Invoices Deemed Bogus By Income Tax Department Cannot Justify Insolvency Proceedings Against Corporate Debtor: NCLAT Principal Bench

Brief Facts:

N.V. Aluminium Cast Pvt. Ltd. (Appellant), an Operational Creditor, filed an appeal against the order in the NCLAT passed by the NCLT Kolkata, which rejected the Section 9 Application filed by the Appellant. The NCLT in its order found that the invoices relied upon by the Appellant were considered bogus by the Income Tax (IT) Authority. The NCLT, based on the findings from an IT assessment order, held that the Appellant's claims were disputed and found fraudulent. The IT assessment report for the Assessment Year (AY) 2021-22 indicated that the Appellant engaged in bogus billing and that more than 67% of the sales made by the Operational Creditor to the Corporate Debtor were also fraudulent. The NCLT imposed a penalty of Rs. One Lakh on the Appellant under Section 65 of the IBC and held that the application was frivolous and filed with malicious intent.

The Appellant argued in the NCLAT that the NCLT's reliance on the IT assessment order for AY 2021-22 was misplaced because the invoices in question pertained to transactions from AY 2022-23. The Appellant contended that the authority erred in considering the earlier assessment order to reject the claim.

The APL Metals Ltd. (Respondent) countered that the IT assessment order for AY 2022-23, relevant to the disputed invoices, had also been passed on March 29, 2024 after hearing the Corporate Debtor's promoters. Therefore, the Respondent argued that the Appellant's claim regarding the improper reliance on the earlier assessment year was without merit, as the relevant assessment order similarly established the fraudulent nature of the transactions.

Observations by the NCLAT:

The NCLAT in its decision upheld the order of the NCLT, which rejected the Appellant's application filed under Section 9. The basis of the rejection was that the Income Tax Department had found the invoices submitted by the Appellant to be bogus. This finding by the Income Tax Department was critical to the Adjudicating Authority's decision to deny the initiation of insolvency proceedings against the Corporate Debtor.

The NCLAT noted that the Appellant argued that the NCLT should not have relied on the assessment for the financial year 2021-22, as it was not directly relevant to the matter at hand. However, the NCLAT held that this contention was no longer tenable in light of the assessment orders for the financial year 2022-23 which explicitly covered the invoices in question. These orders were passed after the Income Tax Authorities heard the promoters of the Corporate Debtor.

In reviewing these findings, the NCLAT agreed that there were no valid grounds to interfere with the rejection of the Section 9 application. The NCLAT reiterated that the invoices, having been declared fraudulent, could not serve as a basis for initiating insolvency proceedings. Consequently, the NCLAT upheld the NCLT's decision to dismiss the Appellant's plea.

However, the NCLAT noted that the rejection of the application under Section 9 does not bar the Appellant from pursuing other legal remedies that may be available.

Further, the NCLAT took issue with the imposition of costs by the NCLT. It held that the imposition of costs, as stated in paragraph 29 of the NCLT's order, was unwarranted in the present circumstances. The NCLAT, therefore, decided to delete the costs imposed.

Case Title: N.V. Aluminium Cast Pvt. Ltd. vs APL Metals Ltd

Case Number: Company Appeal (AT) (Insolvency) No. 568 of 2024

For Appellant : Ms. Kanishk Kejriwal and Ms. Soumya Dutta, Advocates

For Respondent : Mr. Rishav Banerjee, Mr. Patita Paban Bishwal and Ms. Suranjana Chatterjee, Advocates

Date of Judgment: 5 September, 2024

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