Tax Authorities Cannot Recover Pre-CIRP Dues Extinguished Under Resolution Plan: Bombay High Court

The Bombay High Court on 7 September held that tax authorities cannot continue recovery proceedings for pre-CIRP dues extinguished under an NCLT-approved Resolution Plan.

A Division Bench of Justices M.S. Karnik and Sandesh D. Patil allowed a writ petition filed by Aarem Insights Pvt. Ltd., formerly known as Shop CJ Network Pvt. Ltd., and directed the State tax authorities to refund the statutory pre-deposit of Rs. 31,99,174 made by the company for pursuing its MVAT appeal, along with applicable interest. The Bench held:

“The statutory pre-deposits made under Section 26(6A) (c) of the MVAT Act for filing appeals, being 10% of the disputed tax, formed part of the overall tax demands which are now extinguished by the Resolution Plan. Since the NCLT approved plan allocated a fixed sum to the tax department in full settlement of its dues, retention of such pre-deposits over and above the approved amount would be impermissible and contrary to law.”

The dispute related to an MVAT assessment for the period 1 April 2016 to 31 March 2017, under which a tax demand of Rs. 6,20,63,981 was raised against the petitioner. The petitioner challenged the assessment and made a part payment of Rs. 31,99,174 on 22 April 2021 as the statutory pre-deposit.

Meanwhile, the CIRP of the petitioner company was ordered in January 2022 and its Resolution Plan was approved on 21 March 2023, with the approval order subsequently rectified on 18 April 2023. The plan provided for payment of Rs. 1 crore towards disputed government dues, including VAT claims, in full satisfaction of such dues.

Despite being informed of the approved Resolution Plan, the First Appellate Authority confirmed the assessment order on 31 May 2023 and directed recovery of Rs. 5,88,64,807. The petitioner then approached the High Court challenging the order.

The Court held that approval of the Resolution Plan is binding on all stakeholders, including tax authorities, and that proceedings concerning dues extinguished under the plan cannot be continued thereafter.

It referred to the Supreme Court's ruling in Essar Steel India Limited v. Satish Kumar Gupta, (2020) 8 SCC 531, which discussed the objective of Section 31(1) of the IBC. The Supreme Court had held that the provision is intended to ensure that a successful resolution applicant can run the business of the Corporate Debtor on a fresh slate and is not subsequently faced with undecided claims, which would create uncertainty regarding the amount payable by the resolution applicant.

Further, the Bench relied on Ghanashyam Mishra and Sons Private Limited, (2021) 9 SCC 657, where the Supreme Court held that once a Resolution Plan is duly approved by the NCLT under Section 31(1) of the IBC, the claims provided for in the plan stand frozen and bind the Corporate Debtor and its employees, members, creditors, including the Central Government, State Governments and local authorities, guarantors and other stakeholders.

It observed that the pre-deposit could not be retained by the tax department. Since the Resolution Plan settled the government's dues for a fixed amount and the remaining tax liability stood extinguished, retaining the pre-deposit would amount to recovery contrary to the approved Resolution Plan.

Relying on Ruchi Soya Industries Ltd., Murli Industries Ltd., Uttam Value Steels Ltd. and Patanjali Foods Ltd., the judges directed the respondents to refund Rs. 31,99,174 along with applicable interest.

Accordingly, the High Court set aside the impugned appellate order and directed the Joint Commissioner of State Tax to refund Rs. 31,99,174 along with applicable interest.