Income Tax recovery notices for pre-resolution plan dues, including penalties, are quashed if not part of the NCLT-approved resolution plan, as such dues stand extinguished.
Issue:
Whether demands raised by the Income Tax Department (including penalties under Sections 270A and 271AAC of the Income-tax Act, 1961) for a period prior to the date on which the National Company Law Tribunal (NCLT) approved a resolution plan under Section 31 of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016), can be recovered through a recovery notice issued by the Assessing Officer (AO), if these dues were not claimed as part of the approved resolution plan.
Facts:
- For Assessment Year 2017-18, a corporate debtor was undergoing an insolvency resolution process under the Insolvency and Bankruptcy Code, 2016.
- The NCLT had approved a resolution plan submitted by the corporate debtor.
- Subsequent to the approval of the resolution plan, the Assessing Officer (AO) issued a recovery notice to the corporate debtor.
- This recovery notice sought to enforce a demand arising from:
- A penalty order passed under Section 270A of the Income-tax Act (penalty for under-reporting or misreporting of income).
- A demand raised pursuant to a penalty order passed under Section 271AAC (penalty for failure to explain certain cash credits/investments).
Decision:
The court held in favor of the assessee (corporate debtor). It ruled that once a resolution plan was approved, and the demand raised by the Income Tax Department was not claimed in the said resolution plan, such dues, if not forming part of the resolution plan, would stand extinguished. Consequently, no proceedings in respect of such dues for a period prior to the date on which the adjudicating authority (NCLT) granted its approval under Section 31 of the IBC could be continued. Therefore, the impugned recovery notice issued by the Assessing Officer was to be quashed and set aside.
Key Takeaways:
- Supremacy of IBC and Approved Resolution Plan: This judgment underscores the paramountcy of an approved resolution plan under the IBC, 2016. Once a resolution plan is approved by the NCLT under Section 31, it becomes binding on all stakeholders, including the Central and State Governments and any statutory authority (like the Income Tax Department).
- Extinguishment of Unclaimed Dues: A critical consequence of an approved resolution plan is that all claims and demands related to periods prior to the date of approval that were not part of the resolution plan (i.e., not admitted or provided for in the plan) stand extinguished. This includes tax dues, interest, and penalties.
- “Clean Slate” Principle: The IBC aims to provide a “clean slate” to the corporate debtor, allowing it to start afresh without the burden of pre-existing debts that were not accounted for in the resolution plan.
- Failure to File Claim: The Income Tax Department, like any other creditor, has a responsibility to file its claims (including tax demands and penalties) with the Resolution Professional during the Corporate Insolvency Resolution Process (CIRP). If a claim is not filed or not admitted into the resolution plan, it cannot be subsequently enforced.
- No Separate Recovery Post-Approval: Once the resolution plan is approved by the NCLT, the tax authorities cannot initiate or continue any recovery proceedings for pre-CIRP demands that were not part of the plan.
- Applicability of Sections 220, 270A, 271AAC: While Sections 220 (tax payable and deemed in default), 270A (penalty for under-reporting), and 271AAC (penalty for certain cash credits) are provisions of the Income-tax Act, their enforceability for periods preceding the resolution plan is subject to the IBC framework.
- In favour of assessee: The quashing of the recovery notice provides significant relief to the corporate debtor, freeing it from the burden of these prior tax demands.
- This aligns with multiple Supreme Court pronouncements (e.g., Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd.) which have firmly established the extinguishing effect of an approved resolution plan on all pre-CIRP claims not forming part of the plan.
HIGH COURT OF GUJARAT
V S Texmills (P.) Ltd.
v.
Assistant Commissioner of Income-tax
BHARGAV D. KARIA and P. M. Raval, JJ.
R/SPECIAL CIVIL APPLICATION NO. 9098 of 2024
MAY 9, 2025
Tushar Hemani, Sr. Adv. and Ms. Vaibhavi K. Parikhfor the Petitioner. Ms. Maithili D. Mehtafor the Respondent.
ORDER
P. M. Raval, J. – Heard learned senior advocate Mr.Tushar Hemani assisted by learned advocate Ms.Vaibhavi Parikh for the petitioner and learned advocate Ms.Maithili Mehta for the respondent.
2. Rule returnable forthwith. Learned advocate Ms.Maithili Mehta waives service of notice of rule for and on behalf of the respondent.
3. Having regard to the controversy arising in the present petition in narrow compass, with the consent of learned advocates appearing for the respective parties, the matter is taken for final disposal today.
4. By way of the present petition, the petitioner has challenged recovery notices dated 4.3.2024 and 9.4.2024 issued by the respondent under the provisions of the Income Tax Act for the assessment year 2017-18 raised for the year under consideration consequent to passing of the penalty order dated 18.10.2021 under section 271(1)(c) of the Income Tax Act as well as penalty order dated 24.11.2021 under section 270-A of the Income Tax Act.
5. Brief facts of the case are as follow.
5.1 The Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code 2016 was initiated against the petitioner before the National Company Law Tribunal, Ahmedabad and eventually, resolution plan was approved by the committee of creditors which was further approved by the NCLT, Ahmedabad vide order dated 1.1.2020 passed in Smt. Bhavi Shreyansh Shah v. Canara Bank (NCLT – Ahd.)/IA No.664 of 2019 in CP (IB) No.299/NCLT/AHM/2018.
5.2 On 15.12.2023, the petitioner was communicated by the Income Tax Department via email that there are certain outstanding in the case of the petitioner to which the petitioner responded online on 15.12.2023 itself categorically stating that they disagree with the demand raised by the respondent in view of the order passed by the NCLT, Ahmedabad dated 1.1.2020.
5.3 On 29.2.2024, the petitioner requested the respondent to cancel outstanding demand for the year under consideration.
5.4 On 4.3.2024, the respondent authority issued the recovery notice for the year under consideration and on 7.3.2024, the petitioner vide letter dated 5.3.2024 responded to the said notice with a request to cancel outstanding demand in case of the petitioner.
5.5 The respondent thereafter issued recovery notice dated 9.4.2024 raising demand of Rs.1,26,02,075/- raised pursuant to penalty order dated 24.11.2021 passed under section 270A of the Income Tax Act as well as demand of Rs.2,02,200/- raised pursuant to penalty order dated 18.10.2021 passed under section 271AAC of the Income Tax Act for the year under consideration coupled with the fact that none of the above order dated 18.10.2021 under section 271AAC nor penalty order under section 270A dated 24.11.2021 were served upon the petitioner. Hence, the present petition.
6. Learned senior advocate Mr. Tushar Hemani has relied upon the decision of the Honourable Apex Court in the case of Ghanashyam Mishra & Sons (P.) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd/(2021) 9 SCC 657 and has argued that once the order under section 31 of the IBC has been passed by the NCLT, Ahmedabad whereby the resolution plan submitted in the course of CIRP proceedings initiated in the case of the petitioner has been approved, in such circumstances, the impugned recovery notices issued by the respondent in relation to outstanding demand for the year under consideration are bad in law, unjustified, contrary to law and hence, the same are required to be quashed and set aside.
7. Learned standing counsel Ms.Maithili Mehta appearing for the respondent has argued that as per the judgment delivered in the case of Rainbow Private Limited, statutory dues of the Income Tax Department are to be considered as secured creditors and therefore, demand notices issued are in accordance with law and no interference is required at the hands of this Court.
8. Having perused the documents placed on record by the petitioner which have gone uncontroverted by the respondent authority, what emerges on record is that vide order dated 1.1.2020, the NCLT, Ahmedabad has approved the resolution plan, whereas the notices by the respondent authority were issued on 4.3.2024 and 9.4.2024 for the assessment year 2017-18. Thus, once the resolution plan is approved and the respondent having not claimed demand for the assessment year 2017-18 in the said resolution plan, such dues, if not forming part of the 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 (NCLT) grants its approval under section 31 could be continued. This has been specifically held by the Honourable Apex Court in the case of Vaibhav Goel v. Dy. CIT INSC 375 where the judgment in the case of Ghanashyam Mishra and Sons Pvt Ltd (supra) has been referred to and demands made by the Income Tax Department were held to be invalid and unenforciable. Para 95 reads as under.:
“95. In the result, we answer the questions framed by us as under:
| (i) | That once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan; |
| (ii) | 2019 amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect; |
| (iii) | Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the 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 grants its approval under Section 31 could be continued.” |
9. In view of the settled proposition of law and considering the facts on hand, admittedly, the impugned notices are issued for the assessment year 2017-18 much after approval of the resolution plan on 1.1.2020, the notices at Annexure-A dated 4.3.2024 and 9.4.2024 for the assessment year 2017-18 are required to be quashed and set aside and accordingly, the same are quashed and set aside.
10. Rule is made absolute to the aforesaid extent with no order as to costs.