The Calcutta High Court has ruled that personal hearing conducted by way of exchange of chat messages cannot be said to be an effective opportunity of personal hearing to the assessee and that it does not satisfy the test of fairness or the principles of fair play.
The Bench, consisting of Justices T.S. Sivagnanam and Hiranmay Bhattacharyya, reiterated that the moment an insolvency petition is admitted, in view of the moratorium that comes into effect under Section 14(1)(a) of the Insolvency and Bankruptcy Code, 2016 (IBC) there can be no institution or continuation of pending proceedings against the corporate debtor. The Court thus set aside the assessment order passed against the assessee and held that the proceedings initiated against the assessee under the Income Tax Act, 1961 should be kept in abeyance till the completion of insolvency resolution proceedings against the assessee.
A show cause notice was issued to the assessee SREI Equipment Finance Limited proposing to give effect to the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961. Section 263 gives power to the PCIT to revise the orders passed by the Assessing Officer on the ground that they are prejudicial to the interests of the revenue department.
The assessee SREI Equipment Finance Limited submitted a reply to the show cause notice averring that the proceedings initiated against the assessee were liable to be stayed in view of the provisions of Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) since the assessee had been admitted for Corporate Insolvency Resolution Process (CIRP) under IBC. The assessee contended that it was under moratorium by the orders of the National Company Law Tribunal (NCLT) and therefore requested the Assessing Officer (AO) to keep the proceedings under Income Tax Act in abeyance till the completion of the CIRP. The assessee also requested the AO for grant of opportunity of personal hearing.
Thereafter, the assessee filed a writ petition before the Single Bench of the Calcutta High Court challenging the show cause notice issued to it. During the pendency of the writ petition, an assessment order was passed by the AO. The Single Bench dismissed the writ petition of the assessee. Against this order, assessee filed an appeal before the Division Bench of the Calcutta High Court.
The Calcutta High Court observed that though the assessee had requested for an opportunity of personal hearing, the same was not afforded to it and a "so called hearing" by way of exchange of messages in the chat box was conducted.
The Court noted that the assessee again requested the revenue authorities for an opportunity of effective hearing, however, the AO did not consider or reply to the said request of the assessee and proceeded to pass an assessment order.
The Court ruled that the assessment order passed by the revenue department was an ex parte assessment order because the request made by the assessee for personal hearing was not granted to it. The Court added that the personal hearing was apparently conducted by way of exchange of chat messages and it was not clear as to how such an opportunity can be said to be an effective opportunity to the assessee.
The Court held that opportunity of personal hearing should be meaningful and it must not be an empty formality. The Court added that the said basic legal tenets were not noted and followed by the AO.
The Court observed that as per the law laid down by the Supreme Court in the case of Alchemist Asset Reconstruction Company versus Hotel Gaudavan (P) Ltd. & Ors. (2017), the moment an insolvency petition is admitted, the moratorium that comes into effect under Section 14(1)(a) of IBC expressly interdicts institution or continuation of pending suits or proceedings against the corporate debtors. The Court held that the AO should have borne in mind the said legal principle before proceeding to pass the assessment order.
The Court held that the AO after receipt of assessee's reply to the show cause notice did not hear the assessee on the issue relating to the effect of IBC and the so-called hearing by way of exchange of chat messages did not satisfy the test of fairness or the principles of fair play.
Therefore, the Court ruled that the assessment order passed by the AO was liable to be set aside and the matter should be kept in abeyance till the completion of insolvency resolution proceedings against the assessee.
Thus, the Court allowed the appeal and quashed the assessment order.
Case Title: SREI Equipment Finance Limited versus Additional/Joint/Deputy/Assistant Commissioner of Income Tax and Ors
Case Citation: 2022 LiveLaw (Cal) 206
Dated: 10.05.2022 (Calcutta High Court)
Counsel for the Appellant: Mr. J.P. Khaitan, Sr. Advocate and Mr. Somak Basu, Advocate
Counsel for the Respondent: Mr. Tilak Mitra, Advocate