NFAC Can't Sustain Invocation Of Penalty Proceedings Based On Their Own Failure To Lodge Claim Under IBC Within Time: Delhi High Court

The Delhi High Court has held that the National Faceless Assessment Centre (NFAC) cannot sustain invocation of penalty proceedings based on their own failure to lodge a claim under the Insolvency and Bankruptcy Code (IBC) within time.

The bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav has observed that, as per Section 144B of the Income Tax Act, proceedings for assessment, reassessment, or re-computation are initiated in terms of the faceless procedure of assessment as prescribed therein. Any effort to assess, reassess, or re-compute could tend to lean towards a re-computation of liabilities that otherwise stand frozen by virtue of the resolution plan having been approved.

The petitioner/assessee has challenged the notices issued under Section 144B of the Income Tax Act, 1961, pertaining to Assessment Year 2021–22, as well as the consequential notices issued under Sections 143(2) and 142(1) of the Income Tax Act.

The challenge was essentially mounted on the basis of Section 31 of the Insolvency and Bankruptcy Code, 2016, with the petitioner contending that once the resolution plan came to be duly accepted, the bar created in terms of Section 31 of the IBC would apply. The respondent or department would be deprived of the jurisdiction or authority to reopen or assess income for any period prior to the approval of the resolution plan.

The petitioner contended that the Resolution Professional7 appointed pursuant to the commencement of CIRP on November 23, 2020, informed the Income Tax authorities of the pendency of proceedings before the NCLT. This was followed by a communication dated January 28, 2021, in which the RP is stated to have conveyed a request to the Income Tax authorities to lodge their claims in accordance with the provisions of the IBC.

The petitioner, in terms of the provisions of the Act, furnished its Return of Income for AY 2021–22 on March 10, 2022, declaring a net loss of INR 9,47,64,300. The CIRP proceedings in the meantime culminated in the approval of the resolution plan being approved by the NCLT and accepting a plan submitted by M/s Sarthi Constructions, which had been accepted by the Committee of Creditors. The department chose to commence proceedings referable to Section 144B.

The assessee argued that the resolution plan, once approved, would bring the curtains down on any claims pertaining to a period prior to the approval of the RP and is no longer res integra.

The court held that an action or recourse would clearly be barred by Section 31 of the IBC, which binds all creditors of the corporate debtor, including the Central and State Governments or any other local authority to whom a debt is owed. A Section 144B action is what the Supreme Court frowned upon and chose to describe as the “hydra head," thus being contrary to the clean slate principle that the IBC advocates.

“We find ourselves unable to sustain that line of reasoning, bearing in mind the undisputable legal position which we obtain in light of the scheme of the IBC and which fails to incorporate any distinction between voluntary and involuntary corporate insolvency. As we read the provisions of the Act, the IBC does not erect different levels of protection or insulation dependent upon whether corporate insolvency has been initiated voluntarily or on the basis of a petition referable to Section 7 of the IBC,” the court said.

Counsel For Petitioner: Rohit Tiwari

Counsel For Respondent: Abhishek Maratha

Case Title: M Tech Developers Pvt. Ltd. Versus National Faceless Assessment Centre

Citation: 2024 LiveLaw (Del) 466

Case No.: W.P.(C) 15567/2022

Click Here To Read The Order