The NCLAT ruling addressed the permissibility and procedure for the Income Tax Department to conduct set-offs during corporate liquidation.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench of Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka observed that while set-off of tax refunds against outstanding dues is permissible during liquidation, the Income Tax Department's unilateral adjustment of refunds without formally filing a claim with the Liquidator was improper, thus highlighting the necessity for adherence to proper procedural requirements for set-offs in liquidation.
The present appeal, filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC), arises from the Order dated 22.11.2023, passed by the National Company Law Tribunal (NCLT), Mumbai Bench-I. This impugned order dismissed the Appellant-Liquidator’s application seeking the return of Income Tax refund amounts for the two previous assessment years to the liquidation estate of Sunil Hitech and Engineers Ltd., the Corporate Debtor.
The Corporate Debtor was admitted into Corporate Insolvency Resolution Proceedings (CIRP) on 10.09.2018. Subsequently, on 25.06.2019, the Corporate Debtor was admitted into liquidation, and the Appellant was appointed as the Liquidator. A public announcement was made on 01.07.2019, inviting claims from creditors in accordance with Regulation 12 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. Upon examining the Annual Information Statement, the Liquidator discovered that the Corporate Debtor was entitled to an Income Tax Refund (ITR) for the Assessment Year (A.Y.) 2021-2022 amounting to Rs. 5.84 crores plus interest of Rs. 11.46 lakhs. However, this refund was adjusted by the Respondent against Income Tax demands for earlier assessment years, as well as an additional refund of Rs. 60.79 lakhs for A.Y. 2020-2021, which was also adjusted against pre-CIRP tax dues.
The Appellant contended that such adjustments by the Respondent were improper, arguing that the ITR amount should have been part of the liquidation estate under Section 36(3)(b) of the IBC. The Appellant cited a previous Tribunal judgment in Devarajan Raman vs Principal Commissioner Income Tax, asserting that the Income Tax Department lacked the right to adjust past demands with tax refunds, as such refunds constituted an asset of the Corporate Debtor. It was further argued that, under Section 33(5) of the IBC, no legal proceedings should be instituted against the Corporate Debtor post-liquidation, rendering the Respondent’s actions unlawful. The Appellant emphasized the overriding provision of Section 238 of the IBC, which stipulates that the IBC supersedes other laws, including the Income Tax Act. Therefore, any set-off by the Respondent should adhere to the manner prescribed under Regulation 29 of the Liquidation Regulations.
In response, the Respondent contended that Income Tax dues fell under the category of security interest. They argued that the Income Tax Department was a secured creditor and thus legally entitled to set-off, citing Tribunal and Supreme Court judgments to support their stance. The Respondent maintained that Section 245 of the Income Tax Act allowed for the adjustment of refunds against outstanding tax dues and that the set-off had been properly executed in accordance with the Income Tax Act.
The Tribunal reviewed the arguments and the statutory provisions. It noted that the moratorium under Section 33(5) of the IBC, which applies during liquidation, does not prohibit the continuation of pending suits or proceedings. This indicates that the Income Tax Department could legally continue its assessment proceedings even during liquidation. The Tribunal also examined whether the Respondent’s actions in setting off the ITR amount were consistent with IBC provisions. While it recognized the principle of set-off under Regulation 29 of the Liquidation Regulations, it concluded that the Respondent's unilateral set-off action, without submitting a formal claim to the Liquidator, was improper. The Tribunal found that while the concept of set-off during liquidation was permissible, the Respondent was required to follow the proper procedure by filing a claim with the Liquidator, thus ensuring fair distribution among all stakeholders.
In conclusion, while the Tribunal upheld the principle of set-off in liquidation proceedings, it held that the Respondent’s failure to file a claim with the Liquidator rendered the unilateral set-off inappropriate. The Tribunal’s ruling was a nuanced acknowledgement of the legal framework surrounding set-offs and claims within the liquidation process.
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