Issue Of Whether Input Tax Has Been Taken In Excess Can't Be Dealt With In Section 9 Proceedings Under IBC: NCLAT Delhi

Background Facts

Dhanraaj Agencies Pvt. Ltd. (“Respondent/Corporate Debtor”) engaged Zaara Enterprises Venture Pvt. Ltd. (“Appellant”) for interior work to be carried out in Maruti showroom of Corporate Debtor. Advance payments were made by Corporate Debtor to the Appellant for the work.

On 11.07.2022, the Corporate Debtor addressed an email to the Appellant, intimating that the work done by the latter was dissatisfactory and several works were completed by Corporate Debtor on its own cost. The Corporate Debtor also sought refund of the advance payment made to the Appellant.

Thereafter, the Appellant served a Demand Notice upon the Corporate Debtor seeking payment of alleged dues. When no payments were received, the Appellant filed a petition under Section 9 of IBC seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor.

On 01.01.2024, the NCLT while relying on the email dated 11.07.2022 concluded that a pre-existing dispute exists and rejected the Section 9 petition.

The Appellant filed an appeal before the NCLAT against the order dated 01.01.2024 contending that Corporate Debtor has raised a moonshine dispute. The Appellant argued that the entire work stood completed in 2021 and the email dated 11.07.2022 pointed out certain shortcomings in the work and nothing more. Further, the Corporate Debtor had also claimed the Input Tax Credit on the Goods & Services Tax (GST) invoice raised by the Appellant.

NCLAT Verdict

The Bench perused the email dated 11.07.2022 and observed that the email was sent to Appellant much prior to issuance of Demand Notice. In the email the Corporate Debtor had raised dispute regarding completion of work by Appellant and had also sought refund of excess amounts paid to the Appellant. Hence, the dispute raised by Corporate Debtor was not a moonshine defence.

“The submissions of the Learned Counsel for the Appellant that work was completed in March, 2021 and email sent was only moonshine defence cannot be accepted. Averments made in the email raises clear dispute which cannot be said to be moonshine. As per the submission of the Appellant that Corporate Debtor has taken input on the tax invoice sent by the Appellant. It is on record that advance payments were made by the Corporate Debtor and issues whether input tax taken is in excess is the issue which could not be gone into in proceeding under Section 9 of the Code. However, we observe that it shall be open for the Appellant to take such remedy as available under the contract if there are any dues.”

The Bench noted that as per the Appellant, the Corporate Debtor has claimed excess input tax credit on the GST tax invoice raised by the Appellant. It has been held that the issue whether input tax has been taken in excess by Corporate Debtor or not cannot be decided in proceedings under Section 9 of IBC.

The Bench dismissed the appeal while granting the Appellant the liberty to avail remedy as per the contract if there are any dues. The NCLT order rejecting the petition under Section 9 of IBC has been upheld.

Case title: Zaara Enterprises Venture Pvt. Ltd. v Dhanraaj Agencies Pvt. Ltd.

Case No.: Company Appeal (AT) (Insolvency) No. 356 of 2024

Counsel for Appellants: Mr. Ankur Singhal, Advocate

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