In a recent judgment, the Delhi High Court[1] emphasised and reiterated the ‘clean slate’ principle under the Insolvency and Bankruptcy Code, 2016 (‘IBC, 2016’). The High Court held that the notices issued by the Revenue Department after the Resolution Plan had been approved by the National Company Law Tribunal (‘NCLT’) were bad in law. The clean slate principle, as per the High Court, does not admit of any exceptions for the Revenue Department and the tax dues have to be paid as per the Resolution Plan, else they the tax claims will be considered as extinguished.
Facts
The Revenue Department’s impugned notice dated 28.08.2018 called upon Tata Steel Ltd, petitioner, to deposit tax for the assessment years 2001-02, 2009-10, 2010-11, and 2013-14. Via the same notice the petitioner was also asked to justify as to why a penalty under Section 221(1), IT Act, 1961 should not be levied. The petitioner challenged the notice broadly on the ground that the notices were issued after the approval of the Resolution Plan by the NCLT and fell within the ambit of ‘clean slate’ principle. In other words, once the Resolution Plan had been approved by the NCLT, all creditors were bound by the terms of the Resolution Plan and the Revenue Department could not claim an exception from the said principle.
The arguments advanced on behalf of the petitioner also mentioned that the Revenue Department was an operational creditor and tax due to it was operational debt within the meaning of Sections 5(20) and 5(21), IBC, 2016. And the claims that were made by the Revenue Department were the subject matter of the Resolution Plan while those claims that were not part of the Resolution Plan were extinguished and could not be recovered. And since the claim relating to penalty was not lodged by the Revenue Department before the Resolution Professional, it was not provided in the Resolution Plan and thus could not be recovered from the petitioner.
Delhi High Court Decides
The Delhi High Court enlisted the timeline of the Revenue Department’s claims and the insolvency process via which the petitioner became the successor entity to Bhushan Steel. The Delhi High Court noted the dates on which various assessment orders and other orders were passed by the CIT(Appeals) and held that it was clear that the demands for the Assessment Years in question were certainly outstanding on the date the Resolution Plan was approved. The High Court noted that for the Assessment Years 2009-10, 2010-11, and 2013-14 the claims were certainly filed by the Revenue Department before the Resolution Professional. While for the Assessment Year 2001-02 and claims for penalty there was a failure to lodge the relevant claim. In view of these facts, the High Court observed that the failure to lodge the claim within the prescribed time framework cannot result in such claims being placed on a better footing compared to other claims that were considered while finalizing the Resolution Plan.
The Delhi High Court correctly concluded that the demand qua Assessment Year 2001-02 which was communicated via an additional notice after approval of the Resolution Plan ordinarily would stand extinguished under IBC, 2016. However, since an appeal for the Assessment Year 2001-02 was pending before the Supreme Court, the High Court concluded that recoveries for the said Assessment Year would have to be made as per the decision in that appeal. (paras 26 and 32.1)
The Delhi High Court reiterated that qua claims of the Revenue Department filed before the Resolution Professional, i.e., before finalizing the Resolution Plan, they could only be satisfied as per the terms of the Resolution Plan. The Delhi High Court observed:
Notwithstanding the aforesaid argument advanced on behalf of the revenue, we are of the opinion that dues payable to creditors, including statutory creditors, for the periods which precede the date when the RP is approved, can only be paid as per the terms contained in the RP. (para 27)
Thus, if claims were filed by the Revenue Department after the approval of the Resolution Plan, they could not be satisfied since they were presumed to have been extinguished as per the clean slate principle. Though it is important to note here that the said claims should be pending when the proceedings under IBC, 2016 are initiated. Thus, to the extent the pending claims were lodged before the Insolvency Professional and are incorporated in the Resolution Plan approved by NCLT they will be satisfied in the terms incorporated in the said plan; for pending claims that were not incorporated they stand extinguished.
IBC, 2016 Overrides IT Act, 1961
The Delhi High Court also noted, in no ambiguous terms, that IBC, 2016 overrides IT Act, 1961. The fact that IBC, 2016 overrides IT Act, 1961 is a straightforward conclusion when one reads Section 238, IBC, 2016 as it states that the provisions of this law shall have effect notwithstanding anything contained in any other law for the time being in force, which by a reasonable interpretation also includes IT Act, 1961. Clarifying the same, the Delhi High Court observed that:
Thus, where matters covered by the 2016 Code are concerned [including insolvency resolution of corporate persons] if provisions contained therein are inconsistent with other statutes, including the 1961 Act, it shall override such laws. If such an approach is not adopted, it will undermine the entire object and purpose with which the Legislature enacted the 2016 Code. (para 29)
Conclusion
The Delhi High Court’s two observations that: first, pending tax claims against a company which underwent the insolvency process under IBC, 2016 can only be recovered as per the Resolution Plan; second, that IBC, 2016 overrides all other laws including IT Act, 1961 seem obvious and straightforward in hindsight. However, the aggressiveness of the Revenue Department to seek its claims despite the law saying otherwise requires that the law be laid in clear terms and perhaps repeatedly to thwart such tax claims that can cast a shadow on an insolvency process that seeks to revive a debt-laden company.
[1] Tata Steel v Deputy Commissioner of Income Tax 2023: DHC: 7855 – DB.