The provision under a Resolution Plan in relation to “Setting off of losses” under the Income Tax Act, 1961 is subject to scrutiny by the Income Tax Department: NCLAT
ORDER
The Hon’ble National Company Law Appellate Tribunal (NCLAT) has, by way of its order dated July 29 2020, in the matter of Pradeep M.R (Appellant) vs Ravindra Beleyur Resolution Professional in the matter of Merchem Limited & Ors (Respondents) in Company Appeal (AT) (Insolvency) No. 306 of 2019 inter-alia mentioned that setting up off losses under Income Tax Act, 1961 is subject to scrutiny by the Income Tax Department and IBC 2016 lays down that the Resolution Plan should be in compliance with the law laid down.
These Appeals have been filed under Section 32 and 61(3) of the Insolvency & Bankruptcy Code, 2016 to set aside the impugned order passed by the NCLT Chennai in relation to approval of the Resolution Plan. The case inter-alia deals with unreasonable setting off the debt by the resolution applicant and also, cost of the assets of plant and machinery not properly included in the Insolvency resolution process costs and also the debts owed to operational creditors of the corporate debtor have not been provided for in the resolution plan in the manner specified by the Board.
Submissions by the Appellant
1. The Appellant has submitted that the Resolution Plan of the Resolution Applicant is a sale of assets under the guise of Resolution Plan. He has also submitted that the Adjudicating Authority has failed to appreciate that the mass retrenchment/termination of the employees and workmen through Resolution Plan is without following the due procedure of law. He has also submitted that intent of the I&B Code, 2016 is Insolvency Resolution as a “going concern concept” and should not be slump sale of assets.
2. He has also stated that the Adjudicating Authority has failed to appreciate that no provision for payment of statutory dues related to employees/workmen such as gratuity, provident fund etc. has been made in the ‘Resolution Plan’ and it is discriminatory as against the employees and workmen of the Corporate Debtor
3. The Appellant has contended that he is the absolute owner of the Corporate Debtor’s factory, he has entered into a License Agreement with Corporate Debtor on 01.10.2011 and the Corporate Debtor has agreed to pay a sum of Rupees towards license fee payable either a lump sum or such other installments being Rs.16, 50,000/- towards building and Rs.38, 58,000/- towards plant and machinery. He is aggrieved that the License fee for the CIRP period forms part of IRP costs and should have been paid in full while this has not been considered and similarly the financial debt has not been paid.
4. Appellant has also stated that the Resolution Applicant has sought several concession and exemption like allowing setting up off of brought forwarded losses and unabsorbed depreciation for computation of Taxable Profits as per 9 Income Tax Act, 1961, directed to provide a reasonable opportunity to the jurisdiction Principal Commissioner of Income-tax for allowing this set of. Additionally, Accumulated losses as on 31.03.2018 itself are over Rs.121 Crores apart from unabsorbed depreciation. Hence, the impact is very high. In this context, there is a need for referring to the provisions of Section 61 of the I&B Code, 2016 which clearly lays down that the approved Resolution Plan should not be in contravention of the provision of any law for the time being in force apart from the other criteria as specified by the IBBI.
5. The Appellant has contended that he is a financial as well as an operational creditor and has reservations over the viability and feasibility of the Resolution Plan approved. Also, he had extended personal guarantees to the loans of Corporate Debtor and he has mortgaged several of his properties including his wife’s properties to raise loans for the Corporate Debtor.
Submissions by the Respondents
1. While the Respondent No.3 i.e. Resolution Applicant of Corporate Debtor has stated that the Resolution Applicant has already implemented the Resolution Plan by 18.03.2019 and has largely made all the payment to all the Stakeholders/Creditors and has incurred additional costs of Rs.22.40 Crores towards refurbishment of Plant. He has also confirmed that he is keeping the operation of the Corporate Debtor as a going concern and has re-employed 36 ex employees of Corporate Debtor out of total employees joining the unit being 93.
2. Where Resolution Applicant has submitted that the Appellant is sole proprietorship concern and is not being eligible under Section 61 of the IBC, 2016 to Appeal. He has also stated that the instant appeal has been filed on 16.05.2019 after the implementation of the Resolution Plan by 18.03.2019. He has also raised an issue that whatever amount he has got at that time he has not protested.
3. The Resolution Professional stated that the Appellants are the related party and hence are not prejudicially affected and he has determined over Rs. 6 Crores recoverable from the related party. He has also stated that that figures of Rent etc. are invariance with Income Tax Return filed by the Appellant and hence they are not entitled to the claim. At last, He has also raised an issue that whatever amount he has got at that time he has not protested.
CONCLUSION
The Tribunal inter-alia mentioned that, the grey area in this case is that the setting up off losses under Income Tax Act, 1961 is subject to scrutiny by the Income Tax Department and IBC 2016 lays down that the Resolution Plan should be in compliance with the law laid down. Hence, there is a need for getting an affidavit from the Resolution Applicant that he will be successfully completing the Resolution Plan whether he gets this set off under Income Tax Act or not.
The Tribunal also mentioned that the payment of license fee to the building owner where the CIRP has been carried out and business was running on a “going concern basis” for the period till CIRP was continued or they have handed over the building to the building owner whichever is earlier and the same is to be restricted to his Income Tax Returns so far filed. This cost needs to be included in CIRP costs.
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Date: August 08, 2020
About the Author: The author (CS Lovkesh Batra) is Company Secretary by profession and works in the area of Insolvency & Bankruptcy Law.
About the Co-Author: The co-author, Ms. Sneha Solanki is pursuing Law from University of Petroleum and Energy Studies, Dehradun.
Disclaimer: The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The authors and IBC Law Reporter does not take responsibility of the same and this document cannot used to be quoted before any authority under any law.
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