IBC| Statutory Authority Can't Raise Fresh Claim Against Corporate Debtor After Approval Of Resolution Plan: Bombay High Court

A division bench of Justices Sunil Shukre and Anil Pansare of the Nagpur Bench of High Court observed that entertaining undecided claims after the Resolution Plan was submitted, would lead to uncertainty about the amount payable by the prospective Resolution Applicant who would've successfully taken over the business of the Corporate Debtor.

The court was hearing two petitions filed by Murli Industries, engaged in the business of manufacture and sale of cement, challenging notices issued by the Income Tax authorities on March 24 and 25 last year.

The court noted that one of the notices dated March 25, 2021, issued by the Assessing Officer under Section 148 of the Act, sought to reopen the concluded assessment of the petitioner company for the year 2014 – 15. The Officer had reasons to believe that the income chargeable to tax of the petitioner company had escaped assessment.

The company had declared loss of over Rs. 280 crore for the relevant period. The petitioner's case was selected for scrutiny by the Income Tax authorities and intimation to that effect was issued on December 27, 2016 under Section 143(3) read with Section 144 of the IT Act.

The IBC Case

Meanwhile, M/s. Edelweiss Asset Reconstruction Company Limited (EARCL) filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 to initiate the Corporate Insolvency Resolution Process against Murli Industries.

EARCL's application was admitted by the National Company Law Tribunal on April 5, 2017, and a Resolution Professional was appointed for of the company. Only claim submitted was by Deputy Commissioner of Income Tax (TDS), Circle – 1, Nagpur for Rs. 50,23,770.

A resolution plan by Dalmiya Cement (Bharat) Limited was approved by the NCLT on June 3, 2019 and July 22, 2019. The Resolution Plan and the orders of the NCLT were upheld by the National Company Law Appellate Tribunal On January 24, 2020 and the plan was made effective August 25, 2020.

Question of law involved

Whether officials of Income Tax Department under Section 148 of the Income Tax Act, 1961 to a Corporate Debtor can seek returns from a Corporate Debtor for the assessment year falling prior to the date of approval of Resolution Plan under Insolvency and Bankruptcy Code, 2016 on the ground that they believed income chargeable to tax had escaped assessment within the meaning of Section 147 of the Income Tax Act, 1961?

Petitioner's Arguments

Advocate Niraj Sheth along with Advocate AN Agrawal argued that the IT Department could not have issued notices dated March 25, 2021, which was subsequent to the approval of the Resolution Plan. They contended that claims which were not a part of the Resolution Plan were not maintainable against the Corporate Debtor.

They cited Supreme Court judgment in case of Ghanashyam Mishra and Sons Private Limited Vs. Edelweiss Asset Reconstruction Company Limited and others reported in 2021(9) SCC 657 to seek quashing of the notices.

Income Tax Department's Arguments

Advocate SN Bhattad along with Advocate AJ Bhoot defended the notices on behalf of the IT Department. They argued that the claim could not be a part of the Resolution Plan as the claim was not crystallised at that time. The claim that income for a certain year had escaped assessment was disclosed subsequent to the approval of the Resolution Plan. Therefore, it could not have been raised before the Resolution Professional under the CIRP proceedings, they contended.

Observations

The High Court Bench also observed that there could be a case where the statutory authority was precluded from raising claim in the CIRP proceedings because of fault attributable to the Corporate Debtor. However, notices were silent on that aspect.

The court also had a word of advice for the IT authorities and said that the IT authorities ought to have been diligent to verify the previous years' assessment as permissible under the law and to raise the claim in the prescribed form within time before the Resolution Professional.

The statutory authorities may also explore the possibility of raising such claims before the Resolution Professional or Adjudicating Authority by requesting to make certain provisions for payment of statutory claims in the Resolution Plan, which can then be decided by the Committee of Creditors, the Resolution Professional or the Adjudicating Authority, the Bench added.

It also suggested that the IT Authorities or the Legislature may explore the possibility of issuing a circular or by amending the Income Tax Act, 1961, in line with section 44(6) of the Maharashtra Value Added Tax, Act, 2002. This section on "special provision regarding liability to pay tax in certain cases" casts the liability for an amount that cannot be recovered, for any reason whatsoever, on the Directors of the private company, subject to that Director proving that the non-recovery "cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the said company."

The division bench rejected the arguments made on behalf of the IT Department mainly relying on the Supreme Court judgment in Ghanashyam Mishra's case.

The High Court observed that the Supreme Court had, in that case, specifically framed a question which read as – Whether after approval of resolution plan by the adjudicating authority a creditor including the Central Government, State Government or any local authority is entitled to initiate any proceedings for recovery of any of the dues from the corporate debtor, which are not a part of the resolution plan approved by the adjudicating authority?

The Supreme Court, while answering that question in the negative, had observed that the word "other stakeholders" in the Act, would squarely cover the Central Government, any State Government or any local authorities. "The legislature, noticing that on account of obvious omission, certain tax authorities were not abiding by the mandate of I&B Code and continuing with the proceedings, has brought out the 2019 amendment so as to cure the said mischief. We therefore hold, that the 2019 amendment is declaratory and clarificatory in nature and therefore retrospective in operation," it had observed.