The Allahabad High Court in a recent case ruled that any new liability being fastened after the approval of the Resolution Plan would inherently and palpably be illegal and go beyond the Lakshman Rekha of the Insolvency Bankruptcy Code ( IBC ), 2016.
Ns Papers Limited and Another,the writ petitioner has challenged the Assessment Order dated April 28, 2021 passed under Section 144 read with Section 144B of the Income Tax Act, 1961 (‘the Act’) for the assessment year 2018-19.
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The petitioner was the erstwhile company that went through insolvency proceedings. The resolution plan was approved on February 24, 2021 wherein the Income Tax Department had also put forward its claim before the resolution professional. Subsequent to the resolution plan being approved, the assessment order has been passed for the particular assessment year.
Counsel appearing on behalf of the petitioner reiterated that by letter dated March 8, 2021 this information had been communicated to the Income Tax Department. She, accordingly, submits that the entire proceedings that has been initiated and the impugned order that has been passed are without any basis in law and are specifically contrary to Section 31 of the Insolvency and Bankruptcy Code, 2016 ( ‘the Code’).
Since as per the Resolution plan, all pending proceedings are extinguished, now the Resolution Applicant cannot be burdened with this assessment order which is not part of the Resolution Plan. The provisions of IBC ensures that the successful resolution applicant starts running the business of the corporate debtor as a fresh innings after the approval of resolution plan. However, the respondent No.2 passed an impugned order after approval of the resolution plan and made addition. The Resolution Applicant cannot be saddled with any unforseen liability and impugned order is bad as it amounted to fastening liability on the Resolution applicant beyond what has been agreed in the Resolution Plan.
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Mr. Mahajan, counsel appearing on behalf of the respondent authorities has supported the assessment order on the ground that no proper information was given by the petitioner to the Income Tax Authorities with regard to resolution plan. Ergo, the assessment that was carried out by means of faceless assessment was correctly done as the department did not have notice of the IBC proceedings against the petitioner.
Counsel appearing on behalf of the respondent authorities further submits that all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of resolution plan shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority granted its approval under Section 31 could be continued.
It was argued that the question as to whether or not regular assessment under the provisions of the Act can be initiated, continued with and concluded where CIRP under the Code has been initiated and moratorium under Section 14 of the Code has been imposed by the NCLT, has not expressly been raised nor answered, and therefore remains res-integra.
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He further submitted that if proceedings under the Act could be initiated, continued with and culminated during the course of CIRP and institution of Moratorium u/s 14 of the Code, the following may also kindly be considered, for these have a bearing on the fact that income tax proceedings should not get shadowed or extinguished merely by the institution of CRIP and passage of a moratorium order, unless the proceedings were clearly inconsistent with or repugnant to any provisions of the Code, which is not the case here.
It was evident that the petitioner had informed the Income Tax Authorities with regard to the approval of the resolution plan. Secondly, the department itself had filed a claim before the Resolution Professional, and the argument that the department was not aware of the IBC proceedings holds no water.
The argument that an assessment has been kept pending for a prior period and is quantified subsequent to the approval of the resolution plan is an argument in sophistry. If this argument is accepted then all authorities would be in a position to keep assessment/re-assessment pending till completion of the Resolution Plan, and thereafter, culminate the same and saddle the successful Resolution Applicant with an unknown burden.
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A division bench of Justice Shekhar B. Saraf and Justice Vipin Chandra Dixit held “The law cannot be read in a manner wherein the basic structure of the Code is breached by hindering the flow of the same by creation of roadblocks and dams – the underlying principle of the Code is to give a fresh start to the Resolution Applicant. Any new liability being fastened after the approval of the Resolution Plan would inherently and palpably be illegal and go beyond the Lakshman Rekha of the Code.”
The court quashed the impugned assessment order dated April 28, 2021 and held that in the event any penalty proceedings have been initiated by the department, the writ petitioner shall be at liberty to challenge the same in accordance with law.
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