Navigating the Maze: Challenges in Tax Claims during Insolvency and Bankruptcy Code Proceedings

Navigating the complex landscape of tax claims amidst Insolvency and Bankruptcy proceedings presents formidable challenges for both debtors and creditors alike. This article digs into the varied complexities inherent in asserting tax claims within the framework of insolvency, examining the interplay between tax laws, bankruptcy regulations, and the interests of various stakeholders.

Introduction:

The Insolvency and Bankruptcy Code, 2016 (Herein referred to as IBC) commenced on 28th May 2016 is a comprehensive legislation in India that consolidates the existing framework by creating a single law for insolvency and bankruptcy. One of the key features of the IBC is the establishment of the National Company Law Tribunal(Herein referred to as NCLT) and the National Company Law Appellate Tribunal(Herein referred to as NCLAT) to adjudicate insolvency cases. The code provides for the appointment of insolvency professionals who play a crucial role in the insolvency resolution process.

The IBC, 2016 defines creditor under section 3(10) which means

“𝘢𝘯𝘺 𝘱𝘦𝘳𝘴𝘰𝘯 𝘵𝘰 𝘸𝘩𝘰𝘮 𝘢 𝘥𝘦𝘣𝘵 𝘪𝘴 𝘰𝘸𝘦𝘥 𝘢𝘯𝘥 𝘪𝘯𝘤𝘭𝘶𝘥𝘦𝘴 𝘢 𝘧𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭 𝘤𝘳𝘦𝘥𝘪𝘵𝘰𝘳, 𝘢𝘯 𝘰𝘱𝘦𝘳𝘢𝘵𝘪𝘰𝘯𝘢𝘭 𝘤𝘳𝘦𝘥𝘪𝘵𝘰𝘳, 𝘢 𝘴𝘦𝘤𝘶𝘳𝘦𝘥 𝘤𝘳𝘦𝘥𝘪𝘵𝘰𝘳, 𝘢𝘯 𝘶𝘯𝘴𝘦𝘤𝘶𝘳𝘦𝘥 𝘤𝘳𝘦𝘥𝘪𝘵𝘰𝘳 𝘢𝘯𝘥 𝘢 𝘥𝘦𝘤𝘳𝘦𝘦-𝘩𝘰𝘭𝘥𝘦𝘳”

There are two categories of creditors under IBC,

Financial Creditor: 𝘶𝘯𝘥𝘦𝘳 𝘴𝘦𝘤𝘵𝘪𝘰𝘯 5(7) 𝘰𝘧 𝘐𝘉𝘊 “𝘢 𝘱𝘦𝘳𝘴𝘰𝘯 𝘵𝘰 𝘸𝘩𝘰𝘮 𝘵𝘩𝘦 𝘥𝘦𝘣𝘵 𝘪𝘴 𝘰𝘸𝘦𝘥 𝘪𝘯𝘤𝘭𝘶𝘥𝘪𝘯𝘨 𝘢 𝘱𝘦𝘳𝘴𝘰𝘯 𝘵𝘰 𝘸𝘩𝘰𝘮 𝘴𝘶𝘤𝘩 𝘥𝘦𝘣𝘵 𝘩𝘢𝘴 𝘣𝘦𝘦𝘯 𝘭𝘦𝘨𝘢𝘭𝘭𝘺 𝘢𝘴𝘴𝘪𝘨𝘯𝘦𝘥”.

Financial Debt: 𝘶𝘯𝘥𝘦𝘳 𝘴𝘦𝘤𝘵𝘪𝘰𝘯 5(8) of IBC “𝘢 𝘥𝘦𝘣𝘵 𝘢𝘭𝘰𝘯𝘨𝘸𝘪𝘵𝘩 𝘪𝘯𝘵𝘦𝘳𝘦𝘴𝘵, 𝘪𝘧 𝘢𝘯𝘺, 𝘸𝘩𝘪𝘤𝘩 𝘪𝘴 𝘥𝘪𝘴𝘣𝘶𝘳𝘴𝘦𝘥 𝘢𝘨𝘢𝘪𝘯𝘴𝘵 𝘵𝘩𝘦 𝘤𝘰𝘯𝘴𝘪𝘥𝘦𝘳𝘢𝘵𝘪𝘰𝘯 𝘧𝘰𝘳 𝘵𝘩𝘦 𝘵𝘪𝘮𝘦 𝘷𝘢𝘭𝘶𝘦 𝘰𝘧 𝘮𝘰𝘯𝘦𝘺 𝘢𝘯𝘥 𝘪𝘯𝘤𝘭𝘶𝘥𝘦𝘴 𝘴𝘱𝘦𝘤𝘪𝘧𝘪𝘤 𝘣𝘰𝘳𝘳𝘰𝘸𝘪𝘯𝘨𝘴”.

Operational Creditor: 𝘶𝘯𝘥𝘦𝘳 𝘴𝘦𝘤𝘵𝘪𝘰𝘯 5(20) 𝘰𝘧 𝘐𝘉𝘊 “𝘢 𝘱𝘦𝘳𝘴𝘰𝘯 𝘵𝘰 𝘸𝘩𝘰𝘮 𝘢𝘯 𝘰𝘱𝘦𝘳𝘢𝘵𝘪𝘰𝘯𝘢𝘭 𝘥𝘦𝘣𝘵 𝘪𝘴 𝘰𝘸𝘦𝘥 𝘢𝘯𝘥 𝘪𝘯𝘤𝘭𝘶𝘥𝘦𝘴 𝘢𝘯𝘺 𝘱𝘦𝘳𝘴𝘰𝘯 𝘵𝘰 𝘸𝘩𝘰𝘮 𝘴𝘶𝘤𝘩 𝘥𝘦𝘣𝘵 𝘩𝘢𝘴 𝘣𝘦𝘦𝘯 𝘭𝘦𝘨𝘢𝘭𝘭𝘺 𝘢𝘴𝘴𝘪𝘨𝘯𝘦𝘥 𝘰𝘳 𝘵𝘳𝘢𝘯𝘴𝘧𝘦𝘳𝘳𝘦𝘥”.

Operational Debt: 𝘶𝘯𝘥𝘦𝘳 𝘴𝘦𝘤𝘵𝘪𝘰𝘯 5(21) of IBC “𝘢 𝘤𝘭𝘢𝘪𝘮 𝘪𝘯 𝘳𝘦𝘴𝘱𝘦𝘤𝘵 𝘰𝘧 𝘵𝘩𝘦 𝘱𝘳𝘰𝘷𝘪𝘴𝘪𝘰𝘯 𝘰𝘧 𝘨𝘰𝘰𝘥𝘴 𝘰𝘳 𝘴𝘦𝘳𝘷𝘪𝘤𝘦𝘴 𝘪𝘯𝘤𝘭𝘶𝘥𝘪𝘯𝘨 𝘦𝘮𝘱𝘭𝘰𝘺𝘮𝘦𝘯𝘵 𝘰𝘳 𝘢 𝘥𝘦𝘣𝘵 𝘪𝘯 𝘳𝘦𝘴𝘱𝘦𝘤𝘵 𝘰𝘧 𝘵𝘩𝘦 𝘳𝘦𝘱𝘢𝘺𝘮𝘦𝘯𝘵 𝘰𝘧 𝘥𝘶𝘦𝘴 𝘢𝘳𝘪𝘴𝘪𝘯𝘨 𝘶𝘯𝘥𝘦𝘳 𝘢𝘯𝘺 𝘭𝘢𝘸 𝘧𝘰𝘳 𝘵𝘩𝘦 𝘵𝘪𝘮𝘦 𝘣𝘦𝘪𝘯𝘨 𝘪𝘯 𝘧𝘰𝘳𝘤𝘦 𝘢𝘯𝘥 𝘱𝘢𝘺𝘢𝘣𝘭𝘦 𝘵𝘰 𝘵𝘩𝘦 𝘊𝘦𝘯𝘵𝘳𝘢𝘭 𝘎𝘰𝘷𝘦𝘳𝘯𝘮𝘦𝘯𝘵, 𝘢𝘯𝘺 𝘚𝘵𝘢𝘵𝘦 𝘎𝘰𝘷𝘦𝘳𝘯𝘮𝘦𝘯𝘵 𝘰𝘳 𝘢𝘯𝘺 𝘭𝘰𝘤𝘢𝘭 𝘢𝘶𝘵𝘩𝘰𝘳𝘪𝘵𝘺”

Secured Creditor: 𝘶𝘯𝘥𝘦𝘳 𝘴𝘦𝘤𝘵𝘪𝘰𝘯 3(30) of IBC “𝘢 𝘤𝘳𝘦𝘥𝘪𝘵𝘰𝘳 𝘪𝘯 𝘧𝘢𝘷𝘰𝘳 𝘰𝘧 𝘸𝘩𝘰𝘮 𝘴𝘦𝘤𝘶𝘳𝘪𝘵𝘺 𝘪𝘯𝘵𝘦𝘳𝘦𝘴𝘵 𝘪𝘴 𝘤𝘳𝘦𝘢𝘵𝘦𝘥”.

The general tax regime in India encompasses various taxes levied by the central and state governments, including income tax, corporate tax, goods and services tax (GST), customs duties, and other indirect taxes. Numerous amendments to various statutes have been enacted to facilitate the implementation of the objectives outlined in the IBC such as the Companies Act, Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993,  etc. The Income Tax Act, of 1961, like many other acts, underwent amendments to align their provisions with those of the IBC. In the context of insolvency, understanding and navigating the complexities of tax claims is crucial. Therefore, it is essential to assess the correlation between the IBC and the Income Tax to understand its effect on taxpayers and various stakeholders including creditors, corporate debtors, and liquidators in the corporate world.

In ‘Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors’ ^[1] by Hon’ble Supreme Court in its order dated 25/01/2019, upheld the constitutional validity of the IBC, 2016, which emphasized the need for harmonizing various laws with the provisions of the IBC to ensure its effective implementation. As a result of this judgment, several other laws were amended to align with the IBC. These amendments were aimed at streamlining the insolvency resolution process, ensuring consistency across different legislations, and facilitating the resolution of distressed assets in a time-bound manner.

The Interplay between Insolvency and Bankruptcy Code & Tax Laws

The interplay between the IBC and in Tax laws is a critical aspect to consider to effectively navigate the complexities of insolvency and bankruptcy proceedings. One of the important aspects of the IBC is the provision granting overriding authority in instances of inconsistency with other laws or enactments, including the Income Tax Act of 1961.

Section 238 of the IBC states

“𝘛𝘩𝘦 𝘱𝘳𝘰𝘷𝘪𝘴𝘪𝘰𝘯𝘴 𝘰𝘧 𝘵𝘩𝘪𝘴 𝘊𝘰𝘥𝘦 𝘴𝘩𝘢𝘭𝘭 𝘩𝘢𝘷𝘦 𝘦𝘧𝘧𝘦𝘤𝘵, 𝘯𝘰𝘵𝘸𝘪𝘵𝘩𝘴𝘵𝘢𝘯𝘥𝘪𝘯𝘨 𝘢𝘯𝘺𝘵𝘩𝘪𝘯𝘨 𝘪𝘯𝘤𝘰𝘯𝘴𝘪𝘴𝘵𝘦𝘯𝘵 𝘵𝘩𝘦𝘳𝘦𝘸𝘪𝘵𝘩 𝘤𝘰𝘯𝘵𝘢𝘪𝘯𝘦𝘥 𝘪𝘯 𝘢𝘯𝘺 𝘰𝘵𝘩𝘦𝘳 𝘭𝘢𝘸 𝘧𝘰𝘳 𝘵𝘩𝘦 𝘵𝘪𝘮𝘦 𝘣𝘦𝘪𝘯𝘨 𝘪𝘯 𝘧𝘰𝘳𝘤𝘦 𝘰𝘳 𝘢𝘯𝘺 𝘪𝘯𝘴𝘵𝘳𝘶𝘮𝘦𝘯𝘵 𝘩𝘢𝘷𝘪𝘯𝘨 𝘦𝘧𝘧𝘦𝘤𝘵 𝘣𝘺 𝘷𝘪𝘳𝘵𝘶𝘦 𝘰𝘧 𝘢𝘯𝘺 𝘴𝘶𝘤𝘩 𝘭𝘢𝘸”

It serves as a crucial provision aimed at resolving conflicts between the IBC and other existing laws. This section explicitly states that the provisions of the IBC will have an overriding effect on any other law that may be inconsistent with it which states IBC will prevail over all. In the landmark judgment by the Hon’ble Supreme Court in ‘Commissioner of Income Tax v. Monnet Ispat & Energy Ltd’^[2] wherein the Court observed that given section 238 of the IBC, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment, including the Income Tax Act, 1961.

The applicability of the Limitation Act, of 1963 to various proceedings under IBC is noticeable. Numerous appeals in IBC were rejected by the NCLAT on the grounds of being time-barred. The Limitation Act, of 1963 sets a time limit within which legal proceedings must be initiated. The purpose of the Limitation Act is to ensure that legal actions are brought within a reasonable time frame, beyond which the claim may be considered time-barred. In the cases of ‘Innoventive Industries v. ICICI Bank & Anr’^[3] and ‘Parag Gupta & Associates v. BK Educational Service Private Ltd’^[4] The NCLAT deliberated on the applicability of the Limitation Act to proceedings under IBC, concluding that courts have the discretion to determine its relevance, potentially avoiding a backlog of insolvency applications and related legal actions.

^[5]Due to such, Section 238A of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 was brought as Limitation to Section 238, which states “𝘛𝘩𝘦 𝘱𝘳𝘰𝘷𝘪𝘴𝘪𝘰𝘯 𝘰𝘧 𝘵𝘩𝘦 𝘓𝘪𝘮𝘪𝘵𝘢𝘵𝘪𝘰𝘯 𝘈𝘤𝘵, 1963 𝘴𝘩𝘢𝘭𝘭, 𝘢𝘴 𝘧𝘢𝘳 𝘢𝘴 𝘮𝘢𝘺 𝘣𝘦, 𝘢𝘱𝘱𝘭𝘺 𝘵𝘰 𝘵𝘩𝘦 𝘱𝘳𝘰𝘤𝘦𝘦𝘥𝘪𝘯𝘨𝘴 𝘰𝘳 𝘢𝘱𝘱𝘦𝘢𝘭 𝘣𝘦𝘧𝘰𝘳𝘦 𝘵𝘩𝘦 𝘈𝘥𝘫𝘶𝘥𝘪𝘤𝘢𝘵𝘪𝘯𝘨 𝘈𝘶𝘵𝘩𝘰𝘳𝘪𝘵𝘺, 𝘵𝘩𝘦 𝘕𝘢𝘵𝘪𝘰𝘯𝘢𝘭 𝘊𝘰𝘮𝘱𝘢𝘯𝘺 𝘓𝘢𝘸 𝘈𝘱𝘱𝘦𝘭𝘭𝘢𝘵𝘦 𝘛𝘳𝘪𝘣𝘶𝘯𝘢𝘭, 𝘵𝘩𝘦 𝘋𝘦𝘣𝘵 𝘙𝘦𝘤𝘰𝘷𝘦𝘳𝘺 𝘛𝘳𝘪𝘣𝘶𝘯𝘢𝘭 𝘰𝘳 𝘵𝘩𝘦 𝘋𝘦𝘣𝘵 𝘙𝘦𝘤𝘰𝘷𝘦𝘳𝘺 𝘈𝘱𝘱𝘦𝘭𝘭𝘢𝘵𝘦 𝘛𝘳𝘪𝘣𝘶𝘯𝘢𝘭, 𝘢𝘴 𝘵𝘩𝘦 𝘤𝘢𝘴𝘦 𝘮𝘢𝘺 𝘣𝘦”

This section underscores the immediate application of the Limitation Act upon the initiation of proceedings before any authority, which illustrates how the Limitation Act is interconnected with the IBC and the Interplay between the Insolvency and Income Tax Act, thereby creating a network of relationships among various legislations.

Complexities in ascertaining tax claims under Insolvency proceedings

In the most recent matter of ‘ACIT v. ABW Infrastructure Ltd’^[6] by Hon’ble NCLT, in its order dated 16/02/2023, An Application u/s 7 of IBC, 2016 filed by the financial creditor against the assessee before the NCLT and judgment has been passed allowing the said application. As under section 14 of IBC, moratorium was declared by NCLT, all the proceedings in the Court of Law, Tribunal, etc. cannot continue given Amendment to Section 178(6) of the Income Tax Act. In turn, No proceedings can be initiated against the corporate debtor, including the present proceedings before this Income Tax Appellate Tribunal or income tax proceedings, as the IBC has an overriding effect on all acts, including the Income Tax Act, as specified under section 178(6) of the Income Tax Act, 1961 amended since 01.11.2016.

The IBC establishes a sequence for the proceeds from the sale of the liquidation assets shall be referred to as the ‘waterfall mechanism’ ^[7] outlined in Section 53 of the Code. This section has been a point of dispute between tax authorities and the code due to its relevance in insolvency proceedings. This states

  “𝘋𝘪𝘴𝘵𝘳𝘪𝘣𝘶𝘵𝘪𝘰𝘯 𝘰𝘧 𝘈𝘴𝘴𝘦𝘵𝘴  (1) 𝘕𝘰𝘵𝘸𝘪𝘵𝘩𝘴𝘵𝘢𝘯𝘥𝘪𝘯𝘨 𝘢𝘯𝘺𝘵𝘩𝘪𝘯𝘨 𝘵𝘰 𝘵𝘩𝘦 𝘤𝘰𝘯𝘵𝘳𝘢𝘳𝘺 𝘤𝘰𝘯𝘵𝘢𝘪𝘯𝘦𝘥 𝘪𝘯 𝘢𝘯𝘺 𝘭𝘢𝘸 𝘦𝘯𝘢𝘤𝘵𝘦𝘥 𝘣𝘺 𝘵𝘩𝘦 𝘗𝘢𝘳𝘭𝘪𝘢𝘮𝘦𝘯𝘵 𝘰𝘳 𝘢𝘯𝘺 𝘚𝘵𝘢𝘵𝘦 𝘓𝘦𝘨𝘪𝘴𝘭𝘢𝘵𝘶𝘳𝘦 𝘧𝘰𝘳 𝘵𝘩𝘦 𝘵𝘪𝘮𝘦 𝘣𝘦𝘪𝘯𝘨 𝘪𝘯 𝘧𝘰𝘳𝘤𝘦, 𝘵𝘩𝘦 𝘱𝘳𝘰𝘤𝘦𝘦𝘥𝘴 𝘧𝘳𝘰𝘮 𝘵𝘩𝘦 𝘴𝘢𝘭𝘦 𝘰𝘧 𝘵𝘩𝘦 𝘭𝘪𝘲𝘶𝘪𝘥𝘢𝘵𝘪𝘰𝘯 𝘢𝘴𝘴𝘦𝘵𝘴 𝘴𝘩𝘢𝘭𝘭 𝘣𝘦 𝘥𝘪𝘴𝘵𝘳𝘪𝘣𝘶𝘵𝘦𝘥 𝘪𝘯 𝘵𝘩𝘦 𝘧𝘰𝘭𝘭𝘰𝘸𝘪𝘯𝘨 𝘰𝘳𝘥𝘦𝘳 𝘰𝘧 𝘱𝘳𝘪𝘰𝘳𝘪𝘵𝘺 𝘢𝘯𝘥 𝘸𝘪𝘵𝘩𝘪𝘯 𝘴𝘶𝘤𝘩 𝘱𝘦𝘳𝘪𝘰𝘥 𝘢𝘯𝘥 𝘪𝘯 𝘴𝘶𝘤𝘩 𝘮𝘢𝘯𝘯𝘦𝘳 𝘢𝘴 𝘮𝘢𝘺 𝘣𝘦 𝘴𝘱𝘦𝘤𝘪𝘧𝘪𝘦𝘥, 𝘯𝘢𝘮𝘦𝘭𝘺 :—   

         (𝘢) 𝘵𝘩𝘦 𝘪𝘯𝘴𝘰𝘭𝘷𝘦𝘯𝘤𝘺 𝘳𝘦𝘴𝘰𝘭𝘶𝘵𝘪𝘰𝘯 𝘱𝘳𝘰𝘤𝘦𝘴𝘴 𝘤𝘰𝘴𝘵𝘴 𝘢𝘯𝘥 𝘵𝘩𝘦 𝘭𝘪𝘲𝘶𝘪𝘥𝘢𝘵𝘪𝘰𝘯

              𝘤𝘰𝘴𝘵𝘴 𝘱𝘢𝘪𝘥 𝘪𝘯 𝘧𝘶𝘭𝘭;   

         (𝘣) 𝘵𝘩𝘦 𝘧𝘰𝘭𝘭𝘰𝘸𝘪𝘯𝘨 𝘥𝘦𝘣𝘵𝘴 𝘸𝘩𝘪𝘤𝘩 𝘴𝘩𝘢𝘭𝘭 𝘳𝘢𝘯𝘬 𝘦𝘲𝘶𝘢𝘭𝘭𝘺 𝘣𝘦𝘵𝘸𝘦𝘦𝘯 𝘢𝘯𝘥 𝘢𝘮𝘰𝘯𝘨

              𝘵𝘩𝘦  𝘧𝘰𝘭𝘭𝘰𝘸𝘪𝘯𝘨:—        

              (𝘪) 𝘸𝘰𝘳𝘬𝘮𝘦𝘯’𝘴 𝘥𝘶𝘦𝘴 𝘧𝘰𝘳 𝘵𝘩𝘦 𝘱𝘦𝘳𝘪𝘰𝘥 𝘰𝘧 𝘵𝘸𝘦𝘯𝘵𝘺-𝘧𝘰𝘶𝘳 𝘮𝘰𝘯𝘵𝘩𝘴 𝘱𝘳𝘦𝘤𝘦𝘥𝘪𝘯𝘨

                  𝘵𝘩𝘦 𝘭𝘪𝘲𝘶𝘪𝘥𝘢𝘵𝘪𝘰𝘯 𝘤𝘰𝘮𝘮𝘦𝘯𝘤𝘦𝘮𝘦𝘯𝘵 𝘥𝘢𝘵𝘦; 𝘢𝘯𝘥       

             (𝘪𝘪) 𝘥𝘦𝘣𝘵𝘴 𝘰𝘸𝘦𝘥 𝘵𝘰 𝘢 𝘴𝘦𝘤𝘶𝘳𝘦𝘥 𝘤𝘳𝘦𝘥𝘪𝘵𝘰𝘳 𝘪𝘯 𝘵𝘩𝘦 𝘦𝘷𝘦𝘯𝘵 𝘴𝘶𝘤𝘩 𝘴𝘦𝘤𝘶𝘳𝘦𝘥

                  𝘤𝘳𝘦𝘥𝘪𝘵𝘰𝘳 𝘩𝘢𝘴 𝘳𝘦𝘭𝘪𝘯𝘲𝘶𝘪𝘴𝘩𝘦𝘥 𝘴𝘦𝘤𝘶𝘳𝘪𝘵𝘺 𝘪𝘯 𝘵𝘩𝘦 𝘮𝘢𝘯𝘯𝘦𝘳 𝘴𝘦𝘵 𝘰𝘶𝘵 𝘪𝘯

                  𝘴𝘦𝘤𝘵𝘪𝘰𝘯 52;    

         (𝘤) 𝘸𝘢𝘨𝘦𝘴 𝘢𝘯𝘥 𝘢𝘯𝘺 𝘶𝘯𝘱𝘢𝘪𝘥 𝘥𝘶𝘦𝘴 𝘰𝘸𝘦𝘥 𝘵𝘰 𝘦𝘮𝘱𝘭𝘰𝘺𝘦𝘦𝘴 𝘰𝘵𝘩𝘦𝘳

              𝘵𝘩𝘢𝘯 𝘸𝘰𝘳𝘬𝘮𝘦𝘯 𝘧𝘰𝘳 𝘵𝘩𝘦 𝘱𝘦𝘳𝘪𝘰𝘥 𝘰𝘧 𝘵𝘸𝘦𝘭𝘷𝘦 𝘮𝘰𝘯𝘵𝘩𝘴 𝘱𝘳𝘦𝘤𝘦𝘥𝘪𝘯𝘨 𝘵𝘩𝘦

              𝘭𝘪𝘲𝘶𝘪𝘥𝘢𝘵𝘪𝘰𝘯 𝘤𝘰𝘮𝘮𝘦𝘯𝘤𝘦𝘮𝘦𝘯𝘵 𝘥𝘢𝘵𝘦;    

        (𝘥) 𝘧𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭 𝘥𝘦𝘣𝘵𝘴 𝘰𝘸𝘦𝘥 𝘵𝘰 𝘶𝘯𝘴𝘦𝘤𝘶𝘳𝘦𝘥 𝘤𝘳𝘦𝘥𝘪𝘵𝘰𝘳𝘴;  

        (𝘦) 𝘵𝘩𝘦 𝘧𝘰𝘭𝘭𝘰𝘸𝘪𝘯𝘨 𝘥𝘶𝘦𝘴 𝘴𝘩𝘢𝘭𝘭 𝘳𝘢𝘯𝘬 𝘦𝘲𝘶𝘢𝘭𝘭𝘺 𝘣𝘦𝘵𝘸𝘦𝘦𝘯 𝘢𝘯𝘥 𝘢𝘮𝘰𝘯𝘨

             𝘵𝘩𝘦 𝘧𝘰𝘭𝘭𝘰𝘸𝘪𝘯𝘨:—                         

            (𝘪) 𝘢𝘯𝘺 𝘢𝘮𝘰𝘶𝘯𝘵 𝘥𝘶𝘦 𝘵𝘰 𝘵𝘩𝘦 𝘊𝘦𝘯𝘵𝘳𝘢𝘭 𝘎𝘰𝘷𝘦𝘳𝘯𝘮𝘦𝘯𝘵 𝘢𝘯𝘥 𝘵𝘩𝘦 𝘚𝘵𝘢𝘵𝘦

               𝘎𝘰𝘷𝘦𝘳𝘯𝘮𝘦𝘯𝘵 𝘪𝘯𝘤𝘭𝘶𝘥𝘪𝘯𝘨 𝘵𝘩𝘦 𝘢𝘮𝘰𝘶𝘯𝘵 𝘵𝘰 𝘣𝘦 𝘳𝘦𝘤𝘦𝘪𝘷𝘦𝘥 𝘰𝘯 𝘢𝘤𝘤𝘰𝘶𝘯𝘵

               𝘰𝘧 𝘵𝘩𝘦 𝘊𝘰𝘯𝘴𝘰𝘭𝘪𝘥𝘢𝘵𝘦𝘥 𝘍𝘶𝘯𝘥 𝘰𝘧 𝘐𝘯𝘥𝘪𝘢 𝘢𝘯𝘥 𝘵𝘩𝘦 𝘊𝘰𝘯𝘴𝘰𝘭𝘪𝘥𝘢𝘵𝘦𝘥 𝘍𝘶𝘯𝘥 𝘰𝘧 𝘢

               𝘚𝘵𝘢𝘵𝘦, 𝘪𝘧 𝘢𝘯𝘺, 𝘪𝘯 𝘳𝘦𝘴𝘱𝘦𝘤𝘵 𝘰𝘧 𝘵𝘩𝘦 𝘸𝘩𝘰𝘭𝘦 𝘰𝘳 𝘢𝘯𝘺 𝘱𝘢𝘳𝘵 𝘰𝘧 𝘵𝘩𝘦 𝘱𝘦𝘳𝘪𝘰𝘥 𝘰𝘧

               𝘵𝘸𝘰 𝘺𝘦𝘢𝘳𝘴 𝘱𝘳𝘦𝘤𝘦𝘥𝘪𝘯𝘨 𝘵𝘩𝘦 𝘭𝘪𝘲𝘶𝘪𝘥𝘢𝘵𝘪𝘰𝘯 𝘤𝘰𝘮𝘮𝘦𝘯𝘤𝘦𝘮𝘦𝘯𝘵 𝘥𝘢𝘵𝘦;        

           (𝘪𝘪) 𝘥𝘦𝘣𝘵𝘴 𝘰𝘸𝘦𝘥 𝘵𝘰 𝘢 𝘴𝘦𝘤𝘶𝘳𝘦𝘥 𝘤𝘳𝘦𝘥𝘪𝘵𝘰𝘳 𝘧𝘰𝘳 𝘢𝘯𝘺 𝘢𝘮𝘰𝘶𝘯𝘵 𝘶𝘯𝘱𝘢𝘪𝘥 𝘧𝘰𝘭𝘭𝘰𝘸𝘪𝘯𝘨

                𝘵𝘩𝘦 𝘦𝘯𝘧𝘰𝘳𝘤𝘦𝘮𝘦𝘯𝘵 𝘰𝘧 𝘴𝘦𝘤𝘶𝘳𝘪𝘵𝘺 𝘪𝘯𝘵𝘦𝘳𝘦𝘴𝘵;   

        (𝘧) 𝘢𝘯𝘺 𝘳𝘦𝘮𝘢𝘪𝘯𝘪𝘯𝘨 𝘥𝘦𝘣𝘵𝘴 𝘢𝘯𝘥 𝘥𝘶𝘦𝘴;    

       (𝘨) 𝘱𝘳𝘦𝘧𝘦𝘳𝘦𝘯𝘤𝘦 𝘴𝘩𝘢𝘳𝘦𝘩𝘰𝘭𝘥𝘦𝘳𝘴, 𝘪𝘧 𝘢𝘯𝘺; 𝘢𝘯𝘥    

       (𝘩) 𝘦𝘲𝘶𝘪𝘵𝘺 𝘴𝘩𝘢𝘳𝘦𝘩𝘰𝘭𝘥𝘦𝘳𝘴 𝘰𝘳 𝘱𝘢𝘳𝘵𝘯𝘦𝘳𝘴, 𝘢𝘴 𝘵𝘩𝘦 𝘤𝘢𝘴𝘦 𝘮𝘢𝘺 𝘣𝘦”

In the judgment of ‘State Tax Officer v. Rainbow Papers Limited’^[8] In its order dated 06/09/2022, it has been held that “If a Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan.” In other words, The Committee of Creditors, including financial institutions, should prioritize statutory dues owed to the government or governmental authorities over securing their dues. The case deals with whether the provisions of the IBC under Section 53 will override Section 48 of the Gujarat Value Added Tax Act, 2003 (Herein referred as GVAT Act). Section 48 of the GVAT Act, 2003 which reads,“𝘕𝘰𝘵𝘸𝘪𝘵𝘩𝘴𝘵𝘢𝘯𝘥𝘪𝘯𝘨 𝘢𝘯𝘺𝘵𝘩𝘪𝘯𝘨 𝘵𝘰 𝘵𝘩𝘦 𝘤𝘰𝘯𝘵𝘳𝘢𝘳𝘺 𝘤𝘰𝘯𝘵𝘢𝘪𝘯𝘦𝘥 𝘪𝘯 𝘢𝘯𝘺 𝘭𝘢𝘸 𝘧𝘰𝘳 𝘵𝘩𝘦 𝘵𝘪𝘮𝘦 𝘣𝘦𝘪𝘯𝘨 𝘪𝘯 𝘧𝘰𝘳𝘤𝘦, 𝘢𝘯𝘺 𝘢𝘮𝘰𝘶𝘯𝘵 𝘱𝘢𝘺𝘢𝘣𝘭𝘦 𝘣𝘺 𝘢 𝘥𝘦𝘢𝘭𝘦𝘳 𝘰𝘳 𝘢𝘯𝘺 𝘰𝘵𝘩𝘦𝘳 𝘱𝘦𝘳𝘴𝘰𝘯 𝘰𝘯 𝘢𝘤𝘤𝘰𝘶𝘯𝘵 𝘰𝘧 𝘵𝘢𝘹, 𝘪𝘯𝘵𝘦𝘳𝘦𝘴𝘵 𝘰𝘳 𝘱𝘦𝘯𝘢𝘭𝘵𝘺 𝘧𝘰𝘳 𝘸𝘩𝘪𝘤𝘩 𝘩𝘦 𝘪𝘴 𝘭𝘪𝘢𝘣𝘭𝘦 𝘵𝘰 𝘱𝘢𝘺 𝘵𝘰 𝘵𝘩𝘦 𝘎𝘰𝘷𝘦𝘳𝘯𝘮𝘦𝘯𝘵 𝘴𝘩𝘢𝘭𝘭 𝘣𝘦 𝘢 𝘧𝘪𝘳𝘴𝘵 𝘤𝘩𝘢𝘳𝘨𝘦 𝘰𝘯 𝘵𝘩𝘦 𝘱𝘳𝘰𝘱𝘦𝘳𝘵𝘺 𝘰𝘧 𝘴𝘶𝘤𝘩 𝘥𝘦𝘢𝘭𝘦𝘳, 𝘰𝘳 𝘢𝘴 𝘵𝘩𝘦 𝘤𝘢𝘴𝘦 𝘮𝘢𝘺𝘣𝘦, 𝘴𝘶𝘤𝘩 𝘱𝘦𝘳𝘴𝘰𝘯.” The Supreme Court held that Section 48 of the GVAT Act is not in contravention with Section 53 or any other provisions of the IBC. The debts that are owed to a secured creditor also include the State under the GVAT Act which considers the tax authorities as secured creditors and priority shall be given while making the payments.

In ‘Principal Commissioner of Income Tax & Anr. v. M/s Assam Company India Ltd’^[9] The Hon’ble NCLAT Principal Bench, Delhi, in its order dated 07/02/2023, ruled that Income Tax dues are considered Government dues, and the Income Tax authority is a secured creditor. The appellant relied on the Hon’ble Supreme Court judgment on ‘State Tax Officer vs. Rainbow Papers Limited’ in support of their case. However, the Hon’ble Bombay High Court in the case of ‘NRC Limited V. State of Maharashtra & Anr’ has clearly stated that the judgment of ‘State Tax Officer Vs. Rainbow Papers Limited’ was on a different footing and under different circumstances which cannot be referred to in the instant case. The appellant had outstanding income tax demands for the assessment years 2013-14 and 2014-15, receiving a payment that was less than 15% of the total demand. The appellant applied for a review of the NCLT’s order, seeking payment of the entire outstanding amount. The NCLT, in its order, noted that the appellant’s claim should be considered and that they have a right to claim from the new promoter of the company. The appellant demanded payment of the outstanding dues along with interest under Section 220(2) of the Income Tax Act, 1961. However, the respondent stated that the demands were premature as they were pending with the CIT(A) and ITAT, Guwahati Bench.

The court noted that the Adjudicating Authority (NCLT) did not consider all relevant facts, in the order dated 07/02/2023, including the nature of the dues as Government dues and the appellant’s status as a secured creditor. The court set aside the NCLT’s order and remitted the matter back to the NCLT to reconsider the case considering all relevant facts and the Rainbow Papers Limited case judgment.

The Hon’ble NCLT Guwahati Bench^[10] made a hearing on 12/01/2024 pointing out how the Hon’ble Supreme Court emphasized the importance of Section 53 in insolvency cases and the strength of Section 238’s rule in the IBC, 2016. The Hon’ble Supreme Court also stressed the need to prioritize secured creditors claims over government under the ‘Waterfall Mechanism’ otherwise there will be cascading effects on the rights and interests of secured creditors, operational Creditors, and both Central and State Governments. Additionally, it clarified that the Income Tax Act cannot override Section 238 of the IBC, 2016.

The Hon’ble Supreme Court, in the case of ‘ Paschimanchal Vidyut Vitran Nigam Limited Vs. Raman Ispat Private Limited and Others ‘^[11] explained that according to Section 53 of IBC, during liquidation proceedings, the money owed to secured creditors and workers comes after the liquidator’s costs and expenses. However, debts owed to the State are given less priority compared to secured creditors, and even unsecured and operational creditors. This difference wasn’t highlighted in a previous case or was overlooked. The judgment didn’t consider the IBC, which prioritizes debts to secured creditors over those to the government. Even though laws like the GVAT Act may consider government dues as secured debts, the separate treatment in the law shows that Parliament intended for government dues to have lower priority. This intention is also evident from the preamble of the Act itself.

In ‘Ghanshyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. and Ors’^[12] the Hon’ble Supreme Court, in its order dated 13/04/2021, held that after the approval of the resolution plan, no belated claim can be accepted. As per this provision, the belated claims of the Income Tax Department by issuing attachment notices under Section 226(3) of the Income Tax Act were rejected. The NCLT Guwahati Bench pointed out that in the judgment of ‘Essar Steel India Limited V/s Satish Kumar Gupta’^[13] the Hon’ble Supreme Court, in its order dated 15/11/2019, has held that the corporate debtors will be taken up on a ‘clean slate’ and therefore any liability before the approval of the resolution plan whether claimed or not claimed shall be waived/ extinguished. Section 31 of the IBC, 2016 says that once a resolution plan is approved, everyone involved, including the Central Government, the State Government, and local authorities, to whom a debt in respect of the payment of dues arising under any law for the time being in force is owed

cannot be burdened with the liability when the resolution plan is already approved

In the view of Hon’ble NCLT Guwahati, the decision made in the ‘State Tax Officer v. Rainbow Papers Limited’ case does not apply to the current situation. This is because the resolution plan already includes a payment to the Income Tax Authorities, which has been paid to settle their claims. Additionally, the resolution plan was approved and fully implemented in 2018, with the total amount being paid to all creditors. Therefore, it is too late to change the resolution plan that was approved and implemented, and no additional amount can be claimed from the successful resolution applicant.

Conclusion

In conclusion, the complexities surrounding tax claims under insolvency proceedings are multifaceted and require careful consideration of various legal provisions and judicial interpretations. The IBC establishes a priority order for distributing proceeds from asset liquidation, giving rise to disputes between tax authorities and creditors regarding the hierarchy of claims. Section 53 of the IBC delineates this priority, but conflicts arise when tax authorities assert their claims as secured creditors, this distinction has been emphasized in several cases, including ‘State Tax Officer v. Rainbow Papers Limited’ and ‘Paschimanchal Vidyut Vitran Nigam Limited v. Raman Ispat Private Limited and Others.’

Furthermore, the courts have clarified that once a resolution plan is approved and implemented, no belated claims can be accepted, and liabilities before the approval of the resolution plan are waived or extinguished. This principle was reinforced in ‘Ghanshyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. and Ors’ and ‘Essar Steel India Limited v. Satish Kumar Gupta.’

In light of these complexities, it is crucial for all parties involved in insolvency proceedings, including creditors, tax authorities, and the judiciary, to carefully consider and adhere to the provisions of the Insolvency and Bankruptcy Code and relevant tax laws. This will ensure a fair and efficient resolution of insolvency cases while balancing the rights and interests of all stakeholders involved.

Reference(s):

^[1] Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors [AIR (2019) 4 SCC 17]

^[2] Commissioner of Income Tax v. Monnet Ispat & Energy Ltd [(2018) 18.SCC 786]

^[3] Innoventive Industries v. ICICI Bank & Anr [2017 SCC OnLine SC 1025]

^[4] Parag Gupta & Associates v. BK Educational Service Private Ltd [2018 SCC Online 1921]

^[5] Yash Dhawan, “The juxtaposition between income tax laws and the Insolvency and Bankruptcy Code, 2016” (15th September 2021)<https://blog.ipleaders.in/juxtaposition-income-tax-laws-insolvency-bankruptcy-code-2016/> accessed April 14th, 2024

^[6] ACIT v. ABW Infrastructure Ltd [(2023) ibclaw.in 02 ITAT]

^[7] Nancy Mishra & Nakul Agarwal, “TAX AUTHORITIES ARE ‘SECURED’ CREDITORS: WHETHER THE LAW HAS BEEN SETTLED IN STATE TAX OFFICER (1) v. RAINBOW PAPERS LIMITED?” (Volume I 2022) Himachal Pradesh National Law University, Shimla (India)

<https://www.hpnlu.ac.in/PDF/72b5c621-412c-4090-847a-0042a3f25d3f.pdf> accessed April 6th, 2024

^[8] State Tax Officer v. Rainbow Papers Limited [LSI-694-SC-2022(NDEL)]

^[9] Principal Commissioner of Income Tax & Anr. v. M/s Assam Company India Ltd [(2023) ibclaw.in 113 NCLAT]

^[10] Assam Company India Ltd v. Principal Commissioner of Income Tax[(2024) ibclaw.in 68 NCLT]

^[11] Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. and Ors. [LSI-641-SC-2023(NDEL)]

^[12] Ghanshyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. and Ors. [(2021) 13 S.C.R. 737]

^[13] Essar Steel India Limited V/s Satish Kumar Gupta [(2019) ibclaw.in 593]