[By Chirag Motwani]
The author is a student of Hidayatullah National Law University, Raipur.
Introduction:
To enhance the corporate governance regime in India, the Insolvency and Bankruptcy Code, 2016 (IBC) was enacted. The primary purpose of the act was to look upon the financially distressing entities and their revival as a foremost objective. IBC is considered an evolving piece of legislation owing to the numerous development that occurred since its enactment. One of the peculiar features of IBC is its relation with other legislations. One such relation is the relation of IBC with the Income Tax Act. Since the enactment of the Insolvency and Bankruptcy Code (IBC), the conundrum surrounding the validity of reassessment notices under the Income Tax Act for a period preceding the approval of a resolution plan under the IBC reflects the intricate interplay between two distinct legal frameworks. The IBC aims to deal with the financially distressed entities in a way to revive them as the foremost objective.The IBC, designed to address corporate insolvency, aims to provide a streamlined mechanism for the revival and resolution of financially distressed entities. However, the Income Tax Act, which governs the taxation aspects, poses challenges when it comes to reconciling the timelines of insolvency proceedings and the tax assessment cycle. The question arises as to whether reassessment notices issued by tax authorities for a period predating the approval of the resolution plan are valid, considering that the financial landscape of the entity undergoes substantial changes during the insolvency process. The issue needs clarity for effective legal functioning as well as harmonizing both the legal frameworks. This piece aims to highlight the judicial trends in this regard and aims to provide a suitable position of law concerning the dilemma underlined above.
Judicial Trends:
The question concerning the validity of such notices for a period prior to the approval of resolution plan has been dealt in, Murli Industries Limited vs. Assistant Commissioner of Income Tax & ors. The Bombay High Court herein took a view that, the revenue cannot issue notices against the corporate debtor for unpaid taxes after the adjudicating authority has approved the resolution plan. In the case, after the approval of the resolution plan took place in 2019 by NCLT and was upheld by NCLAT in 2020. The Revenue issued Reassessment Notices to the company for the assessment year 2014-15. Bombay HC considered the notices issued by the revenue invalid as the period pertaining to the notice was covered under the resolution plan. Similarly, in The Sirpur Paper Mills Limited and Ors. Vs. Union of India and Ors. the Telangana High Court took a view of setting aside the notices issued by the Income Tax Department for a period dated prior to the resolution plan. The court in the judgment in paragraph 70 mentioned, “From the tone and tenor of the impugned notices what is evident is that respondents are seeking to pass assessment order under Section 143(3) of the Act since the case of petitioner No. 1 was selected for limited scrutiny under CASS. However, the period of the assessment order would be a period covered by the resolution plan.” Again in, Rishi Ganga Power Corporation Ltd. Vs. Assistant Commissioner of Income Tax the Delhi High Court recently took a view that the notices issued by the Income Tax Department under Section 142(1) as invalid as the period for which the notices were issued were predating the period of resolution plan that was approved by the adjudicating authority. However a shift in the position of precedential values was observed in the approach of Madras High Court in, Dishnet Wireless Ltd. v. Assistant Commissioner of Income Tax wherein, the income-tax authorities had initiated reassessment proceedings for AY 2011-12 and AY 2012-13, post admission of the CIRP application. The High Court passed interim orders in the matter, allowing the income-tax authorities to proceed with the reassessment.
This came as an anomaly to the prevailing practice of invalidating the notices for a period prior to the approval of the resolution plan. The rationale behind the allowance of reassessment notices was that the IBC although having an overriding effect cannot impinge upon the rights of any other law being in force at the time and thus IBC cannot dilute the rights of the Income Tax authorities to reassess the assesse for any unpaid tax amount. This judgment is particularly conflicting with the generally accepted position of law and also dampens the spirit of IBC.
Analysis:
It is important to understand the objectives of the IBC in order to analyze the anomaly in Dishnet. The primary objective of the IBC is to revitalize the financially distressed entities.One of the objectives of the code is to revive the corporate debtor. To ensure this it becomes necessary that after the approval of the resolution plan the corporate debtor is not faced by a situation wherein a payment has to be done to clear dues predating the resolution plan. The Supreme Court in, the Essar Steel Case emphasized upon the surprise claims that the corporate debtor should not face after the approval of the resolution plan. The court provided, “ 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 hydra head popping up which would throw into uncertainty amounts payable by the prospective resolution applicant who would successfully take over the business of the corporate debtor.” Furthermore, the over-riding effect of IBC helps in this regard. The over-riding effect has been upheld and provides for the supremacy of the code in case of conflict with other prevailing laws. The Madras High Court did not consider the line of reasoning as provided above and instead passed orders hampering the spirit of IBC. Furthermore the Apex Court in the Ghanshyam Case inter-alia dealt with the “mischief” conducted by authorities also comprising the tax authorities that continued with litigation even after the approval of the resolution plan and provided that it went against the legislative intent of the lawmakers and thus put unnecessary claims upon the corporate debtor. The court provided, “In order to remedy the said mischief, the legislature thought it appropriate to clarify the position that once such a resolution plan was approved by the adjudicating authority, all such claims/dues owed to the State/Central Government or any local authority including local authority including tax authorities which were not the part of the resolution plan shall stand extinguished.” Thus the Madras High Court’s approach in the case has been much criticized.
Conclusion:
The line of reasoning and such distinguishment by the Madras High Court has been severely criticized. On the face of the judgment although much questions have been already raised. One important question that arises is about the incongruity in Dishnet. The case was not of legislative interpretation and moreover the interpretation related to the subject matter and the authority i.e. Income Tax Department have been already answered in Essar Steel and Ghanshyam Case. This raises the question of irregularity caused by the Madras High Court and it’s possible violation of Article 141 of the Indian Constitution and Doctrine of Stare-Decisis. Although the judgment in Dishnet has been stayed by the Supreme Court, it is important that the lower courts follow the precedents. It is also paramount to consider the over-riding effect of the code in order to harmoniously understand most of the anomalies arising with the clash of a statue with IBC. The Insolvency Law Committee Report of March 2018 reflects on the legislative intent behind the enactment of the Code. It reads: “…the introduction of this legislation was done with the aim of replacing the existing framework for insolvency, which was visibly inadequate, ineffective and wrought with delays.” Conclusively, the spirit of the IBC pertaining to timely dispute settlement and reducing unnecessary burden upon the party taking over the corporate debtor should be paramount.