Calcutta High Court Quashes Income-Tax Reassessment Against McNally Bharat After IBC Resolution Plan

Justice Smita Das De allowed the company's writ petition and set aside the notice and order issued by the tax authorities along with all consequential proceedings. The authorities were also restrained from taking action contrary to the resolution plan.

The Court found that the tax authorities had failed to conduct the preliminary inquiry required under Section 148A(a), relied entirely on external reports without independently examining the material, and denied the company complete access to the third-party statements relied upon.

The Court observed:

“On perusal of the documents brought before the Court and considering the submissions made on behalf of the parties, this Court is of the view that the initiation of reassessment proceedings under Sections 148A(b) and 148A(d) of the Income Tax Act, 1961 and the subsequent issuance of the notice under Section 148, were in violation of the statutory preconditions under the Act. The respondents failed to conduct a preliminary inquiry under Section 148A(a) and acted solely on external reports without demonstrating independent application of mind, thereby rendering the proceedings arbitrary and illegal.”

Background

McNally Bharat filed its income-tax return for Assessment Year 2017-18 in November 2017, declaring a loss of ₹747.68 crore. The return was processed in March 2019 and a refund of ₹19.49 crore was sanctioned.

The company subsequently entered the Corporate Insolvency Resolution Process following an application filed by Bank of India. In December 2023, the National Company Law Tribunal approved a resolution plan submitted by BTL EPC Limited. The plan provided that no proceedings or inquiries could be initiated or continued against McNally Bharat for the period before its effective date.

Despite this, the Income Tax Department issued a notice in March 2024 alleging bogus sales worth ₹164.98 crore involving Ranisati Metal Industries and certain alleged shell companies. It thereafter passed an order permitting reassessment and issued a notice under Section 148.

Company's Submissions

Advocates Pranit Bag and A.K. Dey argued that the proceedings violated the approved resolution plan and the Insolvency and Bankruptcy Code, 2016, which overrides inconsistent laws. They also contended that the transactions had been disclosed in the audited financial statements and that the authorities had neither conducted a proper inquiry nor considered the company's objections.

Revenue's Submissions

Advocate Amit Sharma submitted that the reassessment was based on credible information concerning bogus transactions. The Revenue argued that the resolution plan did not prohibit proceedings initiated before the appointed date and relied on Dishnet Wireless Ltd. v. ACIT to contend that insolvency proceedings did not extinguish its reassessment powers.

Court's Findings

The Court held that the NCLT-approved resolution plan was binding on all stakeholders and had overriding effect under Section 238 of the IBC. Relying on Ghanashyam Mishra & Sons v. Edelweiss Asset Reconstruction, it said that claims outside the approved plan stood extinguished and proceedings concerning pre-approval statutory dues could not continue.

It further found that withholding the third-party statements and material relied upon denied the company a fair opportunity to answer the allegations. The reassessment was also beyond the statutory limitation period.

The Court therefore held that the proceedings were without jurisdiction, arbitrary and unsustainable.

For Petitioner: Pranit Bag and A.K. Dey

For Respondents: Amit Sharma