Avil Menezes VS Principal Chief Commissioner of Income Tax Mumbai CA (AT) Ins 258 of 2024
Facts:
1) Corporate Debtor was admitted into CIRP on 10.09.2018. Later, the Corporate Debtor was admitted into liquidation by the Adjudicating Authority on 25.06.2019 and the Appellant was appointed as the Liquidator of the Corporate Debtor. Following the appointment as Liquidator, a public announcement was made on 01.07.2019 inviting claims from the creditors in the liquidation process in terms of Regulation 12 of the Insolvency and Bankruptcy Board of India
2) On vetting the Annual Information Statement of the Corporate Debtor, it came to the notice of the Liquidator. CD was entitled to receive Income Tax Refund for the A.Y. 2021-2022 for an amount of Rs.5.84 cr. and interest thereon amounting Rs.11.46 lakhs. It was also noticed by the Liquidator that the above ITR amount was adjusted on 12.11.2021 by the Respondent against Income Tax demand for A.Y. 2010-2011 for Rs.2.98 cr. and for A.Y. 2011-2012 amounting Rs.2.85 cr. It has also been contended by the Appellant – Liquidator that the Corporate Debtor was also entitled to receive ITR of Rs.60.79 lakhs for A.Y. 2020- 2021 and that the said amount had also been adjusted by the Respondent against pre-CIRP Income Tax dues.
3) Application was filed for refund of the above adjusted amount of the ITR for the AY 2020-21 & 2021-22. AA dismissed I.A. 2968 of 2022. Appeal is filed challenging the order of dismissing the IA.
Issue: Whether the action of respondent in adjusting the ITR amount against CIRP dues is correct ?
Argument:
Appellant:
1) Counsel for the Appellant pointed out that the ITR amount could not have been adjusted by the Respondent towards Income Tax dues and that the said amount should have formed part of the liquidation estate of the Corporate Debtor. It was asserted that in terms of Section 36(3)(b) of the IBC, assets which may or may not be in possession of the Corporate Debtor also constitute part of the liquidation estate and hence the ITR amount available with the Respondent did not belong as such to the Respondent but belonged to the stakeholders and therefore should form part of the liquidation estate.
2) Counsel submitted that Section 33(5) of the IBC provides that once a liquidation order has been passed, no suit or other legal proceedings shall be instituted by or against the Corporate Debtor. In the present case, since the liquidation order had already been passed by the Adjudicating Authority, recovery of income tax dues by invoking Section 245 of the Income Tax Act was illegal and improper.
3) Counsel submitted that in view of the non obstante clause and over-riding provision of the IBC as contained in Section 238, the right of setoff of the Respondent – Income Tax Department was subject to the manner of set-off as prescribed under Regulation 29 of the Liquidation Regulations. It was submitted that Respondent–Income Tax Department is an Operational Creditor, it was argued by the Learned Counsel for the Appellant that the Respondent was required to file their claim with the Liquidator in Form D in accordance with Regulation 18 of Liquidation Regulations for recovery of dues in the requisite form and could not have suo-moto adjusted or set-off the ITR amount against past dues.
4) Counsel submitted that merely having a right to set-off does not automatically lead to having a charge over the property. Section 245 of the Income Tax Act does not expressly create a charge or a security interest. The language of Section 245 of the Income Tax Act does not indicate any such charge to have been created. The right to set-off under Section 245 of the Income Tax Act creates a charge is perverse as it is opposed to the scheme of IBC which recognises set-off and security interest as separate and distinct concept.
Respondent:
1) Counsel submitted that the dues of the Income Tax come under the ambit of security interest. It was also contended that the definition of secured creditor in IBC does not exclude government or governmental authority and hence the act of the Respondent for set-off was lawful.
2) It was submitted that since the dues of the Income Tax Department – Respondent are secured dues and have been availed by invoking Section 245(1) of the Income Tax Act wherein the Respondent has security interest, the provision of Section 238 of IBC would not apply. It was also pointed out that as required under Section 245(1) of the Income Tax Act, a notice for set-off was issued to the Corporate Debtor and to that extent there has been no breach of the procedure prescribed for set-off under the Income Tax Act.
Decision: NCLAT remanded the matter back to the Adjudicating Authority to examine afresh the quantum of set-off of ITR against pre-CIRP tax dues which has been allowed to the Respondent as against their claim entitlement in the liquidation proceedings.
Rationale:
1) It held that though Section 33 contains provisions similar to Section 14 contemplating stay on suits/proceedings during liquidation, however, the reach and gamut of stay under Section 33 differs from Section 14 in that there is no moratorium on continuation of suits/proceedings already instituted earlier.
2) It interpreted that words ‘continuation of pending suits or proceedings’ is consciously omitted in Section 33(5) of IBC in contrast to Section 14 of IBC where it is explicitly stated that moratorium applies both to the institution of suits or proceedings or the continuation of pending law suits or proceedings against the Corporate Debtor. Thus, to our minds, there is no bar in a suit or a legal proceeding continuing along with liquidation proceedings as pending suits or legal proceeding have not been included within the scope of moratorium under Section 33(5) of IBC.
3) It held that the language of Section 245 (1) of the Income Tax Act does not create any charge or security interest in favour of the
Respondent. The creation of a charge by operation of law must be apparent from the express words of the statute.
4) It held thatAll claimants in the liquidation process are required to stake claims for distribution of proceeds of sale in consonance with Section 53 of IBC. Filing of claims for set-off is also mandated by Liquidation Regulations and cannot be bypassed. The Income Tax Department by unilaterally adjusting the ITR amount cannot put itself in a better footing than what is permissible as their claim in the distribution matrix.
Order:
