Approved Resolution Plan is binding on Income Tax Department. Demands raised subsequently are invalid – Supreme Court
In a recent judgment, the Hon’ble Supreme Court has held that the approved Resolution Plan is binding on the Income Tax Department and any subsequent demand raised are invalid.
ABCAUS Case Law Citation:
4478 (2025) (03) abcaus.in SC
In the instant case, the Petitioner/ Resolution Applicants had filed an appeal under Section 62 of Insolvency and Bankruptcy Code, 2016 (the IB Code) challenging the judgment and order passed by the National Company Law Appellate Tribunal (NCLAT).
The Corporate Insolvency Resolution Process (CIRP) was initiated concerning the corporate debtor company (the CD). The appellants were the Joint Resolution Applicants whose Resolution Plan was approved by the National Company Law Tribunal (the NCLT).
The Resolution Plan had referred to the income tax liability of the respondent Income Tax Department for an assessment year based on the existing demand as rectified under section 154 of the Income Tax Act, 1961 (the Act). The liability was shown in the Resolution Plan under the heading “Contingent liabilities”.
However, after the approval of the Resolution Plan, the Income Tax Department (ITD) issued demand notices in respect of the CD related to two assessment years immediately preceding the said assessment year for which liability was shown in the Resolution Plan. However, no claim about the demands for the two assessment years had been submitted before the Resolution Professional.
The IRP, addressed a letter to the ITD, contending that the demands for the two aforesaid assessment years were unsustainable in law. In response, the ITD continued to assert the demand. As a result, the IRP applied to the NCLT for declaring that the demands made by the ITD pertaining to said two assessment years were invalid. It was urged that the said demands were invalid as no claim in respect thereof was made before the Resolution Professional until the Resolution Plan was approved.
The NCLT not only dismissed the application, holding it to be frivolous but also imposed costs of Rs.1 lakh to be payable by the appellants and the IRP. Being aggrieved by the said order, an appeal under Section 61 of the IB Code was preferred before the NCLAT. By the impugned judgment and order, the NCLAT dismissed the said appeal.
The Hon’ble Supreme Court observed that there was no dispute that ITD did not make any claim regarding income tax dues of the CD for the two assessment years under dispute. However, in one paragraph of the order, the NCLT while approving the resolution plan had stated that in respect of statutory dues issues to be decided by the respective government department and appropriate application may be moved before them.
Therefore, the issue in question was whether said paragraph had any relevance to the demands for income tax that were raised after the date of approval of the Resolution Plan? The Hon’ble Supreme Court opined the income-tax liabilities for the said two assessment years had not been shown as contingent liabilities under the Resolution Plan. Hence, what NCLT observed in the said paragraph was not relevant at all.
The Hon’ble Supreme Court observed that Section 31(1) of the IB Code provides for the legal effect of approval of the Resolution Plan. As per the said provisions, the approved resolution plan is binding on the corporate debtor and its employees, members, creditors, (including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed) guarantors and other stakeholders involved in the resolution plan.
The Hon’ble Supreme Court further observed that the words starting from ‘including’ and ending with ‘owed’ were incorporated in the IB Code with effect from 16th August 2019. Section 31(1), as it stood before the amendment mentioned above and after the amendment, came for consideration before the Hon’ble Supreme Court wherein it was held that all the dues including the statutory dues owed to the Central Government, if not a part of the Resolution Plan, shall stand extinguished and no proceedings could be continued in respect of such dues for the period prior to the date on which the adjudicating authority grants its approval under Section 31 of the IB Code.
The Hon’ble Supreme Court held that in the instant case, the income tax dues of the CD for the said two assessment years were not part of the approved Resolution Plan. Therefore, in view of sub-section (1) of Section 31, as interpreted by the Court, the dues of the Income Tax Department owed by the CD for the said two assessment years stood extinguished.
It was observed by the Hon’ble Supreme Court that the above referred decision was specifically relied upon by the appellants before the NCLAT. However, the decision of this Court was brushed aside by the NCLAT, firstly on the ground that the said decision was not relied upon before NCLT and, secondly, on the ground that the appellants had not challenged the Resolution Plan.
The Hon’ble Supreme Court observed that the action of the NCLAT by ignoring the binding precedent and the legal effect of the approval of the Resolution Plan as laid down in the said decision and reasoning that the said decision cannot be considered as it was not cited before made it order perverse.
The Hon’ble Supreme Court disapproved NCLT’s approach of not considering the application on merits and dismissing the same without recording any reasons and also by imposing costs.
The Hon’ble Supreme Court opined that the approved Resolution Plan was binding on the Income Tax Department. Therefore, the subsequent demand raised by the ITD was invalid. It was held that once the Resolution Plan is approved by the NCLT, no belated claim can be included therein that was not made earlier. If such demands are taken into consideration, the appellants will not be in a position to recommence the business of the CD on a clean slate.
Therefore, it was held that the demands raised by the Income Tax Department against the Corporate Debtor which was not part of Aapproved Resolution Plan were invalid and cannot be enforced.
Accordingly, the impugned orders of NCLT and NCLAT was set aside the and the appeal was allowed.
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