By Invitation. Tax authorities left high and dry in IBC cases

Last week, the Supreme Court ruled that the Insolvency and Bankruptcy Code (IBC) will override Income Tax Department’s claims.

In Pr Commissioner of Income Tax vs Monnet Ispat and Energy, the apex court ruled that the moratorium under Section 14 of IBC, 2016, will also apply to appeals being made by the I-T Department against the orders of the Income Tax Appellate Tribunal (ITAT), in respect of the tax liability of a debtor under the corporate insolvency resolution process (CIRP).

By doing so, the apex court has upheld the earlier decision of the Delhi High Court.

The Delhi court had additionally noted that the moratorium continues till the completion of CIRP or until the National Company Law Tribunal (NCLT) approves the resolution plan or passes an order for liquidation of the debtor, whichever is earlier.

In insolvency, there is a dilemma between preserving the insolvent debtor’s business and protecting the rights of creditors. The law and the judiciary shall ensure that the protection of the debtor shall be balanced against the rights of the creditors, and vice-versa .

It may be noted that there is a natural difference between assessment and recovery proceedings. There may be a scenario where the tax authority might be left with no opportunity to ‘revive’ the appeals.

Assessment vs recovery

Income-tax liability is first determined by the assessing officer. The appellate machinery consists of commissioners, ITATs, High Courts and then the Supreme Court. Appeal to the High Courts and the apex court can be made only where the case involves questions of law.

Whether such appeals are restrained by Section 14 of the IBC, depends on the sweep of the moratorium under Section 14 and the nature of the appellate proceedings and whether, as such, these proceedings come within the ambit of Section 14.

The moratorium is intended to restrain proceedings which are in the nature of debt-recovery, and cannot be merely extended to assessment proceedings which have no adverse impact on the assets of the debtor during CIRP.

The Delhi High Court itself, in Power Grid Corporation of India vs Jyoti Structures, ruled that the moratorium provisions would apply to “debt-recovery actions” against the corporate debtor.

The assessment proceedings are only aimed at giving finality to the assessment, which, per se , is a preliminary step, and may or may not lead to a recovery against the debtor, which is what IBC actually bars.

Once the assessment proceedings conclude, the determined tax liability shall stand, subject to the resolution plan under IBC. It is obvious that unless there is an assessment, a creditor’s right to file a claim cannot be served. The tax authorities can only become a creditor when the assessment is made, and not before.

As such, where the assessment itself is in dispute, there is no impending recovery against the debtor. Even disputed claims are to be considered in the resolution plan.

A widely known provision comparable to Section 14 of IBC was Section 22 of the Sick Industrial Companies Act (SICA), where the courts have held that the provision would not extend to proceedings not eroding into the assets or paid-up capital of the company.

‘Revival’, a misnomer?

The moratorium remains operational until the expiry of the CIRP period or until NCLT passes an order approving a resolution plan or an order for liquidation, whichever is earlier. While the Delhi High Court gave liberty to revive the appeals, subject to further orders of NCLT, it is doubtful whether the liberty can be exercised at all.

During CIRP, the resolution plan, if drawn up, may not consider the tax liability at all, which was the subject matter of the purported appeal, being decided by ITAT. Given this, an interesting question which would arise is whether the tax authorities can proceed to make an appeal against the acquirer coming under the resolution plan.

Alternatively, if the debtor goes into liquidation, the moratorium would still continue under Section 33. As such, it would not be possible to revive the appeals.

The stand taken by the judiciary might lead to a permanent prohibition on the tax authorities to make the appeals.

While the spirit of Section 14 has to be protected in all conditions, it should not serve as a dead end to creditors seeking remedy for determination of their dues.

The writer is Senior Associate, Vinod Kothari and Company.