Gujarat High Court Bars Vimal Oil Reassessment Over Past Tax Liability, Cites IBC Clean Slate Principle

The Gujarat High Court on 30 June quashed reassessment proceedings against Vimal Oil and Foods Ltd., holding that the Assessing Officer cannot reopen an assessment of a company sold as a going concern under the Insolvency and Bankruptcy Code (IBC) on mere assumptions without verifying whether any income had actually escaped assessment.

A Division Bench of Justices A.S. Supehia and Vaibhavi D. Nanavati allowed the batch of writ petitions filed by the company and quashed the notice issued under Section 148 and the order passed under Section 148A(d) of the Income Tax Act for Assessment Year 2019-20. The Court observed:

“The reopening is premised on surmises and conjectures expressed by the Assessing Officer. The reopening is premised on a presumption that the petitioner might have claimed deduction of interest on the loans, which was never paid and now the liability has ceased to exist.”

The reassessment proceedings arose from a search conducted in the case of CFM Asset Reconstruction Pvt. Ltd., which had acquired the non-performing assets of Vimal Oil.

The Assessing Officer relied on the difference between the acquired debt and the acquisition cost and alleged that the difference represented cessation of liability. He further alleged that Vimal Oil might have claimed deduction of unpaid interest, resulting in escapement of income of Rs. 13.52 crore under Section 41(1) (which provides for taxation of certain liabilities written back or ceased to exist) and Explanation 1(b) to Section 115JB(2) of the Income Tax Act.

Vimal Oil contended that it had undergone liquidation under the IBC and was sold as a going concern to Arrhum Tradelink Pvt. Ltd. under the "clean slate" principle. It submitted that all past liabilities stood extinguished under the sale agreement. It also submitted that it had never claimed deduction of the disputed interest as the loan had turned into a non-performing asset in financial year 2015-16 and no interest had been debited to its profit and loss account thereafter.

The Revenue argued that the asset reconstruction company had acquired the debt after a substantial haircut and that such cessation of liability could attract Section 41(1). It contended that Vimal Oil had failed to provide satisfactory evidence to establish that it had not claimed deduction of the interest.

The High Court noted that Vimal Oil had specifically explained the Corporate Insolvency Resolution Process (CIRP), the subsequent sale of the company as a going concern and the fact that no deduction of the disputed interest had ever been claimed. However, the Assessing Officer proceeded on the assumption that such deduction might have been claimed instead of verifying the company's profit and loss account, which was available on record.

Relying on its earlier decision in KRBL Ltd. v. State of Gujarat, which followed the Supreme Court's ruling in Ghanshyam Mishra & Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., the Court reiterated that a purchaser acquiring a company under the IBC takes it on a “clean slate” and past liabilities and claims cannot be revived against the new owner.

The Bench observed that “when the petitioner clarified this aspect, it was always open for the Assessing Officer to verify this aspect from the profit and loss account of the petitioner.”

Accordingly, the High Court quashed the notices issued under Sections 148 and 148A(d) of the Income Tax Act and allowed the writ petitions, holding that the reassessment proceedings were based on conjectures and lacked tangible material to establish escapement of income.

For Petitioner: Mr. Tushar Hemani, Senior Counsel assisted by Ms. Vaibhavi K. Parikh.

For Respondent: Mr. Aaditya D. Bhatt, Advocate