IBC Proceedings Can't Dilute Rights Of The Income Tax Department To Reopen Assessment: Madras High Court

The Single Bench of Justice C. Saravanan held that the provisions of Insolvency and Bankruptcy Code cannot be interpreted in a manner which is inconsistent with any other law in the time being in force. Thus, the Court ruled that the proceedings under the Insolvency and Bankruptcy Code cannot dilute the rights of the Income Tax Department to reopen the assessment under Section 148 of the Income Tax Act.

A notice under Section 148 of the Income Tax Act, 1961 for reopening of the assessment was issued against the assessee/petitioner M/s. Dishnet Wireless Limited. Thereafter, a Corporate Insolvency Resolution Plan was submitted by the Insolvency Resolution Professional on behalf of the assessee before the NCLT, Mumbai. After the said Resolution Plan was submitted on behalf of the assessee, proceedings for reopening of the assessment were initiated by the Income Tax Department against the assessee.

Against the reassessment proceedings, writ petitions were filed by the assessee before the Madras High Court. The Madras High Court allowed the Income Tax Department to proceed with the reassessment, however, the department was directed to keep the assessment in a sealed cover. After the passing of the said interim order, the NCLT, Mumbai approved the Resolution Plan of the assessee.

The assessee M/s. Dishnet Wireless Limited submitted before the Madras High Court that the Income Tax Department was not entitled to proceed further with the reassessment proceedings in view of the definition of 'claim' as defined in Section 3(6) of the Insolvency and Bankruptcy Code, 2016.

The assessee contended that the Government is a "corporate debtor" and hence, it cannot proceed with the reassessment proceedings since the Corporation Insolvency Resolution Plan had been approved by the NCLT, Mumbai.

The assessee averred that all the claims existing prior to the approval of the said Corporate Insolvency Resolution Plan were extinguished. Therefore, the assessee submitted that the Income Tax Department could not proceed further with the reassessment proceedings against the assessee.

The Income Tax Department contended that writ petitions were filed by the assessee after a Moratorium under Section 14 of the Insolvency and Bankruptcy Code came into force. The Income Tax Department averred that the said Moratorium did not preclude the Income Tax Department from re-opening the concluded assessment under Section 148 of the Income Tax Act, 1961.

The Income Tax Department averred that only a notice under Section 148 of the Income Tax Act had been issued to the assessee before the Resolution Plan was submitted by it under the Insolvency and Bankruptcy Code, and that the assessee's objections against reopening of the assessment had been overruled by a speaking order. Thus, the Income Tax Department submitted that since the claim of the Income Tax Department had not been crystalized by way of an Assessment Order, therefore, the said claim cannot be said to be extinguished.

The Income Tax Department submitted that there is no bar under the law that inhibits the income tax authorities' power to continue with the reassessment proceedings initiated under Section 148 of the Income Tax Act.

Section 31 (1) of the Insolvency and Bankruptcy Code, 2016 provides that if the Adjudicating Authority is satisfied that the Resolution Plan approved by the committee of creditors meets the specified requirements, it shall approve the said Resolution Plan. Section 31(1) also provides that the said Resolution Plan shall be binding on the corporate debtor and its employees, members or creditors, including the Central Government, State Government or any local authority to whom a debt in respect of payment of dues under any law in force is owed.

The Court noted that the Supreme Court in the case of Ghanashyam Mishra & Sons (P) Ltd. Vs. Edelweiss Asset Reconstruction Co. Ltd. (2021) had held that the 2019 Amendment to Section 31 of the Insolvency and Bankruptcy Code, 2016 is clarificatory and declaratory in nature and hence, it will have a retrospective operation. Thus, the Supreme Court had held that all the dues, including the statutory dues owed to the Central Government, State Government or any local authority, if not a part of the Resolution Plan, shall stand extinguished. The Supreme Court had ruled that no proceeding could be continued in respect of such dues for the period prior to the date on which the adjudicating authority had approved the Resolution Plan under Section 31 of the Insolvency and Bankruptcy Code.

The Court observed that upon admission of petitions for initiation of corporate insolvency resolution process under Section 7 of the Insolvency and Bankruptcy Code, various important duties and functions are entrusted on the Resolution Professional and the Committee of Creditors (CoC), who are required to deeply scrutinized the Resolution Plans. The Court added that after the CoC approves the plan, the adjudicating authority is required to arrive at a subjective satisfaction that the Resolution Plan conforms to the requirements provided under Section 30(2) of the Insolvency and Bankruptcy Code.

The Court noted that the Resolution Plan submitted by the Insolvency Resolution Professional on behalf of the assessee had not contemplated any concession from the Income Tax Department, despite the fact that notices under Section 148 of the Income Tax Act had already been issued to the assessee before the submission of the said Resolution Plan.

The Court observed that the Corporate Insolvency Resolution Plan approved under Section 31 of the Insolvency and Bankruptcy Code did not contemplate the assessee's tax dues under the Income Tax Act. Also, the Court noted that the reassessment proceedings under the Income Tax Act had not been crystallized at the stage of approval of the said Resolution Plan.

The Court held that since the proceedings under the Insolvency and Bankruptcy Code were initiated prior to the initiation of the reassessment proceedings under the Income Tax Act, the assessee should have obtained appropriate concession in the said Corporate Insolvency Resolution Plan.

The Court added that the claims of the Income Tax Department were not considered by the NCLT, Mumbai, while approving the Resolution Plan. Thus, the Court held that the power of the Income Tax Department to initiate reassessment proceedings under Section 148 of Income Tax Act and pass a fresh assessment order cannot be impinged by the said Corporate Insolvency Resolution Plan.

The Court ruled that the provisions of Insolvency and Bankruptcy Code cannot be interpreted in a manner which is inconsistent with any other law in the time being in force.

Thus, the Court held that the proceedings under the Insolvency and Bankruptcy Code, 2016 cannot dilute the rights of the Income Tax Department to reopen the assessment under Section 148 of the Income Tax Act. Therefore, the Court ruled that the Income Tax Department cannot be precluded from reopening the assessment under the Income Tax Act.

The Court, thus dismissed the writ petitions. The Court directed the Income Tax Department to communicate to the assessee the Assessment Orders passed by the Income Tax Department pursuant to the interim orders issued by the High Court. The Court granted liberty to the assessee to file an appeal before the Commissioner of Income Tax (Appeals) against the said Assessment Orders, within thirty days from the date of communication of the Assessment Orders.

Case Title: M/s. Dishnet Wireless Limited versus the Assistant Commissioner of Income Tax (OSD)

Dated: 17.06.2022 (Madras High Court)

Citation: 2022 LiveLaw (Mad) 278

Counsel for the Petitioner: Mr. A.R.L. Sundaresan, Senior Counsel for Mr. Allwin Godwin

Counsel for the Respondent: Mr. Prabhu Mukunth Arunkumar, Junior Standing Counsel

Click Here To Read/Download Order