Income Tax Refunds Determined During CIRP Form Part of Corporate Debtor's Assets: NCLT Ahmedabad

The National Company Law Tribunal (NCLT) at Ahmedabad has recently observed that income tax refunds determined during the Corporate Insolvency Resolution Process (CIRP) form part of the assets of the corporate debtor and must remain available for the insolvency resolution process.

A coram of Judicial Member Shammi Khan and Technical Member Sanjeev Sharma observed that, “Once the refund is determined under Section 143(1) of the Income Tax Act, the said amount constitutes a receivable of the Corporate Debtor and therefore forms part of the assets of the Corporate Debtor which must remain available for the insolvency resolution process.”

The application was filed by the Resolution Professional of Wind World (India) Limited against the Income Tax Department. The Corporate Debtor was admitted into CIRP on February 20, 2018. A public announcement dated February 23, 2018 invited claims from the creditors of the Corporate Debtor.

Pursuant to the announcement, the Income Tax Department filed a claim in Form B for an amount of ₹11,28,28,77,841. However, the claim was not admitted as an operational debt and was categorised as a contingent claim with a notional value of ₹1 in view of the pendency of assessment proceedings and appeals.

During the CIRP, the Resolution Professional filed income-tax returns for several assessment years, including AY 2019-20, AY 2021-22, AY 2022-23 and AY 2023-24. Refunds were determined under Section 143(1) of the Income Tax Act, 1961. However, the Income Tax Department either adjusted or proposed to adjust these refunds against alleged pre-CIRP income-tax demands pertaining to earlier assessment years.

The Resolution Professional submitted that the adjustment of refunds by the Income Tax Department was impermissible during the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code (IBC). According to the applicant, pre-CIRP tax dues could not be set off against refunds that became payable to the Corporate Debtor during the CIRP period. Reliance was also placed on Section 238 of the IBC, the Code's non-obstante provision, to argue that the IBC prevails over any inconsistent provisions contained in other statutes, including the Income Tax Act.

The Income Tax Department, on the other hand, maintained that Section 245 of the Income Tax Act authorises it to adjust refunds against outstanding tax demands.

The Income Tax Department also argued that the Corporate Debtor had not complied with CBDT Instruction No.1914 dated February 29, 2016, which requires payment of 20% of the disputed tax demand.

Examining Section 245, the Bench acknowledged that the provision permits tax authorities to adjust refunds against outstanding dues. However, it clarified that this power is not absolute and must operate subject to overriding statutory provisions.

The tribunal further observed that the moratorium under Section 14 of the IBC bars recovery of pre-CIRP dues, including through indirect means such as adjustment of refunds. It relied on earlier decisions, including Ram Ratan Kanoongo v. Deputy Commissioner of Income Tax and Krishna Mohan Gollamudi v. Income Tax Department, which held that tax refunds cannot be appropriated towards pre-CIRP liabilities during the moratorium.

Attention was also drawn to Sections 18(1)(f) and 25(2)(a) of the IBC. These provisions place a statutory obligation on the interim resolution professional and the resolution professional to take control of, preserve, and protect the assets of the Corporate Debtor during the insolvency process.

It observed that any unilateral adjustment of refunds by the department would amount to depletion of the corporate debtor's assets and frustrate the objective of value maximisation under the code.

Accordingly, the tribunal held that the adjustment of income tax refunds determined for AY 2019-20, AY 2021-22, AY 2022-23 and the proposed adjustment for AY 2023-24 against pre-CIRP tax dues during the subsistence of the moratorium was illegal and in violation of Sections 14 and 238 of the IBC.

The Income Tax Department was directed to refund Rs 35,67,07,796 along with statutory interest under Section 244A of the Income Tax Act within four weeks.

Thus, the application was allowed.