Wednesday, 3 November 2021

Uttam Strips Ltd. Vs. Assistant Commissioner of Income Tax - Income Tax Assessment Orders which pertain to the period prior to initiation of the CIRP of the Corporate Debtor, which is now led by the New Management on approval of the Resolution Plan, are unsustainable in law and without jurisdiction.

NCLT New Delhi-II (25.10.2021) In Uttam Strips Ltd. Vs. Assistant Commissioner of Income Tax [IA. 2395, 2396 and 2397/ND/2020 in CP No. (IB) 137(ND)/2018] held that;

  • in our considered view, the Assessment Orders, as referred to in the three I.A.s, passed by the Income Tax Department, which pertain to the period prior to initiation of the CIR process of the Corporate Debtor, which is now led by the New Management on approval of the Resolution Plan, are unsustainable in law and without jurisdiction.


Excerpts of the order;

Under consideration are 03 I.As. No. 2395, 2396 and 2397 of 2020 preferred by Uttam Strips Pvt. Ltd., the Corporate Debtor and Jyoti Strips Pvt. Ltd., the Successful Resolution Applicant (hereinafter, both together referred as ‘Applicants’) against Assistant Commissioner of Income Tax Circle 27(1), New Delhi under Section 60(5) of IBC, 2016 read with Rule 11 of NCLT Rules 2016.

 

# 2. That the Applicants have made the following prayers in the IA No. 2395 of 2020:

a. Allow the present Application and restrain the respondent from reopening, re-assessing, assessing, imposing any penalty or otherwise taking any action or giving effect to any such action already taken or the like against the Corporate Debtor in relation to the period prior to Effective Date under the approved resolution plan i.e., 12.06.2019, the date of receipt of certified copy of the order of NCLT approving the resolution plan;

b. Pass an order restraining the respondent from initiating, continuing or implementing any action, penalty proceedings, raising any demand against the corporate debtor in relation to period prior to the Effective Date under the approved resolution plan i.e., 12.06.2019, the date of receipt of certified copy of resolution plan;

c. Pass an order setting aside all proceedings, penalty proceedings, demands and actions initiated, continued against the corporate debtor in relation to period prior to the Effective Date under the approved resolution plan i.e., 12.06.2019, including the assessment order dated 28.12.2018 demand dated 28.12.2018 of Rs. 51,92,23,380/- or any other amount from the applicants towards income tax dues;

d. Pass such order or further orders that this Hon’ble Adjudicating Authority may deem fit and proper in the facts and circumstances of the case.

 

# 5. Since the relief sought by the Applicants and the parties in the three IAs are common, therefore, all the 3 Applications are taken up together for adjudication through this common order.

 

# 6. To put succinctly, facts of the case are that the Operational Creditor, M/s Power2SME Pvt. Ltd. had filed an application bearing no IB137/(ND)/2018 under Section 9 of IBC 2016 for initiation of CIR Process against the Corporate Debtor M/s. Uttam Strips Ltd. That vide Order dated 09.04.2018, this Adjudicating Authority had initiated the CIR Process against the Corporate Debtor and vide order dated 06.06.2019, this Adjudicating Authority had approved the Resolution Plan submitted by M/s Jyoti Strips Pvt. Ltd, the Successful Resolution Applicant.

 

# 7. It is submitted by the Applicants that before initiation of CIR process of the Corporate Debtor, the Income Tax Department had issued notices under Section 143(2) of the Income Tax Act, 1961. It is added that the during the CIRP proceedings of the Corporate Debtor, certain notices were issued by the Assistant Commissioner of Income Tax/Respondent against the Corporate Debtor in contravention of Section 14 of the Insolvency and Bankruptcy Code, 2016 (“IB Code”) when the moratorium was already in place.

# 8. It is further added that the Income Tax Department continued to proceed against the Corporate Debtor even during the period of moratorium and based on such proceedings, it had passed the Assessment orders (i) dated 28.12.2018 as stated in IA 2395/2020, (ii) dated 20.12.2019 as stated in IA 2396/2020; and (iii) dated 22.12.2019 as stated in IA/2397/2020.

 

# 9. It is submitted by the Applicants that while replying to the notice issued by Assistant Commissioner of Income Tax under section 144 and 147 of the Income Tax Act, 1961, the Resolution professional vide its letter dated 26.12.2018 had duly informed the Income Tax Department about CIRP of the Corporate debtor and imposition of moratorium in terms of Section 14 of IBC.

 

# 10. It is added by the Applicant that despite knowledge of the CIR process and moratorium in respect of the Corporate Debtor, the Income Tax Department did not file its claims in relation to any of the Assessment Years at any stage before the Resolution Professional as required under the provisions of IBC, 2016.

 

# 13. It is submitted by the Applicants that Resolution Plan with respect to the Corporate Debtor was approved by this Adjudicating Authority vide order dated 06.06.2019.

 

# 14. It is stated by the Applicants that by passing the Assessment Orders, the Income Tax Department has raised demands for payment of income tax dues pertaining to the period prior to initiation of the CIRP of the Corporate Debtor. The said demands have arisen on account of certain notices and proceedings initiated by the Income Tax Department against the Corporate Debtor before initiation of CIRP of the Corporate Debtor. However, such proceedings were continued during the continuance of the moratorium period under Section 14 of IBC, 2016, which is clearly impermissible in law, and therefore void.

 

# 15. That the Respondent/Income Tax Department did not file its reply despite opportunities. Therefore, its right to file reply was closed vide order dated 01.10.2021 of this Adjudicating Authority.

 

# 16. After hearing submissions of the Applicants and perusing the application and documents placed on record, this Bench observes that the 03 Assessment Orders under reference and as detailed below were stayed by this Adjudicating Authority vide order dated 13.07.2020.

IA Number

Assessment Order dated

Assessment Years

IA/2395/2020

28.12.2018

2016-17

IA/2396/2020

20.12.2019

2017-18

IA/2397/2020

22.12.2019

2012-13

 

# 17. From the aforesaid facts, we observe that whereas, the CIRP against the Corporate Debtor commenced vide Order dated 09.04.2018, all the three Assessment Orders passed by the Income Tax Department on the subsequent dates (i.e., during the moratorium period), relate to the pre-CIRP period from 2012-13 to 2017-18. Hence, it is amply clear that through these Assessment Orders, the Income Tax Department has been attempting to recover their dues pertaining to the period prior to the initiation of CIR process of the Corporate Debtor.

 

# 18. In the circumstances, it is worthwhile to refer to Section 32(A) of the IBC, 2016, the contents of which are reproduced below : . . .  

 

# 19. From the plain reading of the aforesaid provision, it can be inferred that the Corporate Debtor, on approval of the Resolution Plan by the Adjudicating Authority and on change in management, is immune from the proceedings which pertain to the pre-CIRP period.

 

# 20. At this stage, we refer to the Judgment of the Hon’ble Supreme Court dated 15.11.2019 in the matter of Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta & Ors in Civil Appeal No. 8766- 67 OF 2019, the relevant paragraph of which reads as below :

  • “67. For the same reason, the impugned NCLAT judgment in holding that claims that may exist apart from those decided on merits by the resolution professional and by the Adjudicating Authority/ Appellate Tribunal can now be decided by an appropriate forum in terms of Section 60(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove. For these reasons, the NCLAT judgment must also be set aside on this count.”       (Emphasis supplied)

 

# 21. Further, the Hon’ble High Court of Karnataka in its Judgement dated 27.05.2021 passed in the matter of Union of India & Ors. Vs Ruchi Soya Industries Ltd. Writ Appeal No. 2757/2018 (T-TAR), (2021) ibclaw.in 12 HC has observed the following :

  • “77. The provisions of Section 238 of “IBC” states that the provisions of “IBC” shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Further, it is noted that crown debts do not take precedence even over secured creditors, who are private persons. This is clear on a reading of Section 238 of “IBC” which provides for the overriding effect of “IBC” notwithstanding anything inconsistent contained in other law for the time being in force or effect by any such law. Therefore, if the departments of Central or State Governments do not file an application or participate in the resolution process, their claims automatically get extinguished having regard to the judgment of the Hon’ble Supreme Court in the case of Ghanashym Mishra.”      (Emphasis supplied)

 

# 22. Here, we refer to the Judgment of the Hon’ble Supreme Court dated 13.04.2021 in the matter of Ghanashyam Mishra and Sons Private Limited versus Edelweiss Asset Reconstruction Company Limited in Civil Appeal No. 8129 OF 2019, the concluding para of which reads as overleaf :

  • “CONCLUSION

  • 95. In the result, we answer the questions framed by us as under:

  • (i) That once a resolution plan is duly approved by the Adjudicating Authority under sub section (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan;

  • (ii) 2019 amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect;

  • (iii) Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued.”  (Emphasis supplied)

 

# 23. In view of the aforesaid settled position of law, in our considered view, the Assessment Orders, as referred to in the three I.A.s, passed by the Income Tax Department, which pertain to the period prior to initiation of the CIR process of the Corporate Debtor, which is now led by the New Management on approval of the Resolution Plan, are unsustainable in law and without jurisdiction.

 

# 24. In view of the above, the following Assessment Orders passed by the Income Tax Department are hereby, quashed :

IA Number

Assessment Order dated

Assessment Years

IA/2395/2020

28.12.2018

2016-17

IA/2396/2020

20.12.2019

2017-18

IA/2397/2020

22.12.2019

2012-13

 

# 25. The IA. 2395/ND/2020, IA. 2396/ND/2020, IA. 2397/ND/2020 are accordingly Allowed.

 

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The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.