The Delhi High Court in a recent case[1] reiterated the legal position relating to outstanding tax of an entity which has or is undergoing the insolvency process under IBC, 2016. In the impugned case, the Revenue Department claimed that the petitioner owed it taxes despite such the Revenue Department’s claims not being part of the approved resolution plan. The High Court relying on relevant precedents stated that tax claims that were not part of the approved resolution plan stand extinguished and the Revenue Department is also bound by the resolution plan approved under IBC, 2016.
Facts
The petitioner, TUF Metallurgical Pvt Ltd, took over the management of the erstwhile corporate debtor in accordance with the terms of the resolution plan which was approved by the NCLT under Section 31(1), IBC, 2016 via order dated 05.11.2019. The public advertisement regarding commencement of the Corporate Insolvency Resolution Process (CIRP) was issued under Section 15, IBC, 2016 stating that the last date for filing of claims was 21.01.2019. But until the said date the Revenue Department did not submit any claim. It was on 12.12.2019 that the Revenue Department passed an order against the petitioner qua Assessment Year 2017-18. The petitioner’s claim was that the tax demand was barred after the approval of resolution plan was rejected by the Revenue Department which issued a Demand Notice and levied a penalty on the petitioner. Against the said order, the petitioner filed a writ petition before the Delhi High Court.
Arguments
The arguments of the petitioner and the Revenue Department were straightforward. The petitioners argued that the Revenue Department ignored the legal and factual ramifications which ensued on conclusion of any insolvency process. The petitioner stated that once the resolution plan was approved by the concerned authority, it was not open to the Revenue Department to open stale claims which were settled upon conclusion of the insolvency proceedings. The Revenue Department, on the other hand, argued that it stood on a ‘different footing’ from other creditors and that the tax claims of the Revenue Department would not be affected by the provisions of IBC, 2016. (para 4)
Decision
Given that the argument of the Revenue Department did not have a legal leg to stand on, the decision of the Delhi High Court did not involve unravelling a complex legal web. The High Court’s conclusion rested on Supreme Court’s observations in Ghanshyam Mishra’s case[2], where the Supreme Court categorically observed that once the resolution plan has been approved by the adjudicating authority under Section 31(1), IBC, 2016, the claims as provided in the resolution plan shall stand frozen and shall be binding on the corporate debtor, its employees, members, Central Government, State Government, guarantors and other stakeholders. It was clarified by the Supreme Court that claims that are not part of the resolution plan shall stand extinguished and no person shall be entitled to initiate or continue proceedings in respect of claims which were not part of the resolution plan. It was further clarified that the said bar also applies to tax due to the Central or State Government.
The conclusion, based on the findings in Ghanshyam Mishra case is that if the Revenue Department fails to respond to the public advertisement in time, its claims will not be part of the resolution plan. And subsequently, the Revenue Department cannot initiate proceedings in respect of taxes due prior to initiation of insolvency proceedings on the ground that it stands on a different footing than other creditors. Courts and IBC, 2016 do not acknowledge, and rightly so, that the Revenue Department is not bound by terms of the resolution plan. Accordingly, the Delhi High Court in the impugned case allowed the petitioner’s writ petition and set aside the demand and orders by the Revenue Department.
Conclusion It is indeed a case of unending mystery that why does the Revenue Department does not respond to the public notices relating to commencement of insolvency process on time. And if it for some reason fails to respond to the notices on time, why does it initiate proceedings against the assessees, when the law clearly states that the provisions of IBC, 2016 shall override all other laws,[3] which of course also includes tax legislations. And more specifically, if the Revenue Department’s claim was not part of the approved resolution plan, the claim stands extinguished. The Revenue Department does not stand on a ‘different’ footing from other creditors. The IBC, 2016 certainly does not state so. It is a self-image that the Revenue Department has conjured with no legal basis.
[1] TUF Metallurgical Pvt Ltd v Union of India & Anr 2023:DHC:8856-DB.
[2] Ghanshyam Mishra & Sons Pvt Ltd v Edelweiss Asset Reconstruction Co Ltd (2021) 9 SCC 657.
[3] Section 238, IBC, 2016.