Introduction
In a landmark judgement titled Avil Menezes (Liquidator) v. Principal Chief Commissioner of Income Tax, Mumbai[i], the National Company Law Appellate Tribunal (‘NCLAT’) adjudicated upon issues pertaining to the power that the Income-tax department (‘Respondent’) has during ongoing liquidation proceedings of a corporate debtor (‘CD’). The NCLAT ruled on various important issues concerning the power of the Department to set-off refund amounts due to the assessee against pre-CIRP tax demand when the liquidation commenced for the CD.
Brief Facts
Sunil Hitech and Engineers Ltd., the CD, was admitted to the corporate insolvency resolution process (‘CIRP’) in 2018 and subsequently into liquidation in 2019, whereby the Appellant, Avil Menezes, was appointed as the liquidator.
Vetting of annual information statement (‘AIS’) revealed that CD was entitled to receive an income-tax refund ('IT Refund') for assessment year (‘AY’) 2021-22 amounting to Rs. 5.84 crores, along with interest approximately amounting to Rs. 11 lakhs.
The Respondent adjusted/set-off the IT Refund amount towards tax demand for AY 2010-11 and 2011-12 and adjusted the refund amount due to CD for AY 2020-21 against pre-CIRP income tax dues.
The Appellant filed an application before the adjudicating authority (‘AA’) seeking a return of the IT refund amount to the liquidation estate of CD. However, the AA subsequently dismissed such an application.
Aggrieved by the order passed by AA, the Appellant filed an appeal before the NCLAT under s. 61 of Insolvency and Bankruptcy Code, 2016 (‘IBC’).
Issues
Whether a continuation of pending proceedings is permitted after a liquidation order has been passed under s. 33 of the IBC?
Whether the Respondent is a secured creditor having security interest under s. 245(1) of the Income-tax Act, 1961 (‘IT Act’)?
Whether was there any infirmity in the suo-moto action of the Respondent in the appropriation of the IT Refund amount and in setting off the amount against tax arrears of the pre-CIRP period?
Held
The NCLAT held that while the Respondent was empowered to continue assessment proceedings, it could not adjust the amount unilaterally without adhering to the established procedure for liquidation. The NCLAT, therefore, ordered that the matter be remanded to the AA to examine the quantum of set-off of IT Refund against pre-CIRP tax dues.
i. Issue 1: The NCLAT observed that s. 33(5) of the IBC puts a bar only with respect to fresh suits/proceedings and does not restrict the continuation of pending suits or proceedings. Thus, the Respondent was legally entitled to continue assessment proceedings without any permission from AA.
ii. Issue 2: The NCLAT observed that s. 245(1) of the IT Act does not create any charge or security interest in favour of the Respondent; thus, it is not a secured creditor having a security interest.
iii. Issue 3: The NCLAT observed that the principle of set-off during liquidation proceedings is permitted under Chapter III of Part II of IBC and reg. 29 of Liquidation Regulations, 2016. However, the Respondent is not empowered to unilaterally adjust/set-off the IT Refund amount with past tax dues by bypassing the provisions of s. 53 of the IBC and the Liquidation Regulations, 2016.
The NCLAT relied on the judgment of the Hon’ble Supreme Court in Sundaresh Bhatt’s case, which observed that while statutory authorities can take steps to determine the tax, interest, fines, and penalty due, they cannot enforce a claim or recovery of the tax due during the period of moratorium. Further, it was also observed that if the set-off amount exceeds the claim entitlement as per liquidation proceedings, the Respondent will be directed to return the excess amount adjusted. If the set-off amount is less than the claim entitlement, the balance would stand extinguished due to the failure of the Respondent to file a claim before the liquidator.
Our Analysis
Through its judgement, the NCLAT has thoroughly clarified that while tax authorities have unlimited jurisdiction to conduct an assessment, any Suo-moto action taken to initiate recovery of tax or execute their claim unilaterally would be ultra vires under the provisions of the IBC. The interplay between the IBC and the IT Act is such that even though the Respondent is authorised to continue pre-CIRP assessment proceedings, they should follow the procedure laid down under the IBC. The Respondent cannot self-authorize itself to prioritise and put itself on a better footing to recover the dues that have been lost without being mindful of the claim so permissible as per the distribution matrix. This judgment addresses the common practice of revenue authorities exploiting their governmental position to gain an unfair advantage over private creditors by accessing assets that should form part of the liquidation estate. By delineating the limits of their powers, the court has taken a commendable step towards ensuring equitable treatment of all creditors.
End Note
[i] Company Appeal (AT) (Insolvency) No. 258 of 2024 dated 12.07.2024.
Authored by Aditya Gupta, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.