Kerala High Court Disapproves NCLT for Exceeding Jurisdiction In Declaring Tax Assessment Of Company Invalid

Kerala High Court Disapproves NCLT for Exceeding Jurisdiction In Declaring Tax Assessment Of Company Invalid

Sets aside the order and remits the matter back for further consideration

The Kerala High Court has criticized the Kochi bench of the National Company Law Tribunal (NCLT) for assuming the jurisdiction of the Constitutional Court in declaring a tax assessment order issued against a company undergoing liquidation, void.

The Court added that the NCLT order showed a lack of basic understanding of the law and indicated that it reflected poorly on the tribunal members’ competence.

The High Court bench comprising Justice Dinesh Kumar Singh explained that a new tax demand could not be enforced during the moratorium period under Section 14 of Section 33 (5) of the Insolvency and Bankruptcy Code (IBC) when a company was undergoing insolvency. However, there was no such embargo for determining the amount of tax and other levies against the corporate debtor.

The judge was shocked to find that the NCLT had declared a tax assessment of the corporate debtor as void despite having no such power under the IBC.

The bench held, “This Court finds the impugned order passed by the NCLT, Kochi bench, as preposterous and untenable. The tribunal has no power and authority under the IBC to declare an assessment order as void ab initio and non-est in law. Such an order only reflects the competence of the persons who are manning such an important tribunal. The order shows the lack of basic understanding of the law.”

In October 2019, the company, Albanna Engineering (India) Pvt Ltd (corporate debtor) was admitted to the Corporate Insolvency Resolution Process (CIRP).

A moratorium was also declared under Section 14 of the IBC until December 2021, when a liquidation order was passed against it.

On finding certain irregularities in the company's assessment records for 2015-2016, a notice was issued under Section 25(1) of the Kerala Value Added Tax (KVAT) Act.

Subsequently, a tax assessment was carried out and the company's liability was totaled at Rs.11.76 crores. The amount was claimed by the Deputy Commissioner (works contract) of the Kerala State Goods and Services Tax (SGST) department.

The claim was submitted before the resolution professional. However, the liquidator/resolution professional of the corporate debtor challenged the tax assessment and filed a plea before the NCLT for permission to file an appeal against the assessment order.

The NCLT directly decided on the validity of the tax assessment.

In its 26 October 2022 order, the NCLT bench of P Mohan Raj (Judicial Member) and Satya Ranjan Prasad (Technical Member) observed that since the tax assessment order of 25 February 2021 was passed during a moratorium period, it violated Section 14 (1)(a) of the IBC.

Thus, the NCLT directed the liquidator to disregard the tax assessment order and consider Kerala’s VAT department's claims without factoring in the assessment order.

The tribunal stated, “The impugned order is void ab initio and non-est in law. Therefore, no appeal needs to be filed against the void order. The application is liable to be dismissed. The applicant/liquidator is directed to consider the claim submitted by the KVAT works contract authorities independently, ignoring the supra void impugned order.”

However, the tax department challenged the order before the High Court.

The Court held that the NCLT exceeded its authority and took over the High Court's jurisdiction by declaring the assessment order void.

The bench stated, "Instead of considering the application of the 2nd respondent (corporate debtor represented by its resolution professional) for permission to file an appeal against the assessment order, the NCLT assumed the jurisdiction of the Constitutional Court to declare the assessment order as void ab initio.”

Thus, the Court set aside the order of the NCLT and remitted the matter back to the tribunal.

The petitioner (Deputy Commissioner (works contract) was represented by government pleader Arun Chandy.

Advocate KB Arunkumar appeared for the corporate debtor Albana Engineering.