Introduction
In a significant judgment titled Principal Commissioner of Income-tax v. Patanjali Foods Ltd[i], the Bombay High Court (‘HC’) has held that a notice issued under s. 148 of the Income Tax Act, 1961 (‘IT Act’) cannot be used to collect evidence against previous directors and promoters after the resolution plan is approved under s. 31 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). Following the approval of the resolution plan, all previous dues of the company are extinguished, giving the new management a clean slate.
Brief Facts
Patanjali Foods Ltd underwent the corporate insolvency resolution process (‘CIRP’), resulting in the approval of a resolution plan (‘Plan’) by the National Company Law Tribunal (‘NCLT’).
Subsequently, the revenue department issued a notice under s. 148 of the IT Act, for reassessment proceedings regarding periods prior to the resolution plan’s approval.
Aggrieved by the reassessment proceedings, Patanjali Foods approached the HC to quash the notice as invalid and contrary to the law.
Issue
Is the issuance of a notice under s. 148 of the IT Act valid if it occurs after the approval and implementation of a Plan under the IBC?
Held
The HC held that the notice issued under s. 148 of the IT Act, after the approval of the resolution plan by the NCLT, was invalid and bad in law.
Further elaborating on its decision, the HC referred to its earlier judgment in Alok Industries Limited v. Assistant Commissioner of Income-tax[ii]. It underscored that notices under ss. 147/148 cannot be used merely to collect evidence against third parties or former promoters. The HC also noted that upon approval of the resolution plan under s. 31 of the IBC, all prior dues, including statutory dues, are deemed extinguished.
Analysis
The HC, through this decision, has reaffirmed the importance of freeing newly appointed management from the legacy issues of the company. This approach gives them a clean slate and an unbiased opportunity to manage the company effectively. The judgment also underscores the necessity of distinguishing between the individual liabilities of the promoters and those of the new management, which is appointed according to the Plan under the IBC. Moreover, the judgment clarifies that actions taken under the IT Act against former promoters should not affect the corporate debtor, particularly once the Plan has been approved by the NCLT.
End Notes
[i] [2024] 161 taxmann.com (Bombay)
[ii] [2024] 161 taxmann.com 285 (Bombay)
Authored by Aditya Gupta, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.
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