NCLAT Delhi: Claims Of Tax Assessment Orders Passed During Moratorium Under IBC Can Be Considered As Unsecured Operational Debt

Background Facts:

On 23.07.2017, Anil Ltd. (Corporate Debtor) entered the Corporate Insolvency Resolution Process ('CIRP') with the estimated date of closure of CIRP as 19.02.2018. Subsequently, due to no Resolution of the Corporate Debtor, a Liquidation Order was issued against the Corporate Debtor on 25.10.2018.

The Commissioner of the State Tax Department (Appellant) on 16.10.2018 issued an order to attach the immovable properties of the Corporate Debtor under the Gujarat VAT Act, 2003 (GVAT Act), for outstanding dues from the assessment years 2007 to 2017. The said attachment order has been challenged by the Liquidator contending it to be invalid due to the moratorium on the Corporate Debtor and asserted that the allegedly attached properties were part of the liquidation estate.

Claims were submitted by the Appellant for the assessment years 1994-95, 1995-96, 1996-97, 1997-98, and 2014-15, amounting to Rs. 545 crores which were admitted by the Liquidator. Additionally, claims totaling Rs. 455 crores were also filed for the assessment years 2015-16 and 2016-17 by the Appellant. On 17.07.2020, the Liquidator admitted all claims, summing up to Rs. 1001.72 crores.

In 2023, the Liquidator rejected the Appellant's claims for the assessment years 1994-98 and 2013-17, while admitting the claims for the assessment years 2007-12.

The Appellant argued that the CIRP concluded on 20.05.2018 (date of closure of liquidation process) and under Section 48 of the VAT Act, their dues should have the first charge over the Corporate Debtor's property, thus they should be considered Secured Creditors.

NCLT Ahmedabad via its Order dated 31.10.2023 rejected the Appellant's application to treat its claim as a Secured Creditor under the waterfall arrangement specified in Section 53 of IBC during liquidation. The same has been challenged by the Appellant.

NCLAT Verdict:

The NCLAT Delhi dismissed the appeal and held that claims of Tax Assessment Orders passed during the moratorium under Sections 14 & 33(5) of IBC can be considered Unsecured Operational Debt.

The Appellate Tribunal on the question of the Assessment order passed during the CIRP and Liquidation process decided that following the initiation of the liquidation process for the Corporate Debtor, the moratorium remains in effect under Section 33(5) of IBC, as confirmed by the Supreme Court of India in Sundaresi Bhatt vs. Central Board of Indirect Taxes and Customs.

It held that the assessment orders for the assessment years 2013-14 and 2014-15, issued by the Appellant on March 30, 2018, and July 31, 2018, respectively, were made after the moratorium was imposed on August 23, 2017, under Section 14 of IBC and violative of Section 14(b) of IBC.

It also noted that the assessment orders for the years 2015-16 and 2016-17, issued by the Appellant on November 29, 2019, and March 23, 2020, respectively, were made after the liquidation order for the Corporate Debtor was passed on 25.10.2018. The said assessment orders passed under the VAT Act are violative of Section 33(5) of IBC since once a liquidation order has been passed, no suit or legal proceeding can be instituted by or against the Corporate Debtor, subject to Section 52.

The Appellate Tribunal clarified that the Appellant during the moratorium period could determine the tax, interest, fine or any penalty which is due, however, the Appellant could not enforce his claims for recovery or levy of interest on the tax due during the period of Moratorium.

NCLAT also observed that the claims of Assessment Orders passed during the moratorium under Sections 14 & 33(5) of IBC have been rightly admitted as 'Unsecured' Operational Debt since the Appellant has itself acknowledged that for A.Y. 2014-15, 2015-16 & 2016-17, the assessments were carried on during moratorium.

NCLAT also observed that the CIRP period does not end as per the estimated date of closure of CIRP provided in Form A Public Announcement of the Corporate Debtor since the time period of 330 days prescribed under IBC is indicative and directory in nature and not mandatory. In fact, large number of cases, due is several reasons, are not able to be resolved within such stipulated period and if the contentions of the Appellant is accepted then the Resolution Process of the Corporate Debtor, in most of the cases, may not take off at all.

Thus, applying the above observations in the present case, NCLAT observed that Supreme Court's decision in State Tax Officer vs. Rainbow Papers Ltd. is not applicable to the Appellant's case as the Gujarat Sales Tax Act, 1969 does not have a provision similar to Section 48 of the Gujarat Value Added Tax Act, 2003. Thus, the tax claims cannot be treated as that of secured creditors.

The NCLAT observed that the Appellant issued attachment orders on the Corporate Debtor's property in violation of Section 14 of the IBC and regulations therein. However, despite Adjudicating Authority's Order 15.06.2023 directing the Appellant to lift the attachment within ten days of receiving notification from the Liquidator, the Appellant has continued the illegal and unlawful attachment on the Corporate Debtor's property, which is directly in contravention to the law.

In conclusion, NCLAT noted that the Liquidator's classification of remaining admissible outstanding dues as Unsecured debts is correct and observed that the appeal against NCLT Ahmedabad's Order dated has no merit.

Case Title: Commissioner of State Tax Department vs. Ramchandra Dallaram Chaudhary (Liquidator)

Case No.: Comp. App. (AT) (Ins) No. 34 of 2024 & I.A. No. 105, 106, 990 of 2024

Counsel for Appellant: Ms. Aastha Mehta, Advocate.

Counsel for Respondent: Mr. Ramji Srinivasan, Sr. Adv. with Mr. Atul Sharma, Ms. Namrata Saraogi, Mr. Shivanshu Kumar, Ms. Aditi Sharma, Mr. Vikram Choudhary, Advocates

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