission of the offence by the corporate debtor is not available and the criminal liability will continue to haunt the persons, who were in in-charge of the assets of the corporate debtor, or who were responsible for the conduct of its business or those who were associated with the corporate debtor in any manner, and who were directly or indirectly involved in the commission of the offence, and they will continue to be liable.”
Therefore, there is no scope of any doubt that the old directors and other associated persons of the Corporate Debtor will have no immunity from proceedings already going on or any other proceeding which may be started in future.
Can the directors of a company be prosecuted alone for the offence of the company without prosecuting the company?
Of late doubts are being raised in certain quarters regarding whether, the directors of a company can be prosecuted for any violation under the Income Tax Act, without prosecuting the company itself. In other words, can action be initiated against the directors alone for any default committed by the company and or its directors? Is it necessary that in order to prosecute the directors for any default of the company, it is imperative to implicate the company first? Hence, if the company gets immunity, impliedly, do the directors also get immunity ?
The above interpretation/argument is not new and has already been examined by higher judicial forums in the past. In the present context it is negated by Section 32 A of the I&B Code itself which as discussed above, expressly denies such immunity. As regards the general legal validity of such proceeding, the Ho’ble Supreme Court had the occasion to consider this issue in Anil Hada v. Indian Acrylic Limited [2000 (1) ALD (Cri) 25 SC; 2000 CLC 91 SC], and while interpreting sections 138 and 141 of the Negotiable Instruments Act, 1881, inter alia, held that when the company was the drawer of the cheque such company was the principal offender under section 138 thereof. The apex court further held that the remaining persons were made offenders by virtue of the legal fiction created by the Legislature as per the section. Expounding further, the apex court noted that the provisions did not contain a condition that prosecution of the company was sine qua non for prosecution of the other persons. The Apex court held, that a finding that the offence had been committed by the company was actually the sine qua non for convicting the other persons.
Identical view has been taken by the Supreme Court in Sheoratan Agarwal v. State of M.P. [AIR 1984 SC 1824] in respect of Essential Commodities Act & the Andhara Pradesh High Court in the case of Rama Bhushanam v. Registrar of Companies, A.P. [2002 CLC 508 (A.P.)]. In AP High Court case the Registrar of Companies filed prosecution against the directors without impleading the company which was already under liquidation. The Supreme Court in Anil Hada v. Indian Acrylic Limited [2000 (1) ALD (Cri) 25 SC; 2000 CLC 91 SC] also held that if a company was not prosecuted due to any legal snag or otherwise, the other prosecuted persons couldn’t, on that score alone, escape from penal liability created through the legal fiction envisaged in the section.
The provisions regarding the liability of the directors and other persons for offences committed by the company are enumerated under various Acts such as Industries (Development and Regulation) Act, Foreign Exchange Regulation Act; MRTP Act, Securities Contracts (Regulations) Act; Essential Commodities Act, Employees’ Provident Fund and Misc. Provisions Act, The Environment (Protection) Act, Minimum Wages Act; Payment of Gratuity Act, Apprentices Act, Central Excise and Salt Act, Customs Act, 1961, Negotiable Instruments Act etc. etc. and the pro-visions are somewhat identical in nature. Hence, law as laid down under other Acts by the Courts would be equally applicable to Income-tax Act, 1961.
In view of the express provision of Section 32 A of the I&B Code and the judicial authorities mentioned above, the argument that the directors can’t be prosecuted without prosecuting the company, is manifestly not sound legally. It is more so in the context of Section 32 A of the I&B Code which grants immunity to the company and therefore, this itself is a reasonable ground as held by the apex court, for proceeding against the director alone.
There is no immunity to the past directors or other persons associated directly or indirectly with the Corporate Debtor in relation to any offence committed by the Corporate Debtor in the past and they can be proceeded against without impleading the company.
Issues on Taxation of the Corporate Debtor:
a) Carry forward of unabsorbed depreciation and Business Loss.
One area of concern and confusion is relating to carry forward of business loss and un-absorbed depreciation of earlier years by the Corporate Debtor after the Resolution Order. There is no restriction on carry forward as long as the business is carried on. However, this is subjected to section 79 of the Income Tax Act, which provides that carry forward and set off shall be allowed only if there is continuity in the beneficial ownership of shares having 51% of the voting power. Thus section 79 of the Income Tax Act expressly prohibits carry forward of loss and depreciation by the Corporate Debtor after the takeover by a new successful bidder as the share holding undergoes complete change and there is no continuity of 51% of beneficial ownership. In order to overcome this and to allow the benefit of carry forward of losses as well as unabsorbed depreciation to the Corporate Debtor, Section 79 of the Income Tax Act, 1961 has been amended with effect from 1-4 2018 by adding a new proviso which is reproduced below.
“Provided also that nothing contained in this section shall apply to a company where a change in the shareholding takes place in a previous year pursuant to a resolution plan approved under the Insolvency and Banckruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner.”
A plain reading of the above proviso makes it clear that once the Resolution Order is passed by the NCLT, Section 79 will not be applicable on the Corporate Debtor. The only condition is that the jurisdictional Principal Commissioner of Income Tax (PCIT) is afforded an opportunity of being heard, understandably in the Corporate Insolvency Resolution Process (CRIP) proceeding.
The practice presently being followed by the NCLTs with regard to the direction regarding carry forward of business loss is not uniform or consistent.
In course of the CRIP the Resolution Professional invariably gives notice to the AO/PCIT to lodge claim if any, of the department as operational creditor. Unfortunately, most such notices remain non-complied. Some of the benches of the NCLT take this opportunity of being heard to the department as sufficient compliance under the amended second proviso of section 79 of the Income Tax Act and accordingly give clear direction in the Resolution Order to allow past losses of the Corporate Debtor to be carried forward. (Antanium Holdings Pte Ltd vs Sujana Universal Industries … on 17 May, 2021 NCLAT, Chennai, Company Appeal (AT) (CH) (Ins) No.07 of 2021)
However, in many other cases, the NCLT bench gives a general observation that losses of the past years shall be carried forward as per law and the Corporate Debtor may approach the jurisdictional PCIT who will pass necessary order under section 79 of the Income Tax Act to carry forward the losses. ( NCLAT, New Delhi Company Appeal (AT) (Insolvency) No. 467 of 2019 In the matter of : JSW Steel Limited ….Appellant vs. Ashok Kumar Gulla & Ors. ….Respondents )
The issue is which of the two approaches is correct? The legal question is, whether the PCIT as per the second proviso of the amended Section 79 of the Income Tax Act, is required in law, to pass a separate order under section 79 in each case for carry forward of past losses ? The amendment in section 79 only says, that he has to be given an opportunity of being heard. Does a right of being heard automatically grant the PCIT an inherent power to pass an order? Section 79 clearly says that it will not apply to companies where order under I&B Code has been passed by the NCLT. Besides, the order of the NCLT in any case is binding on the PCIT. Therefore, can the PCIT deny carry forward in his order if any, under section 79 ? The jury is still out on this issue and the Govt. need to issue clarification. A harmonious reading of the entire scheme and the Income Tax Act gives the impression that the Resolution Professional in course of CRIP has to give an opportunity to the Jurisdictional PCIT not only to lodge his claim as an operational creditor but also, separately respond to the issue of carry forward of loss under section 79 of the Income Tax Act. in view of the amendment in Section 79. If the PCIT in his response objects to carry forward of loss, the NCLT has to deal with the objection in the Resolution Order. If the PCIT chooses not to participate in the proceeding, then, there is no need to go back to the PCIT for order under section 79 and the losses would be routinely carried forward irrespective of whether the NCLT gives a specific direction in the Resolution Order or not. However, if the NCLT gives a direction to this effect, then the PCIT will have to be approached for an order under section 79 which, in the scheme of things, should be a formality as he (the PCIT) cannot deny the claim. Incidentally the provisions of Section 79 of the Income Tax Act, 1971 has been further amended by Finance Act 2019 to provide that the section will not only not apply to the Corporate Debtor but also to its subsidiary and the sunsidiaries of its subsidiary. This is effective from Asstt. Year 2020-21.
Keeping in mind that the amendment is recent and the CRIP procedures are in the process of getting settled, the Govt. may issues necessary advisory to the NCLT benches to deal with this issue in every order so that there is no confusion on this account.
Liability under Section 115JB-MAT:
As per the accounting practice prescribed under the Companies Act, once the liability towards creditors/loans ceases after the order by the NCLT, the Corporate Debtor will have to write back such liabilities in its books. Such write-back to the extent it is on revenue account and was claimed as deduction in earlier year, would be profit under section 41(1) of the Income Tax Act. Even if the company has no taxable income under the normal provisions of the Act, the write back would also be part of Book Profit and the Corporate Debtor would be liable to tax on it under section 115JB of the Income Tax Act. However, by way of relief to such companies (Corporate Debtors), the Govt. has further amended the provisions of Section 115JB and has provided that they will be eligible to deduct the aggregate of carried forward loss and unabsorbed depreciation in computing the Book Profit. The readers may recall that in case of other companies (Non CRIP) only the lower of the two, depreciation or loss is deductible. The relevant amendment brought about by Finance Act 2019, effective from Asstt. Year 2020-21 is reproduced below:
“(iih) the aggregate amount of unabsorbed depreciation and loss brought forward in case of a company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016.
Explanation.—For the purposes of this clause, the expression “Adjudicating Authority” shall have the meaning assigned to it in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) and the loss shall not include depreciation; or
(iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account in case of a company other than the company referred to in clause (iih).
If after deduction as prescribed above the Corporate Debtor still has Book Profit, it would be liable to tax under section 115JB of the Income Tax Act.
Some of the Benches of the NCLT are in the Resolution Order even granting specific exemption to the Corporate Debtor from the provisions of Section 41(1) & 115JB of the Income Tax Act in response to the prayer made to this effect in the Resolution Application. However, grant of such exemption does not appear to be in accordance with the legislative intent of the Government. The Govt. after considering everything has granted extra concession to the Corporate Debtors by amending Section 115JB. This by itself indicates that the Corporate Debtor has no exemption from section 115JB and if it has Book Profit as per section 115JB, it is liable to pay tax on it like any other company. The exemption being granted by the NCLT is neither envisaged in the scheme of the I&B Code nor appears to be the legislative intent. Such orders need to be carried to higher forum in appeal for clarity of law on the issue.
Liability under section 56(2)(x) & 50CA of the Income Tax Act:
Section 56(2)(x) of the Income Tax Act provides that where any person receives any property (including shares of a company) for a consideration less than its fair market value (computed as per Rule prescribed ), the fair value as exceeding the consideration would be taxable in the hands of the person receiving such property.
Similarly as per Section 50 CA of the IT Act, where the consideration received on transfer of unquoted shares, is less than its fair market value (computed as per Rule prescribed), such fair market value shall be deemed to be the full value of consideration received for the purpose of computing capital gains
These two provisions would have hit the new successful applicant as well as the old share holders of a company undergoing CRIP adversely. Therefore, the Central Board of Direct Taxes (CBDT) vide notification dated 29 June 2020 has replaced Rule 11UAC of the IT Rules. As per the revised Rule 11UAC, effective from fiscal year 2019-20, the provisions of Section 56(2)(x) of the IT Act would not apply to:
Thus not only has the Govt. removed the rigors of the said two clauses from operating on persons associated with a CRIP proceeding but has also conveyed that wherever relief was to be provided to the participants of CRIP under I&B Code, specific amendments have been brought under the relevant Acts. The absence of amendment therefore, indicates intent of not extending further relief. Such relief, in absence of amendment can’t be read into and grated by the NCLT.
From the discussion made above it is clear that there are many grey areas in the interplay of the I&B Code and the Income Tax Act, 1961. This is expected as the tax laws take time to get settled and the issues arising from the NCLT are relatively new. Many such grey areas would, in due course, be sorted out by clarificatory Circulars from the Govt. The Law of precedent is the bedrock of our judicial system. The rule of precedent is binding for the reason that there is a desire to secure uniformity and certainty in law. A clarificatory circular from the Govt. can save many per incuriam.