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ITAT Kolkata Affirms IBC's Overriding Effect on Income Tax Proceedings

Introduction

The Hon’ble Income Tax Appellate Tribunal, Kolkata (‘ITAT’) in the case of M/s Kohinoor Steel Pvt. Ltd. v. ITO [i] dismissed the appeal of Kohinoor Steel Pvt. Ltd. (‘Assessee’) as the Assessee was undergoing the corporate insolvency resolution process (‘CIRP’) under the Insolvency and Bankruptcy Code, 2016 (‘IBC’).

Brief Facts

  • The assessment proceedings were conducted against the Assessee under s. 143(3) of the Income Tax Act, 1961 (‘ITA’) and addition under s. 68 of the ITA was made by the assessing officer (‘AO’) which pertained to transactions involving share capital and share premium obtained from various entities, which were deemed to have been done at high premiums.

  • Being aggrieved by the same, the Assessee had filed an appeal before the Commissioner of Income-tax (appeals) ‘CIT (A)’ contending that the addition and disallowance made by the AO was wrong in law. However, the CIT (A) had upheld the AO’s order.

  • Consequently, the Assessee had appealed before ITAT contending that CIT (A) had erred in confirming the addition made by AO under s. 68 of the ITA as income of the Assessee. Further, during proceedings, the Assessee had brought to the attention of the ITAT, that the CIRP process was initiated against the Assessee.

Held

The ITAT dismissed the appeal filed by the Assessee and observed as under.

  • The ITAT observed that in respect of s. 14 of the IBC, institution of suits or continuation of pending suits or proceedings against the Corporate Debtor (‘CD’) including the execution of any judgement, decree, or order in any court of law, tribunal, arbitration panel or other authority shall be prohibited during the moratorium period.

  • The ITAT had relied on the Hon’ble Supreme Court’s decisions in the case of Ghanashyam Mishra & Sons (P.) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.[ii] and M/s. Ruchi Soya Industries Limited v. Union of India[iii], observing that once the resolution plan (‘RP’) is approved under s. 31(1) of the IBC, the claims provided in the plan stand frozen and the claims which are not part of the plan will stand extinguished. Thus, the ITAT held that even the statutory dues of the government or local authorities, if not part of the RP, get extinguished and any legal proceedings prior to the approval of RP under s. 31 of the IBC ceases to proceed.

  • The ITAT also relied on the Hon’ble High Court decision in Electricity Distribution Company Limited v. Sri Vasavi Industries Limited[iv] observing that any claims not made during the CIRP process or before approval of the RP are deemed to be extinguished.

  • Further, the ITAT observed that as per s. 238 of the IBC and on the basis of the various precedents provisions of the IBC have an overring effect.

  • Therefore, in view of the above, in the present case the ITAT held that no proceedings can be initiated against the CD i.e. Assessee including income tax proceedings as IBC has an overriding effect on all the acts including the ITA which has been specifically provided under s. 178(6) of the ITA.

Conclusion & Analysis

The ITAT's interpretation in respect of s. 14 of the IBC underscores the necessity to halt legal proceedings against CD during the moratorium period, ensuring a conducive environment for the resolution process to unfold without external discrepancies.

The ITAT reaffirms that once an RP is approved under s. 31(1) of the IBC, claims outlined in the plan are frozen, while those excluded are extinguished. This extends even to statutory dues owed to governmental or local authorities, reinforcing the efficacy of the RP as the guiding document for debt restructuring.

Further, the decision also highlights in respect of s. 238 of the IBC, underscoring that the IBC overrides other laws including ITA which is also stipulated under s. 178(6) of the ITA. Thus, upon approval of RP, no proceedings can be initiated against the CD and all the claims which are not part of the RP get extinguished.




End Notes

[i] [2024] 159 taxmann.com 571 (Kolkata - Trib. ITAT) (19.02.2024).

[ii] (2021) 9 SCC 657.

[iii] Civil Appeal No. 447-448 of 2013.

[iv] 2022 (7) TMI 580 Calcutta HC.




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

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