Scrutiny By Income Tax Department Barred For The Period Covered By The Resolution Plan: Telangana High Court

The High Court of Telangana in a Bench consisting of Justice Ujjal Bhuyan and Justice Chillakur Sumalatha in Sirpur Paper Mills Limited & Another. V. Union of India & Two Others held that for the period covered by the Resolution Plan, Income Tax Department cannot carry out any scrutiny or assessment in respect of the Corporate Debtor regarding carry forward of losses and set off against future profits under Income Tax Act, 1961. Factual Background The Petitioner/ Corporate Debtor filed a writ petition under Article 226 of the Constitution in the High Court of Telangana seeking quashing of notices under the Income Tax Act sent by the Respondent/ Income Tax Department, with a direction to the Respondents not to reopen their claims which were settled in insolvency proceedings. Sirpur Paper Mills Limited (Petitioner no.1) was the Corporate Debtor, against whom its Operational Creditor, i.e. M/s. Rama Road Lines and others filed an application for initiating Corporate Insolvency Resolution Process u/s 9 of the Insolvency and Bankruptcy Code, 2016. The NCLT admitted the Corporate Debtor to insolvency on 18.09.2017. By virtue of the order, Section 13 came into play and moratorium was imposed. Resolution Applicant (Petitioner no. 2) submitted a resolution plan, which was revised and the final resolution plan was approved by the Committee of Creditors on 19.07.2018. The Corporate Debtor contended that even though the Income Tax Department had enough time to raise their claims before the resolution professional, it failed to do so. The Corporate Debtor, through Resolution Professional, filed a return for the assessment year 2017-18 on 17.10.2019. The Income Tax Department , thereafter issued notice dated 22.09.2019 u/s 143(2) of the Income Tax Act, 1961 r/w Rule 12E of the Income Tax Rules, 1962 for limited scrutiny of the Corporate Debtor's return. Hence, the notice was issued after the approval of the resolution plan. Responding to the notice, the Corporate Debtor, by a letter, said that as the Resolution Plan has been approved by the Tribunal, all proceedings and claims stood discharged by virtue of Section 31(1) of IBC. However, soon after this, the Income Tax Department again sent a notice to the Corporate Debtor to furnish the accounts for the assessment year 2017-18 regarding its immovable assets. Aggrieved by this, the Corporate Debtor filed a writ petition. Decision Of The High Court Objective Of The Code The Court observed that the main objective for the introduction of the IBC appears to provide an effective legal framework for timely resolution of insolvency and bankruptcy proceedings, which would support development of credit markets while encouraging entrepreneurship. The Code also seeks to balance the interest of all stakeholders in the payment of dues. It seeks to improve the ease of doing business, facilitating more investments, in the process leading to higher economic growth and development. While discussing other provisions of the IBC, the Court noted that Section 31 of the Code provides that once the resolution plan is approved by the Adjudicating Authority, it shall be binding on the corporate debtor and its employees, members, creditors including Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan. Section 53 provides for the distribution of assets in the order of priority/waterfall mechanism under the Code, clause (e) of which contains the dues of Central and State Government in respect to two years preceding the liquidation commencement date. Thus, it is included in the fifth entry. Section 238 of the Code states that 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. Thus, provisions of IBC will override other laws, including the Income Tax Act. Income Tax Act Vs. IBC In this regard, the Court took note of the following judgments- In Dena Bank v. Bhikhabhai Prabhudas Parekh & Co, the Supreme Court held that income tax dues being in the nature of crown debts do not take precedence over secured creditors who are private persons. Thus, the common law doctrine of priority of Crown debts would not extend to providing preference to Crown debts over secured private debts. The Court relied on the decision of the Supreme Court in Principal Commissioner of Income Tax v. Monnet Ispat and Energy wherein the Court disposed of the Income Tax Appeals filed by the Revenue in view of admission of insolvency resolution application against the assessee, which prohibited institution of suits or continuation of pending...

Scrutiny By Income Tax Department Barred For The Period Covered By The Resolution Plan: Telangana High Court

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