Whether Income Tax Demand And Penalty Extinguished In CIRP ? Delhi High Court Stays Demand Notice

An application filed by the Union of India (through the Ministry of Corporate Affairs) under Sections 241 and 242 of the Companies Act before the NCLT based on recommendations of the Ministry of Finance, Department of Economic Affairs. It was alleged that operations of the IL & FS Group of Companies were being carried out in a manner prejudicial to the public interest. The application was made under Sections 241 and 242 of the Companies Act. The Union of India could not file an application under the IBC as in India there exists no concept of group level insolvency resolution and, at the relevant date, financial services were outside the ambit of the IBC.

The NCLT suspended the board of IL & FS Group and constituted a new board. Furthermore, against the subsequent order of NCLT dated 10.10.2018, in which the request of the Union of India for a grant of moratorium similar to that under Section 14 of the IBC was rejected, the NCLAT vide order dated 15.10.2018 granted moratorium against all proceedings by any person.

The NCLAT directed that a resolution process similar to that of the IBC be adopted and a committee of creditors be formed. The CoC published a public announcement calling upon the creditors of IL & FS Group Entities to submit their claims with proof. A resolution plan was formulated and submitted before the NCLT for approval, which contemplated the extinguishment of all tax liabilities prior to 15.10.2018. The resolution plan was agreed to by the Union of India and approved by Justice (Retd.) D.K. Jain, who was appointed by NCLAT for supervision of the entire resolution process. The NCLT, vide order dated February 2, 2021, approved the resolution plan which, inter alia, contemplated the extinguishment of tax liabilities.

The petitioner, Indo Enviro Integrated Solution, acquired 100% shares of IL & FS Environmental & Infrastructure Services Limited (part of the IL & FS Group) pursuant to its response to an open bid and approval of the resolution plan by NCLT. During the pendency of the Resolution Process and the moratorium period, the Income Tax Department initiated assessment for AY 2018-19.

After the approval of the resolution plan, the Income Tax Authorities confirmed the demand of Rs. 48.5 crores, despite the petitioner having brought to the attention of the authorities that pursuant to the NCLT order, all tax liabilities for the period in question have been extinguished.

The petitioner challenged the order and the consequential demand and penalty notice on grounds of being in contravention of the order of the NCLT and principles of natural justice.

The petitioner stated that the order and the consequential notices of demand and penalty, raising a demand for income tax amounting to Rs. 48 crores, were in complete contravention of the order passed by the NCLT. The petitioner claimed that once the resolution process was approved, all claims and liabilities of creditors (including the Central Government, local tax or regulatory authorities) existing prior to October 15, 2018 were extinguished.

The department/respondent argued that six weeks be allowed to file counter-affidavits.

The issue raised was whether government debts can be extinguished under the Companies Act resolution process (which is not the same as the IBC process).

The court, while listing the matter on September 27, 2022, stayed the order as well as consequential income tax notices of demand and penalty.

Case Title: Indo Enviro Integrated Solution Limited Versus ACIT

Citation: W.P.(C) 8899/2022

Dated: 03.06.2022

Counsel For Petitioner: Advocate Sujit Ghosh With Advocate Mannat Waraich

Counsel For Respondent: Advocate Shailendra Singh

Click Here To Read/Download Order