Income Tax Dues Are Government Dues; Income Tax Authority Is A Secured Creditor: NCLAT Delhi

Background Facts

Seri Infrastructure Pvt. Ltd. (“Financial Creditor”) filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Assam Company India Ltd. (“Corporate Debtor”). On 26.10.2017 the Adjudicating Authority initiated CIRP against the Corporate Debtor.

The Income Tax Department (“IT Department/Appellant”) placed its income tax demand before the Resolution Professional for the Assessment Years 2013-14 and 2014-15. The total amount claimed was Rs. 16,20,25,953/-, which was outstanding before the CIRP commencement date.

The Resolution Professional informed the IT Department that their claim cannot be admitted since the Corporate Debtor has filed an appeal before the Commissioner of Income Tax (Appeals) for both the concerned Assessment Years. However, once the appeals get decided, the new promoter of the Corporate Debtor would pay the demand which is a statutory liability.

The IT Department responded that mere filing of an appeal would not grant immunity to the Corporate Debtor from recovery of tax dues. Subsequently, a Resolution Plan was approved for the Corporate Debtor on 20.09.2018. The Successful Resolution Applicant approved the claim of the IT Department to the extent of Rs. 1,20,23,691.03/- only and paid the same.

The IT Department issued a Attachment Order on 28.01.2020 against the Corporate Debtor for a sum of Rs. 6,71,05,730/- towards Income Tax and Rs. 1,70,53,311.00 towards interest for the assessment year 2014-15 to the Banker of the Corporate Debtor i.e Allahabad Bank. The Attachment Order was passed after 15 months of approval of Resolution Plan.

The Corporate Debtor filed an application before the Adjudicating Authority, seeking setting aside of the Attachment Order passed by the IT Department. The Adjudicating Authority vide an order dated 20.01.2021 held that the claims of IT Department cannot be entertained 15 months after the approval of resolution plan. The Attachment Order was set aside and the Corporate Debtor was directed to implement the Resolution Plan without any violation.

The IT Department filed an appeal before NCLAT against the order dated 20.01.2021. It was contended that the dues belong to the Revenue Department and the non-payment of which would cause loss to the public exchequer. Further, the Resolution Professional himself acknowledged the dues of IT Department and had intimated that after the finality of first appeal these dues would be payable by the new promoter.

NCLAT Verdict

The Bench placed reliance on Supreme Court judgment in State Tax Officer v Rainbow Papers Limited, Civil Appeal No. 1661 of 2020, wherein it was held that:

“52. If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan.

53. In other words, if a company is unable to pay its debts, which should include its statutory dues to the Government and/or other authorities and there is no plan which contemplates dissipation of those debts in a phased manner, uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.

54. In our considered view, the Committee of Creditors, which might include financial institutions and other financial creditors, cannot secure their own dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter, any other dues.

57. As observed above, the State is a secured creditor under the GVAT Act. Section 3(30) of the IBC defines secured creditor to mean a creditor in favour of whom security interest is credited. Such security interest could be created by operation of law. The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority.”

The Bench opined that the dues of the Income Tax Authority are ‘Government dues’ and Income Tax Authorities are Secured Creditors. Accordingly, the Adjudicating Authority’s order dated 20.01.2021 whereby the Attachment Order of IT Department was quashed, has been set aside by the NCLAT Bench. The matter has been remitted back to the Adjudicating Authority to be heard in accordance with the mandate in State Tax Officer v Rainbow Papers Limited and fresh orders be passed.

Case Title: Principal Commissioner of Income Tax & Anr. v M/s Assam Company India Ltd.

Case No.: Company Appeal (AT) (Insolvency) No. 243 of 2022.

Counsel For Appellant: Mr. Ruchir Bhatia, Sr. Standing Counsel, Mr. Shlok Chandra, Jr. Standing Counsel and Mr. Keshav Garg, Advocates.

Counsel For Respondent: Mr. Abhijeet Sinha, Mr. Ajay Gaggar, Advocates.

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