Initiating Tax Proceedings After CIRP Approval Violates Section 31 IBC: Bombay High Court

Recently, the Bombay High Court dealt with a writ petition filed by Uttam Value Steels Ltd. and Mr. Subodh Karmarkar, challenging several notices issued by the Income Tax Department under various provisions of the Income Tax Act, 1961. The dispute revolved around tax claims and proceedings initiated by the Income Tax authorities against Uttam Value Steels Ltd., despite the company having successfully undergone a Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC).

Facts of the Case

Uttam Value Steels Ltd., the first petitioner, was admitted into the CIRP on June 26, 2018, by an order passed by the National Company Law Tribunal (NCLT), New Delhi. Following the initiation of the CIRP, the company went through various resolution processes under the IBC. Eventually, a resolution plan was finalized by the Committee of Creditors and approved by the NCLT on May 6, 2020. The approved resolution plan provided for a complete waiver of all tax liabilities and interest dues relating to the period before the commencement of the CIRP. Prior to the initiation of the CIRP, on April 17, 2018, the Income Tax Department had conducted a search and seizure operation under Section 132 of the Income Tax Act against the Vinod Jatia Group, with which Uttam Value Steels Ltd. was associated through certain business transactions. It was alleged that the Vinod Jatia Group had engaged in bogus transactions, and the petitioner's company was also implicated.

Subsequently, on March 15, 2021 nearly a year after the resolution plan had been approved the Revenue initiated proceedings under Section 153C of the Income Tax Act against Uttam Value Steels Ltd. In response to these notices, on January 4, 2022, the petitioners filed a detailed representation to the Revenue, asserting that the approval of the resolution plan by the NCLT extinguished all past claims, including the claims raised by the Income Tax Department. The petitioners contended that Section 31 of the IBC clearly stipulated that once a resolution plan is approved, it becomes binding on all creditors, including tax authorities, and extinguishes all claims from the period prior to the CIRP.

They cited precedents, particularly the Supreme Court's ruling in Ghanshyam Mishra & Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited, which reaffirmed that all claims not included in the resolution plan are extinguished. On the other hand, the Revenue, in its affidavit dated June 21, 2022, contended that while past claims were indeed waived, the current proceedings pertained to tax liabilities that were not crystallized before the CIRP and, therefore, constituted future liabilities.

Judgement

The Bombay High Court, in its judgement, ruled in favor of the petitioners. The court held that once a resolution plan is approved under Section 31 of the Insolvency and Bankruptcy Code (IBC), 2016, it is binding on all creditors, including government authorities, such as the Income Tax Department. The court emphasized that all claims, including tax liabilities that were not part of the approved resolution plan, are extinguished, and no fresh proceedings can be initiated for claims related to the period before the CIRP.

The Bombay High Court heavily relied on the Supreme Court's landmark judgment in Ghanshyam Mishra & Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited to decide the case between Uttam Value Steels Ltd. and the Income Tax Department.

In Ghanshyam Mishra, the Supreme Court addressed the issue of whether any creditor, including government authorities, could continue to pursue claims that were not part of the approved resolution plan. The case firmly established that once a resolution plan is approved by the National Company Law Tribunal (NCLT) under Section 31 of the IBC, it becomes binding on all stakeholders, including the Central Government, State Governments, and any local authorities, such as tax authorities. The Supreme Court made it clear that all claims, even those owed to statutory authorities, are extinguished if they are not included in the resolution plan.

In conclusion, the court ruled that Uttam Value Steels Ltd. should be allowed to operate with a clean slate as per the IBC's provisions, and all past claims, including tax claims, were extinguished following the approval of the resolution plan.

Court: Bombay High Court

Case: Uttam Value Steels Ltd. Vs Assistant Commissioner of Income Tax

Advocates for the Petitioners: Mr. Vikram Deshmukh, a/w Siddhi Doshi, i/b

Advocate for Respondents: ALMT Legal, Mr. Suresh Kumar

Judge: G.S. Kulkarni & Somasekhar Sundaresan, JJ.

Date: August 28th, 2024

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