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The recent judgment by the National Company Law Appellate Tribunal (NCLAT) in the case of Avil Menezes (Liquidator) vs. Principal Chief Commissioner of Income Tax, Mumbai (2024- NCLAT).
The recent judgment by the National Company Law Appellate Tribunal (NCLAT) in the case of Avil Menezes (Liquidator) vs. Principal Chief Commissioner of Income Tax, Mumbai (2024- NCLAT) addresses significant issues concerning the applicability of the moratorium under Section 33(5) of the Insolvency and Bankruptcy Code (IBC) during the liquidation process. The judgment clarifies whether the Income Tax Department can adjust income tax refunds against past dues during liquidation and the scope of the moratorium in such scenarios. This case provides insights into the interpretation of Sections 14 and 33(5) of IBC, the concept of secured creditors, and the principle of set-off during the liquidation process, impacting the Corporate Insolvency Resolution Process (CIRP) and ongoing cases under consideration of the National Company Law Tribunals (NCLTs).
Moratorium under Section 33(5) vs. Section 14 of IBC:
The judgment distinguishes the moratoriums under Section 14, applicable during CIRP, and Section 33(5), applicable during liquidation. While Section 14 imposes a broad moratorium on the institution and continuation of pending suits or proceedings, Section 33(5) only bars the institution of new suits, allowing pending suits or proceedings to continue during the liquidation process. This interpretation clarifies that ongoing legal actions can proceed without requiring permission from the Adjudicating Authority, thus providing more flexibility in handling such cases during liquidation.
Income Tax Department as Secured Creditor:
The NCLAT examined whether the Income Tax Department could be considered a secured creditor under Section 245(1) of the Income Tax Act, 1961. The tribunal referred to previous judgments and concluded that the Income Tax Department does not qualify as a secured creditor in this context. This distinction is crucial as it impacts the department's ability to claim priority in recovering dues during liquidation.
Principle of Set-off during Liquidation
The judgment clarifies that the principle of set-off is permissible during liquidation, as outlined in Regulation 29 of the Liquidation Regulations. However, the Income Tax Department's unilateral action in adjusting the income tax refund against pre-CIRP dues without filing claims with the Liquidator was deemed improper. This emphasizes the need for statutory compliance and equitable treatment of creditors in the liquidation process, ensuring that no creditor receives a disproportionate share of the liquidation assets.
Findings of the Court:
The main issue before the Court was whether the NCLT had the jurisdiction to give directions to ED for release of the Corporate Debtor's attached properties by invoking Section 32A of IBC.
After consideration of the arguments advanced and the precedents cited by both the parties to the writ petitions, the Court inter alia held that NCLT was well within its jurisdiction in declaring that the Corporate Debtor would stand discharged from offences alleged to have been committed prior to CIRP and that the attached properties shall become free from attachment on approval of the resolution plan.
The Court observed that Section 32A of the IBC is a non-obstante provision enabling an automatic discharge from prosecution. This immunity is available solely to the Corporate Debtor and only when the resolution plan is approved governing a complete change in control and management of the Corporate Debtor. The aforesaid protection is also extended to the property of the Corporate Debtor under sub-clause (2) of Section 32A. The Court also examined the purpose and object of Sections 31 and 60(5) of IBC which explicitly depicts that the legislature has enjoined NCLT with the duty to ensure that the resolution plan can be effectively implemented and with the jurisdiction to dispose any question of law arising in relation to resolution proceedings.
The Court relied on the landmark Supreme Court judgement of Manish Kumar vs. Union of India 1 upholding the constitutional validity of Section 32A of IBC, to feature the legislative intent behind Section 32A which provision gives immunity to the Corporate Debtor from actions taken by authorities, including attachment under PMLA.
Hence, once the conditions under Section 32A of IBC are met, any further prosecution against the Corporate Debtor and its properties shall cease and the Corporate Debtor is only required to cooperate/assist the authorities in the continued prosecution against the individuals involved in the offence.
This judgment will influence pending cases under NCLTs by providing clear guidelines on the continuation of legal proceedings during liquidation and the treatment of claims by statutory authorities like the Income Tax Department. It reinforces the importance of following due process and the hierarchy of claims as prescribed under the IBC, promoting fairness and transparency in the resolution and liquidation processes.
The NCLAT's decision in Avil Menezes (Liquidator) vs. Principal Chief Commissioner of Income Tax, Mumbai offers essential clarifications on the interplay between IBC provisions and income tax regulations during liquidation. By distinguishing the moratorium scopes under Sections 14 and 33(5) of IBC and addressing the principle of set-off, the judgment ensures a more predictable and equitable framework for resolving insolvency and liquidation cases.
The NCLAT's decision also highlights the importance of following the correct procedural framework under the IBC for claiming set-offs during liquidation. The IT Department's unilateral appropriation of the Income Tax Refund amount was found to be improper, emphasizing the need for statutory compliance and equitable treatment of all creditors. The judgment provides clarity on the continuation of legal proceedings during liquidation and reinforces the principle that all claims, including those from statutory authorities, must follow the due process prescribed by the IBC.
List of Judgments Referred and Gist
Principal Commissioner of Income Tax Vs Assam Company India Ltd. (2023- NCLAT)
Gist: This judgment considered whether the Income Tax Department could be deemed a secured creditor. The tribunal initially held that government authorities, including the Income Tax Department, could be considered secured creditors based on statutory provisions. However, this position was later confined to specific statutory contexts, particularly under the Gujarat Value Added Tax Act, as clarified by subsequent judgments.
State Tax Officer (1) Vs. Rainbow Papers Limited (2022- SC)
Gist: The Supreme Court held that the operational creditor could be treated as a secured creditor based on specific statutory provisions of the Gujarat Value Added Tax, 2003. This case was pivotal in determining the status of government dues and their priority during insolvency proceedings.
Paschimanchal Vidyut Vitran Nigam Ltd. Vs. Raman Ispat Pvt. Ltd. & Ors (2023- SC)
Gist: The Supreme Court clarified that the ratio of the Rainbow Papers case should be confined to its specific statutory context, emphasizing that not all government dues automatically qualify as secured under insolvency proceedings.
Mr. Devarajan Raman (Liquidator) v. Principal Commissioner Income Tax and Ors (2024 – NCLAT)
Gist: This case held that set-off of tax dues by the Income Tax Department was impermissible during the CIRP phase. The principle of set-off could not be applied until after the liquidation order was passed, reinforcing the distinct procedural requirements during CIRP and liquidation.
Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs (2022 – SC)
Gist: The Supreme Court ruled that while statutory authorities could determine the quantum of tax dues during the moratorium, they could not enforce or recover these dues unilaterally. This judgment highlighted the limited jurisdiction of statutory authorities during the insolvency process.
Principal Commissioner of Income Tax Vs Monnet Ispat and Energy Ltd. (2018) 18 SCC 786
Gist: The Supreme Court held that Section 238 of IBC, which provides an overriding effect over other laws, includes tax laws. This judgment reinforced the precedence of IBC provisions over conflicting statutory claims, including those from the Income Tax Department.
Footnote
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