Resolution Plan Approval under IBC extinguishes Past Tax claims/Demands: Bombay HC [Read Order]

The Bombay High Court has ruled that tax proceedings related to periods before the commencement of the Corporate Insolvency Resolution Process ( CIRP ) are extinguished once a resolution plan is approved. This decision follows the Assessee’s transition to new ownership and management under the CIRP.

The Division Bench, comprising Justice G. S. Kulkarni and Justice Somasekhar Sundaresan, noted that Section 31(1) of the Insolvency and Bankruptcy Code (IBC) mandates that the approval of a resolution plan by the adjudicating authority is binding on the Central Government and all its agencies concerning statutory dues, including taxes. Therefore, any enforcement actions by tax authorities in relation to past dues are bound by this approval.

Unlock Global Markets: Register for Foreign Trade Programme Now, Click here

The Petitioner, Uttam Value Steels Ltd., was admitted to the CIRP under an order of the National Company Law Tribunal (NCLT). Following this, a resolution plan, approved by the Committee of Creditors (CoC) and sanctioned by the NCLT as per Section 31 of the IBC, included a complete waiver of all tax and interest dues that accumulated prior to the CIRP’s initiation.

Before the CIRP, the Assessing Officer (AO) had conducted a search and seizure operation against the Vinod Jatia group, alleging that several companies within the group engaged in bogus transactions and fictitious accounting entries. Some of these transactions involved the Petitioner.

The AO then notified the Petitioner about initiating proceedings under Section 153C of the Income Tax Act, alongside multiple summonses under Section 133(6). The Assessee objected, stating that all past claims, including those from the Revenue, were extinguished following the resolution plan's approval. Despite this, the Revenue rejected the Assessee's objections. The Petitioner subsequently approached the High Court, seeking to quash all notices and communications from the Revenue, arguing that Section 31 of the IBC makes the resolution plan binding on the tax authorities as well.

The Bombay High Court noted that the tax proceedings against the Vinod Jatia Group predated the CIRP and concluded that, even if these liabilities were allowed to crystallise later, they would still pertain to the period before the approval of the resolution plan. As such, they stood extinguished. In reference to the Supreme Court ruling in Ghanshyam Mishra & Sons Pvt. Ltd., the Court reaffirmed that once a resolution plan is approved, no further proceedings can be initiated or continued for dues arising before the CIRP.

The Bench further emphasised that all dues not accounted for in the resolution plan are extinguished, and no one has the right to initiate or continue proceedings for such claims.

Unlock Global Markets: Register for Foreign Trade Programme Now, Click here

The Court thus rejected the Revenue’s argument that the proceedings pertained to liabilities emerging after the CIRP, calling it "misconceived and untenable." The Court clarified that the resolution plan’s approval closed all claims pursued by the Revenue for any activities prior to the CIRP.

Moreover, the Court dismissed the Revenue’s claim that the tax amounts, not having crystallised yet, should be considered future dues, stating that they were, in fact, past dues. In conclusion, the Court stressed that no proceedings related to operations before the CIRP approval could be pursued after the approval of the resolution plan.

The Bombay High Court thus quashed the tax proceedings, holding that since they predated the CIRP, they were extinguished, and the Assessee's petition was allowed.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates