IBC Prevails: ITAT Upholds IBC Over Income Tax Act in Liquidation Cases

Prefatory Note

In the case of Varun Resources Ltd. v. Income-tax Officer[i], the Income Tax Appellate Tribunal, Mumbai (ITAT) on 27.05.2024 delved into the intersection of the Insolvency and Bankruptcy Code, 2016 (IBC) and the Income-tax Act, 1961 (ITA), particularly regarding the jurisdiction of Income-tax Authorities during the moratorium period under the IBC. The ITAT had to determine whether the actions of the Assessing Officer and the Commissioner of Income Tax (Appeals) [CIT(A)] were legally justified, particularly when the company was in liquidation under the IBC.

Facts of the Case

• Varun Resources Ltd. ('appellant') was undergoing liquidation proceedings under the IBC before the National Company Law Tribunal (NCLT) during the assessment proceedings for the assessment year (AY) 2017-18. The assessing officer (AO) completed the assessment under s. 143(3) of the ITA and imposed a penalty under s. 271B of the ITA for failing to get accounts audited as mandated by s. 44AB of the ITA. The company’s turnover exceeded one crore rupees.

• The appellant appealed against the penalty order before the CIT(A), who dismissed the appeal, deeming it unmaintainable due to the ongoing liquidation process. The CIT(A) held that the pendency of the liquidation process rendered the appeal infructuous.

• The appellant, through its liquidator, contested this decision before the ITAT, challenging the jurisdiction of the Income-tax Authorities to impose penalties and assess tax dues during the moratorium period under the IBC.

The Decision of the ITAT

• The ITAT held that the provisions of the IBC would prevail over the ITA by virtue of s. 238 of the IBC, which provides that the IBC overrides other laws. However, the ITAT acknowledged that while the Income-tax Authorities have limited jurisdiction to assess and determine the quantum of income tax dues during the moratorium period, they are not authorised to initiate recovery of such dues during this period.

• The ITAT further observed that the CIT(A) erred in dismissing the appeal as unmaintainable, as the issue at hand was solely related to determining tax dues. It clarified that the Income-tax Authorities are permitted to assess tax liabilities even during the moratorium imposed under the IBC. The ITAT pointed out that the ongoing liquidation process did not prevent the CIT(A) from adjudicating the matter on its merits. Consequently, the ITAT set aside the impugned order and remanded the case back to the CIT(A) for fresh adjudication on the merits, in accordance with the law.

Our Analysis

This ruling highlights the primacy of the IBC over other laws, including the ITA, in cases involving corporate debtors undergoing insolvency or liquidation. S. 238 of the IBC is a non-obstante clause that ensures the IBC’s provisions take precedence over conflicting provisions in other laws. This is consistent with the Supreme Court’s ruling in Sundaresh Bhatt, Liquidator of ABC Shipyard v. Central Board of Indirect Taxes and Customs[ii], which limited the powers of revenue authorities during the moratorium period.

However, this ruling also provides a nuanced approach that is needed in such cases. While the IBC curtails the powers of revenue authorities to recover dues during the moratorium, it does not completely strip them of their jurisdiction to assess or determine tax liabilities. The CIT(A)’s dismissal of the appeal on the grounds of maintainability failed to recognise this distinction, leading to an anomaly. The ITAT rightly corrected this by remanding the case for a merits-based adjudication.

The ITAT’s emphasis on affording the appellant a fair opportunity to be heard also reinforces the importance of procedural fairness, even in complex insolvency cases.

Thus, this case reiterates that while the IBC may impose restrictions during insolvency proceedings, it does not absolve corporate debtors of their tax obligations. The liquidator's responsibility to ensure legal and accurate assessments of tax dues remains intact, as does the jurisdiction of tax authorities to determine such dues, albeit within the confines of the IBC’s moratorium provisions.

End Notes

[i] [2024] 164 taxmann.com 748 (Mumbai - Trib.).

[ii] [2022] 141 taxmann.com 471/94 GST 1.

Please find below the write-ups on where the IBC overrides other laws:

1. Supremacy of IBC over Customs Act: Supreme Court’s Protective Shield for Corporate Debtors by Sanyam Aggarwal

2. NCLT Proceedings Prevail Over Enforcement Directorate Proceedings by Sanyam Aggarwal

3. Bombay High Court Clarifies the Interplay between IBC and PMLA in Asset Release Post CIRP by Srishty Jaura & Preethi Suresh

4. [NCLAT] Affirms IBC's Overriding Effect Over SARFAESI and RDDBFI Acts in Insolvency Proceedings by Adhijeet Neogy

5. NCLAT Rules: Pendency of DRT Proceedings Does Not Hinder Action Under S. 7 of the IBC by Sanyam Aggarwal

6. IBC overrides Electricity Act: Supreme Court Reinforces IBC’s Waterfall Mechanism by Sanyam Aggarwal

Authored by Sanyam Aggarwal, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.