Initiating Tax Proceedings After CIRP Approval Violates Section 31 IBC: Bombay High Court

Initiating Tax Proceedings After CIRP Approval Violates Section 31 IBC: Bombay High Court

The Bombay High Court recently addressed a writ petition filed by Uttam Value Steels Ltd. and Subodh Karmarkar, challenging various notices issued by the Income Tax Department under several provisions of the Income Tax Act, 1961. The case centered on tax claims and actions taken by the Income Tax authorities against Uttam Value Steels Ltd., even though the company had successfully completed a Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC).

Uttam Value Steels Ltd., the first petitioner, was admitted into the CIRP on June 26, 2018, by an order passed by the National Company Law Tribunal (NCLT), New Delhi. Following the initiation of the CIRP, the company underwent various resolution processes under the IBC. Eventually, a resolution plan was approved by the Committee of Creditors and sanctioned by the NCLT on May 6, 2020. This plan provided for a complete waiver of all tax liabilities and interest dues related to the period before the commencement of the CIRP. Prior to the CIRP's initiation, the Income Tax Department had conducted a search and seizure operation on April 17, 2018, under Section 132 of the Income Tax Act against the Vinod Jatia Group, with which Uttam Value Steels Ltd. was associated. It was alleged that the group engaged in bogus transactions, and Uttam Value Steels Ltd. was implicated in these activities.

Nearly a year after the resolution plan had been approved, on March 15, 2021, the Income Tax Department initiated proceedings under Section 153C of the Income Tax Act against Uttam Value Steels Ltd. In response, the petitioners filed a detailed representation to the Income Tax authorities on January 4, 2022, arguing that the approval of the resolution plan by the NCLT extinguished all past claims, including those raised by the Income Tax Department. They contended that under Section 31 of the IBC, once a resolution plan is approved, it becomes binding on all creditors, including tax authorities, and extinguishes all claims from before the CIRP.

The petitioners referenced legal precedents, particularly the Supreme Court's decision in Ghanshyam Mishra & Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited, which reaffirmed that claims not included in a resolution plan are extinguished. The Income Tax Department, however, argued in an affidavit dated June 21, 2022, that while past claims were waived, the current proceedings concerned tax liabilities that had not been crystallized before the CIRP and thus constituted future liabilities.

The Bombay High Court ruled in favor of the petitioners, stating that once a resolution plan is approved under Section 31 of the IBC, it is binding on all creditors, including government entities such as the Income Tax Department. The court held that all claims, including tax liabilities not included in the approved resolution plan, are extinguished and no new proceedings can be initiated for claims related to the period before the CIRP.

The court relied on the Supreme Court's landmark ruling in Ghanshyam Mishra & Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited to settle the dispute between Uttam Value Steels Ltd. and the Income Tax Department. In Ghanshyam Mishra, the Supreme Court firmly established that once a resolution plan is approved by the NCLT, it binds all creditors, including government authorities, and extinguishes any claims that are not part of the approved resolution plan.

In conclusion, the Bombay High Court ruled that Uttam Value Steels Ltd. should be allowed to operate without any lingering tax claims or liabilities from the past, in line with the IBC's provisions. All tax claims from before the CIRP were deemed extinguished following the approval of the resolution plan.