Statutory Dues Of Income Tax, VAT Etc. Are Operational Debts Under IBC : NCLAT [Read Judgment]

The National Company Law Appellate Tribunal has held that statutory dues of income tax, value added tax etc. are 'operational debts' under the Insolvency and Bankruptcy Code 2016.

Consequently, it held that Income Tax Department, Sales Tax Department of states etc., who are entitled to such dues, are 'operational creditors'.

The judgment was given by the NCLAT dismissing a batch of appeals filed by the IT Department and Sales Tax Departments against orders passed by NCLT benches of Mumbai and Hyderabad approving resolution plans for corporate debtors, which had included tax dues.

The departments took the stand that tax dues enjoy the status of 'first charge' under law, and therefore cannot be included in resolution plans. The further argument was that 'operational debts' under IBC covers only debts in relation to supply of goods and services.

The NCLAT noticed that the definition of 'operational debt' under Section 5(21) covered a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority, in addition to claims in respect of supply of goods or services.

"As the 'Income Tax', 'Value Added Tax' and other statutory dues arising out of the existing law, arises when the Company is operational, we hold such statutory dues has direct nexus with operation of the Company. For the said reason also, we hold that all statutory dues including 'Income Tax', 'Value Added Tax' etc. come within the meaning of 'Operational Debt'", observed the Tribunal headed by Justice S J Mukhopadhyaya

"For the said very reason, we also hold that 'Income Tax Department of the Central Government' and the 'Sales Tax Department(s) of the State Government' and 'local authority', who are entitled for dues arising out of the existing law are 'Operational Creditor' within the meaning of Section 5(20) of the 'I&B Code'", the Tribunal further held.

The Appellants in Company Appeal (AT) (Insolvency) No. 309 of 2018 were represented by Ms. Pinky Anand and Mr. Atmaram Nadkarni, Ld. Additional Solicitor General(s) of India.

"This is a landmark judgement and will have far reaching effects for several people and companies affected under the IBC Code," said Dr. U.K. Chaudhary, Mr. Ramji Srinivasan & Mr. Mukul Talwar, Ld. Senior Advocates, representing the respondents in the appeal.

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