Delhi High Court Rules NFAC Cannot Impose Penalties For Their Own Failure To Lodge IBC Claim In Time

Delhi High Court Rules NFAC Cannot Impose Penalties for Their Own Failure to Lodge IBC Claim in Time

The Delhi High Court ruled that the National Faceless Assessment Centre (NFAC) cannot justify initiating penalty proceedings solely due to their own failure to file a claim under the Insolvency and Bankruptcy Code (IBC) within the stipulated timeframe.

The Justices Yashwant Varma and Purushaindra Kumar Kaurav bench has noted that under Section 144B of the Income Tax Act, proceedings for assessment, reassessment, or re-computation are conducted following the faceless assessment procedure outlined therein. Any attempt to assess, reassess, or recompute could potentially involve recalculating liabilities that are otherwise restricted due to the approval of the resolution plan.

The petitioner/assessee has contested the notices issued under Section 144B of the Income Tax Act, 1961, for the Assessment Year 2021–22, along with the subsequent notices issued under Sections 143(2) and 142(1) of the Income Tax Act.

The challenge primarily relied on Section 31 of the IBC, with the petitioner arguing that once the resolution plan was validly accepted, the prohibition established under Section 31 of the IBC would be applicable. Consequently, the respondent or department would lack the jurisdiction or authority to initiate or assess income for any period preceding the approval of the resolution plan.

The petitioner argued that the Resolution Professional appointed following the initiation of the Corporate Insolvency Resolution Process (CIRP) on November 23, 2020, notified the Income Tax authorities about the ongoing proceedings before the National Company Law Tribunal (NCLT). Subsequently, on January 28, 2021, the RP purportedly made a request to the Income Tax authorities to submit their claims in compliance with the provisions of the IBC.

In accordance with the provisions of the Act, the petitioner submitted its Return of Income for Assessment Year 2021–22 on March 10, 2022, declaring a net loss of INR 9,47,64,300. Meanwhile, the Corporate Insolvency Resolution Process (CIRP) proceedings concluded with the approval of the resolution plan by the NCLT, accepting a proposal submitted by M/s Sarthi Constructions, which had been endorsed by the Committee of Creditors. Subsequently, the department initiated proceedings under Section 144B.

The assessee contended that the approval of the resolution plan would effectively resolve any claims relating to a period before the appointment of the RP and was no longer open to question.

The court determined that any action or recourse would unequivocally be prohibited by Section 31 of the IBC, which binds all creditors of the corporate debtor, encompassing the Central and State Governments or any other local authority owed a debt. An action under Section 144B, as described by the Supreme Court, was deemed the "hydra head," contradicting the clean slate principle advocated by the IBC.

The court, in light of the clear legal stance established by the scheme of the IBC, observed that it cannot uphold that line of reasoning. It emphasized that the IBC does not differentiate between voluntary and involuntary corporate insolvency, as the Act does not provide varying levels of protection or insulation based on the initiation method of corporate insolvency. Consequently, for all the aforementioned reasons, the court grants approval to the instant writ petition.