NCLAT Flags Petty Litigation By Income Tax Dept, Calls For CBDT Policy Action In IBC Case

Calling the appeal a “perfect example for wastage of valuable public resources," the National Company Law Appellate Tribunal (NCLAT) dismissed an appeal filed by the Income Tax Department in an insolvency matter and directed that the issue be brought to the notice of the Chairperson of the Central Board of Direct Taxes (CBDT) for appropriate policy action against such litigation.

The appellate tribunal made the observation while upholding the approval of the resolution plan of Solar Voltaic Power LLP and rejecting the challenge raised by the Income Tax Department, which had sought a higher allocation towards its tax dues.

The bench observed,

“We are of the view that the present case is a perfect example for wastage of valuable public resources in pursuing frivolous litigations by public agencies. The Insolvency & Bankruptcy Code has been in operation for ten years now and all the statutory authorities/ government agencies are aware of positions of their claim in hierarchy of claims prescribed by water fall mechanism under Section 53 of the Code.”

It further said,

“Despite availability of this information, the present appeal has been filed and pursued vigorously by the Department knowing fully well that this would not lead to any fruitful result. The valuable resources of the government and Tribunal are wasted in disposal of such appeal, particularly when there is a huge pressure of cases. We would like to bring this to the notice of Chairperson, Central Board of Direct Taxes for appropriate policy action so that valuable public resources are not frittered away on petty litigation."

The dispute arose from the Corporate Insolvency Resolution Process (CIRP) of Solar Voltaic Power LLP, which commenced on September 19, 2023, when the National Company Law Tribunal (NCLT), Jaipur Bench, admitted the insolvency petition.

A public announcement inviting claims from creditors was issued on September 22, 2023. The Income Tax Department filed a claim of Rs. 3,11,11,442 towards outstanding tax dues of the corporate debtor. However, the Resolution Professional did not admit the claim, stating that the department failed to furnish enforceable assessment orders despite repeated requests.

Meanwhile, the Committee of Creditors approved the resolution plan submitted by Valente Lifespace Creators Pvt. Ltd., and the plan was later approved by the NCLT on December 11, 2024.

Under the approved plan, only Rs. 1.5 lakh was allocated towards the Income Tax Department's dues, leading to the present appeal.

The department argued that the Resolution Professional acted arbitrarily in rejecting its claim and that the resolution plan failed to properly account for statutory dues exceeding Rs. 3 crore. It also contended that the communication rejecting its claim was sent only by email and had allegedly gone to the spam folder, depriving it of the opportunity to object before the NCLT.

Opposing the appeal, the Resolution Professional submitted that the claim was filed beyond the prescribed timeline and was unsupported by assessment orders, without which the tax demand could not be treated as crystallised. It was further argued that the Department furnished the assessment order only after the Committee of Creditors had approved the plan and the application for approval was already pending before the NCLT.

The Resolution Professional also pointed out that the total resolution plan value was Rs. 20 lakh, out of which Rs. 13.5 lakh was earmarked towards CIRP costs, leaving only Rs. 6.5 lakh for distribution among unsecured financial creditors and operational creditors, including government authorities.

The NCLAT held that there was no irregularity in the manner in which the claim was dealt with and noted that the Department failed to approach the NCLT in time even after being informed about the plan approval process.

On distribution of proceeds, the tribunal observed that government dues fall lower in priority under the waterfall mechanism in Section 53 of the Insolvency and Bankruptcy Code and generally receive only nominal amounts in resolution plans.

In the present case, the tribunal noted that even though the Department's claim was not admitted, it was still allocated Rs. 1.5 lakh, and if the claim had been admitted in full, the Department would have received only about Rs. 75,000 on a proportionate basis.

Holding that no injustice had been caused and that the appeal lacked merit, the tribunal dismissed the appeal.