Approval of Resolution Plan Under IBC Extinguishes All Pre-CIRP Tax Liabilities, Barring Subsequent Reopening of Assessment

In brief

The question

1. Whether the Income Tax Department can initiate reassessment proceedings or claim tax dues for a period prior to the approval of a Resolution Plan under the IBC

The court held

the approval of the Resolution Plan under the IBC extinguished all prior tax liabilities not provided for in the plan

It also directed

The Court quashed and set aside the impugned notice under Section 148 and the order under Section 148A(d) of the Income Tax Act, both dated 29.03.2023, as they were legally unsustainable following the CIRP conclusion

01Facts

The petitioner, a registered company, filed its income tax return for Assessment Year (AY) 2019-20

¶ 4.1

Subsequently, the petitioner underwent a Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC).

A Resolution Plan for the petitioner was approved by the National Company Law Tribunal (NCLT) on 05.10.2021

¶ 4.5

This plan expressly provided for the waiver and extinguishment of all assessed or unassessed tax liabilities for the period prior to the plan's approval

¶ 4.5, 7

Despite this, the Respondent-Income Tax Department issued a notice dated 28.02.2023 under Section 148A(b) of the Income Tax Act, 1961, and a subsequent order and notice under Section 148 dated 29.03.2023, seeking to reopen the assessment for AY 2019-20

¶ 4.6, 4.7

02Issues

i.1. Whether the Income Tax Department can initiate reassessment proceedings or claim tax dues for a period prior to the approval of a Resolution Plan under the IBC

¶ 5, 10

ii.2. Whether an approved Resolution Plan under Section 31 of the IBC results in the absolute extinguishment of all claims not specifically included in the plan

¶ 8, 9

03Law Applied

Section 31 of the Insolvency and Bankruptcy Code, 2016, which mandates that an approved Resolution Plan is binding on all stakeholders, including Central and State Governments

¶ 5.1, 9

"Clean Slate" doctrine established by the Hon’ble Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satishkumar Gupta, holding that a successful resolution applicant cannot be burdened with "undecided" or hidden claims after the plan's approval

¶ 8

principle from Ghanshyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd., which settled that all statutory dues owed to the Government, if not part of the Resolution Plan, stand extinguished and no proceedings can be continued in respect of such dues for the period prior to the approval date

¶ 9

Provisions in the judgment · 6 · Linked ones open on LawLens

Insolvency and Bankruptcy Code, 2016. Section 7 Section 13 Section 15 Section 30 Section 31 Section 60

04Reasoning

The Court examined the specific provisions of the NCLT-approved Resolution Plan dated 05.10.2021, which explicitly stated that all tax liabilities (assessed or unassessed) would stand waived and extinguished upon approval

¶ 6.1, 7

The Court noted that the Respondent-Department could not controvert the settled legal position regarding Section 31 of the IBC

¶ 5.1

Applying the precedent from Ghanshyam Mishra, the Court reasoned that once the NCLT approves the plan, all claims not included therein are frozen and extinguished to provide the Corporate Debtor a "fresh slate"

¶ 9, 10

Consequently, the Court found that because the tax liabilities for AY 2019-20 were extinguished as of 05.10.2021, the Department lacked the jurisdiction to issue notices for reassessment in February and March 2023

¶ 10