The Bombay High Court has ruled that no statutory authority, including income tax authorities, can raise a new claim against a debtor company after the resolution plan is finalized and approved.
A dividing bench of Judges Sunil Shukre and Anil Pansare of the Nagpur Bench of High Court observed that receiving unresolved claims after submission of the resolution plan would lead to uncertainty as to the amount payable by the potential resolution candidate who would have successfully taken over the business from the debtor company.
The court was hearing two motions filed by Murli Industries, which specializes in manufacturing and selling cement, challenging notices issued by income tax authorities on March 24 and 25 last year.
The court noted that one of the notices dated March 25, 2021, issued by the valuation agent under section 148 of the Act, was to reopen the concluded valuation of the applicant company for the year 2014-15. The officer had reason to believe that the applicant company’s taxable income had escaped taxation.
The company had reported a loss of over Rs. 280 crores for the relevant period. The applicant’s case was selected for review by the income tax authorities and a notification to that effect was issued on December 27, 2016 under section 143(3) read together with section 144 of the computer law.
The IBC case
Meanwhile, M/s. Edelweiss Asset Reconstruction Company Limited (EARCL) has filed an application under Section 7 of the Insolvency and Bankruptcy Code 2016 to commence the process of corporate insolvency resolution against Murli Industries.
EARCL’s claim was admitted by the National Company Law Tribunal on 5 April 2017 and a resolution professional was appointed for the company. The only claim submitted was made by the Deputy Commissioner of Income Tax (TDS), Circle – 1, Nagpur for Rs. 50,23,770.
A resolution plan of Dalmiya Cement (Bharat) Limited was approved by the NCLT on June 3, 2019 and on July 22, 2019. The resolution plan and orders of the NCLT were upheld by the National Company Law Appellate Tribunal on January 24, 2020 and the plan came into effect on August 25, 2020.
Question of law at issue
If officers of the Income Tax Department under Section 148 of the Income Tax Act 1961 to a debtor company may require returns from a debtor company for the tax year preceding the date of approval of the resolution plan under the Insolvency and Bankruptcy Code 2016 on the ground that they believed that the taxable income had escaped assessment within the meaning of section 147 of the Income Tax Act of 1961?
Barrister Niraj Sheth and Barrister AN Agrawal argued that the IT department could not have issued notices dated March 25, 2021, which was after the resolution plan was approved. They argued that claims that were not part of the resolution plan were not enforceable against the debtor company.
They cited the Supreme Court judgment in Ghanashyam Mishra and Sons Private Limited Vs. Edelweiss Asset Reconstruction Company Limited and others reported in 2021 (9) SCC 657 to seek the cancellation of the notices.
Arguments from the Income Tax Department
Attorney SN Bhattad and Attorney AJ Bhoot defended the opinions on behalf of the IT department. They argued that the claim could not be part of the resolution plan because the claim was not crystallized at that time. The allegation that revenues for a certain year escaped assessment was disclosed after the resolution plan was approved. Therefore, it could not have been raised before the resolution professional under the CIRP procedure, they argued.
The High Court also observed that there could be a case where the statutory authority was prevented from asserting a claim in the CIRP proceedings due to fault attributable to the debtor company. However, reviews were silent on this aspect.
The court also gave advice to the IT authorities and said that the IT authorities should have exercised due diligence to verify the assessment of previous years as permitted by law and to raise the claim in the prescribed form within the time limit before resolution professional.
The statutory authorities may also explore the possibility of bringing these claims before the resolution professional or the adjudicating authority by requesting that certain provisions for the payment of statutory claims be included in the resolution plan, which may then be decided by the committee. of the creditors, the resolution professional or the adjudicating authority, added the training.
He also suggested that IT authorities or the legislature could explore the possibility of issuing a circular or amending the Income Tax Act 1961, pursuant to section 44(6) of the Income Tax Act 2002. Maharashtra value added tax. This section on “special provision relating to the obligation to pay tax in certain cases” imposes the responsibility of an amount which cannot be recovered, for whatever reason, on the directors of the private company, provided that such director proves that the non-recovery “cannot be attributed to any gross negligence, fault of execution or failure to perform his duties in connection with the affairs of the said company.”
The divisional bench rejected the arguments put forward on behalf of the IT department relying primarily on the judgment of the Supreme Court in the Ghanashyam Mishra case.
The High Court observed that the Supreme Court in that case had specifically formulated a question which read as follows: whether, after the resolution plan has been approved by the adjudicating authority, a creditor, including the central government, the government of the State or any local authority, has the right to initiate proceedings for the recovery of any sums owed to the debtor company, which is not part of the resolution plan approved by the contracting authority?
The Supreme Court, while answering this question in the negative, observed that the phrase “other stakeholders” in the law would cover central government, any state government or any local authority squarely. “The legislator, finding that due to an obvious omission, certain tax authorities were not complying with the mandate of the I&B Code and pursuing the procedure, published the 2019 amendment in order to remedy the said wrongdoing. We therefore believe that the 2019 Amendment is declaratory and clarifying in nature and therefore retroactive in its operation,” he observed.
Case title: Murli Industries Limited v. Assistant Commissioner of Income Tax and Ors.