IBC Overrides Tax Laws: NCLAT Declares Government Dues as Operational Debt

Introduction

In the case of Assistant Commissioner CGST & Central Excise v. Pradeep Kabra[i], the National Company Law Appellate Tribunal (‘NCLAT’) examined whether the tax dues claimed by the Assistant Commissioner CGST & Central Excise (‘Appellant’), should be treated as secured operational debt under the Insolvency and Bankruptcy Code, 2016 (‘IBC’).

Brief Facts

• The National Company Law Tribunal (‘NCLT’) vide order dated 13.09.2023 approved the resolution plan (‘Plan’) of M/s. Cengres Tiles Limited, the Corporate Debtor (‘CD’).

• The Appellant challenged this order before the NCLAT, arguing that the Plan allocated only Rs. 1,00,000 against its admitted tax claim of Rs. 11,76,90,942.

• The Appellant contended that it should have been treated as a secured operational creditor (‘OC’), entitled to the same rights as that of the other secured OCs relying on the Hon’ble Supreme Court decision in State Tax Officer vs. Rainbow Papers Limited[ii] and Sanjay Kumar Agarwal vs. State Tax Officer [iii].

• On the contrary, the resolution professional (‘Respondent’) maintained that the Appellant’s claim was rightly classified as operational debt, asserting that Central Excise dues are not recognized as secured dues under statutory provisions.

Held

• The NCLAT affirmed that the Appellant’s claim was rightly treated as operational debt and not as secured debt in accordance with s. 30(2)(b) of the IBC.

• While s. 11E of the Central Excise Act, 1944, and s. 82 of the Central Goods and Services Tax Act, 2017 provide priority to tax dues; the NCLAT clarified that these provisions do not override the IBC, which governs claim distribution in insolvency proceedings.

• The NCLAT also referred to prior decisions in the case of Assistant Commissioner of Central Tax, CGST Division v. Sreenivasa Rao Ravinuthala[iv] and State Tax v. Zicom Saas Pvt. Ltd.[v]. These rulings established that claims of tax authorities are operational debts, and OCs are entitled to payment per s. 30(2)(b) of the IBC, following the waterfall mechanism under s. 53(1).

• Hence, the NCLAT dismissed the appeal, upholding the NCLT’s approval of the Plan.

Conclusion

This judgment underscores the conflict between tax laws and the IBC regarding the treatment of government tax dues in insolvency proceedings. While tax statutes designate tax dues as a first charge, the IBC’s waterfall mechanism under s. 53 governs the priority of claims.

The NCLAT reaffirmed that government tax dues do not automatically override the priority rights of secured financial creditors within the IBC framework. By upholding the treatment of the Appellant’s claim as operational debt, the ruling reinforces the IBC’s supremacy in insolvency resolution, ensuring that all creditors, including government authorities, are subject to the same structured insolvency process.

End Notes

[i] NCLAT, New Delhi CA (AT) (Insolvency) No. 844 of 2024 (23.01.2025); 2025 SCC OnLine NCLAT 35.

[ii] (2023) 9 SCC 545.

[iii] AIR 2023 SC 5636.

[iv] CA(AT)(CH)(Ins.) No. 346 of 2021.

[v] CA (AT) (Ins.) No. 246 of 2022.

Authored by Purvi Garg, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.