Delhi High Court Quashes Income Tax Assessment Order, Upholds Statutory Injunction On Claims Prior To Resolution Plan Approval

Delhi High Court Quashes Income Tax Assessment Order, Upholds Statutory Injunction On Claims Prior To Resolution Plan Approval

The Delhi High Court has quashed an income tax assessment order, ruling that the statutory injunction applies to claims related to periods before the approval of a resolution plan under the Insolvency and Bankruptcy Code (IBC).

The bench, consisting of Justices Yashwant Varma and Ravinder Dudeja, noted that if a company is unable to pay its debts, including statutory dues to the government or other authorities, and there is no plan for phased or proportional reduction of these debts, the company must be liquidated and its assets distributed according to Section 53 of the IBC.

The petitioner, a limited company engaged in manufacturing and exporting steel products, was subject to proceedings initiated by the State Bank of India under Section 7 of the IBC. The National Company Law Tribunal (NCLT) admitted the petition, appointed an Interim Resolution Professional, and enforced a moratorium under Section 14 of the IBC. The NCLT's approval of the Resolution Plan and its order were communicated to the respondents on December 4, 2020.

Following this, a reassessment notice was issued, prompting the petitioner to submit its response on May 26, 2021. The department had also issued notices under Section 142(1) on September 7, 2021, and December 17, 2021, demanding the submission of documents and online filing of the Return of Income. The petitioner raised preliminary objections to the reassessment.

The petitioner challenged the notice under Section 148 of the Income Tax Act, 1961, for the Assessment Year 2014-15, arguing that the reassessment was barred due to the Resolution Plan's approval and the statutory injunction in place. The petitioner claimed the department had no jurisdiction to proceed with reassessment for periods before the resolution plan's approval.

The department argued that it was constrained from submitting claims during the Corporate Insolvency Resolution Process (CIRP) because the assessment proceedings were not concluded. The department maintained that the Resolution Plan approval did not nullify its claims.

The court, in allowing the petition, held that once a resolution plan is approved, it becomes binding on the corporate debtor, including its employees, members, and creditors. This binding effect extends to the Central Government, State Government, Local Authorities, and any other entities to whom statutory dues are owed.