Approved IBC Resolution Plan Extinguishes Prior Tax Demands

Approved IBC Resolution Plan Extinguishes Prior Tax Demands But Preserves Brought Forward Business Losses

Issue

Whether the Revenue department can raise fresh tax demands against a corporate debtor for additions relating to a period prior to the National Company Law Tribunal (NCLT) approval date, if no such claim was placed before the NCLT.
Whether the “clean slate” principle under the Insolvency and Bankruptcy Code (IBC) disables a corporate debtor from carrying forward and setting off its pre-resolution accumulated business losses against future profits.

Facts

A search operation conducted on a related business group unearthed incriminating material belonging to the assessee, who is a corporate debtor.
Based on this material, the Assessing Officer initiated proceedings by issuing a notice under Section 153C and subsequently made several tax additions and transfer pricing adjustments for the assessment year 2015-16.
While the matter was pending before the Commissioner (Appeals), a corporate resolution plan for the assessee was approved by the NCLT and later restored by the Supreme Court via an order dated February 28, 2020.
The assessee argued that under Section 238 of the IBC, the resolution plan wiped out all past, unsubmitted tax liabilities and demands.
The Commissioner (Appeals) adjudicated the case on its merits but ruled that only the accumulated, brought-forward losses could be adjusted.
The Revenue department appealed, arguing that if the corporate debtor is granted a “clean slate” from past tax liabilities, it should also lose the right to carry forward and set off its past unabsorbed losses in future years.

Decision

Held, yes: Since the Revenue department did not submit any tax claim or demand before the NCLT, no fresh demand can be raised against the assessee for additions pertaining to the period prior to the resolution plan’s effective date.
Held, yes: The “clean slate” principle cannot be twisted to cancel the corporate debtor’s accumulated brought-forward losses, meaning the company retains the right to carry them forward and set them off.

Key Takeaways

IBC Overrides Prior Tax Demands: Section 238 of the IBC gives the resolution process absolute statutory priority over the Income-tax Act. Any tax liability or demand originating before the effective date of an approved resolution plan is permanently extinguished if the tax department fails to lodge it as a claim before the NCLT.
Asymmetrical Protection of Assets: The “clean slate” rule operates as a shield for the new management against hidden or unsubmitted past liabilities; it does not destroy valid tax attributes like accumulated business losses.
Losses Form Part of Corporate Value: Accumulated business losses are commercial assets that influence a resolution applicant’s decision to rescue a distressed company. Forcing the forfeiture of these losses would undermine the core IBC objective of reviving sick corporate entities.

IN THE ITAT CHENNAI BENCH ‘D’

Orchid Pharma Ltd.

Deputy Commissioner of Income-tax^*

ABY T. VARKEY, Judicial Member
and MS. PADMAVATHY.S, Accountant Member

IT Appeal No.4079 (CHNY) of 2025
IT(TP)Appeal No.36 (CHNY) of 2025
[Assessment year 2015-16]

MAY 11, 2026

Shrenik Chordia, C.A. for the Appellant. V. Justin, CIT for the Respondent.

ORDER

Ms. Padmavathy. S, Accountant Member.- These cross appeals by the assessee and the Revenue are against the order of the Commissioner of Income Tax (Appeals), Chennai-18 (in short “CIT(A)”) passed u/s. 250 of the Income Tax Act, 1961 (in short “the Act”) dated 28.10.2025 for Assessment Year (AY) 2015-16.

2. The assessee is a company and filed the return of income for AY 201516 on 30.11.2015 admitting total income at Nil. There was a search and seizure operation u/s. 132 of the Act carried in the case of M/s. Shri Rama Chandra University Trust Group on 23.11.2015. The A.O of the searched party has sent satisfaction notice u/s. 153C of the Act stating that certain seized materials belongs to the assessee and accordingly the A.O after recording satisfaction issued a notice u/s. 153C of the Act. The assessee in response filed the return declaring total income at Nil. Since the assessee had international transactions, the A.O made a reference to the Transfer Pricing Officer (TPO) to complete the Arm’s Length Price (ALP) of the international transactions. The TPO proposed a transfer pricing adjustment to the tune of Rs.9,26,43,358/-. The A.O passed the draft assessment order incorporating the TP adjustment. The A.O also made various additions/disallowances. Since the assessee preferred further remedy through CIT(A), the A.O passed the final assessment order against which the assessee filed an appeal before the CIT(A). Before the CIT(A), the assessee brought to notice that the National Company Law Tribunal (NCLT) has passed an order in assessee’s case on 27.10.2017 which was agitated by some creditors before the National Company Law Appellate Tribunal (NCALT) which set aside vide order dated 13.11.2019 the order of the NCLT. The assessee further brought to the attention of the CIT(A) that the NCALT order was challenged before the Hon’ble Supreme Court and the Supreme Court vide order dated 28.02.2020 restored the order of the NCLT. The assessee accordingly submitted that as per the provisions of Section 238 of the IB Code 2018 which has an overriding effect on all other laws and therefore any demand arising out of any proceedings prior to the order of the NCLT would become Nil. The CIT(A) however proceeded to adjudicate the issues on merits stating that the adjudication of the appeal before him is not going to result in any enhancement or reduction of demand since only loses claimed are brought forward will be adjusted. The CIT(A) on merits gave partial relief to the assessee. Both the assessee and the Revenue are in appeal against the order of the CIT(A).

3. The Ld. Authorized Representative (AR) of the assessee submitted that Ground No.5 in assessee’s appeal pertains to the legal contention that all claims, demands and statutory dues of the revenue prior to 31.03.2020 i.e. effective date stands extinguished and nullified. The ld AR further submitted that if the said ground is considered and allowed, the rest of the grounds of the assessee and also the grounds of the revenue would become academic. Accordingly we will first consider Ground No.5 in assessee’s appeal.

4. The ld AR reiterated the facts as submitted before the lower authorities. The Ld. AR submitted that the NCLT order approving the resolution plan was passed don 27.06.2019 whereas the final assessment order u/s. 143(3) r.w.s. 144C r.w.s 153C of the Act for the impugned year was passed on 18.02.2019 i.e., prior to the date of approval of resolution plan. The Ld. AR drew our attention to the approved resolution plan whereby any claims pertaining to the period up to the effective date i.e., 31.03.2020 would get extinguished. The relevant part of the resolution plan is extracted hereunder:

“8.2. All claims, liabilities, damages, penalties, cause of actions, deficiencies, assessments, demands or losses of any nature whatsoever (whether admitted/verified/submitted or not, due or contingent, asserted or unasserted, crystallised or uncrystallised, known or unknown, disputed or undisputed, present or future or whether or not set out in the balance sheet or profit & loss account of the Corporate Debtor or the list of the creditors) shall be dealt with only as envisaged in this Resolution Plan and all other claims (including whether pending before any court or authority, arbitrator or otherwise) or demands made by or liabilities or obligations owed or payable to any Person (including any demand for any losses or damages, principal, interest, compound interest, penal interest, notional or crystallized mark to market losses on derivatives and other charges already accrued/accruing or in connection with any third-party claims) to which the Corporate Debtor is or may be subject to and which pertains to the period on or before the Effective Date, shall stand irrevocably and unconditionally settled, discharged and extinguished in perpetuity.”

5. The Ld. AR also drew our attention to the decision of the Coordinate Bench of the Tribunal in assessee’s own case for AY 2013-14 & 2014-15 with regard to levy of penalty where the Coordinate Bench has deleted the penalty considering the resolution plan of the NCLT. The relevant observations of the Coordinate Bench in this regard are extracted below:

“14. Having heard both the parties and on perusal of the sequence of events as filed by the Id. AR vide letter dated 28.08.2024, which is not disputed by the Id. DR, we find from the decision dated 28.02.2020 passed by the Hon’ble Supreme Court in the case filed by the State Bank of India against one of the “Resolution Applicants” M/s. Accord Life Spec Private Limited by setting aside the order of the NCLAT, confirmed the order of the NCLT approving the “Resolution Plan approved by the CoC in compliance of section 30(2) of the Code settling the operational creditors including the income-tax at NIL value. Therefore, in our opinion, the penalty imposed under section 271(1)(c) of the Act does not survive and it is deleted. Thus, the grounds raised in the both the appeals are allowed.”

6. The Ld. AR without prejudice submitted that the addition sustained by the CIT(A) with regard to the TP adjustment towards management fee is not arisen out of incriminating material found during the course of search. The Ld. AR submitted that the year under consideration is an unabated assessment and therefore the A.O cannot make any addition without any incriminating material. The Ld. AR in this regard relied on the decision of the Hon’ble Supreme Court in the case of Pr. CIT v. Abhisar Buildwell (P.) Ltd. 454 ITR 212 (SC) . With regard to the additions deleted by the CIT(A), The Ld. AR submitted that the issues were covered by the decision of the Coordinate Bench in assessee’s own case and the CIT(A) has correctly followed the binding precedence to allow the issues in favour of the assessee.

7. The Ld. Departmental Representative (DR), on the other hand, relied on the orders of the TPO/A.O.

8. We have heard the parties, and perused the material available on record. The final assessment order u/s. 143(3) r.w.s.144C r.w.s.153C in assessee’s case is passed on 18.02.2019 and the NCLT order approving the resolution plan is passed on 27.06.2019. From the perusal of the order of NCLT we notice that all pending claims that are not part of the resolution plan which pertain to the period on or before the Effective Date i.e. 31.03.2020, shall stand irrevocably and unconditionally settled, discharged and extinguished in perpetuity. During the course of hearing it is submitted before us that no demand or claim towards income tax dues have been placed before the NCLT and that the same is not part of the approved resolution plan. Therefore we see merit in the contention of the ld AR that the any demand towards the additions sustained by the CIT(A) can be raised against the assessee since the same pertain to period prior to the effective date.

9. The ld DR raised a contention that if the assessee’s contention of being provided with a “clean slate” by the order of the NCLT is to be accepted then the unabsorbed losses of the assessee cannot also be allowed to be carried forward. The ld DR argued that if the losses are allowed to be carried forward then the same would amount to allowing double benefit of no demand against the assessee as well as losses being allowed to be set off against future profit. In this regard we notice that the Hon’ble Bombay High Court while considering an identical issue in the case of Amns Gandhidham Ltd. v. ACIT (Bombay)] has held that –

14. As regards to the Revenue’s contention that allowability of losses can be examined by the Respondents, we find that this would not be permissible in the facts of the present case because notice to the Principal Commissioner under Section 79 (2) (c) of the I. T. Act was served on the Principal Commissioner on 28th June 2022 and the Principal Commissioner did not make any submissions at the time when the Resolution Plan was approved by the NCLT or any time prior thereto. Once this is the case, denial of carry forward of losses cannot be denied to the Petitioner. We say this also because we find merits in the Petitioner’s contention that availability of such losses would be one of the factors that would have been taken into account by the Resolution Applicant when submitting its proposal to take over the Corporate Debtor (namely, the Petitioner).

10. The ld AR during the course of hearing submitted that in assessee’s case also the revenue has not made any submission before the NCLT and this fact is not controverted by the ld DR during the course of hearing. Accordingly we are unable to appreciate the contention the “clean slate” provided by the order of the NCLT is to be applied to the brought forward losses of the assessee company. In view of these discussions we hold that additions made by the AO do not survive. Accordingly the grounds in assessee’s appeal on merits and the grounds in revenue’s appeal have become academic.

11. In result the appeal of the assessee is partly allowed and the revenue’s appeal is dismissed.