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Impact of CIRP and Moratorium on Tax Appeals: Analysis of ITAT’s Decision

Introduction

The Income Tax Appellate Tribunal (‘ITAT'), Delhi Bench, recently rendered a significant decision in the case of DCIT v. Rapid Buildwell Ltd.[i]. The Revenue filed an appeal against the order dated 16.08.2018 of the Commissioner of Income Tax (Appeals)-XXV, New Delhi (‘CIT(A)’) pertaining to the assessment year (‘AY’) 2010-11. The crux of the matter revolves around the Assessing Officer’s (‘AO’) disallowance of claimed expenses and depreciation, which the CIT(A) subsequently deleted.

Brief Facts

  • Rapid Buildwell Ltd., engaged in the business of renting and maintenance of immovable properties, filed its return of income for AY 2010-11, declaring a loss of Rs. 4,65,09,758. The AO initially accepted the returned loss and completed the assessment. However, upon subsequent scrutiny, the AO noticed an alleged erroneous allowance of unabsorbed depreciation amounting to Rs. 3,28,61,126.

  • Consequently, the AO reopened the case, leading to an order that reduced the loss to nil by disallowing both the claimed depreciation and business loss of Rs. 1,36,48,632. The AO contended that the business was not set up during the relevant year 2009-10 and that the assets were not utilized for business purposes during the relevant AY. Hence, the claimed expenses and depreciation were not allowable as per the Income-tax Act, 1961(‘the Act’).

  • On appeal, the CIT(A) overturned the AO’s decision, holding in favour of the assessee. However, dissatisfied with the CIT(A)’s order, the Revenue then approached the ITAT challenging the CIT(A)’s order, leading to the current proceedings.

Held

  • At the outset of the hearing, the ITAT was apprised that Rapid Buildwell Ltd. had been admitted to the Corporate Insolvency Resolution Process (‘CIRP’) on 21.11.2022 under the Insolvency and Bankruptcy Code, 2016 (‘the Code’) and that the National Company Law Tribunal (‘NCLT’) had granted a moratorium against the institution of proceedings against the corporate debtor (‘CD’), as per s. 14 of the Code.

  • S. 14 of the Code, among other things, prohibits the institution of suits or continuation of pending suits against the CD during the moratorium period. Upon considering this crucial aspect, the ITAT dismissed the appeal without delving into the merits of the case.

Conclusion

The ITAT’s decision aligns with the principles of the Code, which aims to provide a breathing space to financially distressed companies undergoing the resolution process. The moratorium, granted by the NCLT, encompasses a prohibition on legal proceedings, including tax-related appeals.

This decision underscores the crucial interplay between tax and insolvency proceedings. The moratorium serves as a shield, preventing unwarranted legal actions during the resolution process and allowing the CD and the Resolution Professional to focus on the revival or orderly liquidation of the company.

In light of the NCLT’s grant of moratorium, the ITAT exercised prudence in dismissing the Revenue’s appeal. This decision reinforces the legal protection afforded to companies undergoing insolvency proceedings, emphasizing the need for a harmonious approach between tax laws and insolvency regulations. As the CD progresses through the CIRP, the Revenue retains the option to pursue the appeal post-resolution, adhering to the relevant provisions of the Act.


End Note:

[i] DCIT v. Rapid Buildwell Ltd., ITA No. 6905/Del/2018, 2024 TAXSCAN (ITAT) 106


Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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