Calcutta High Court Quashes Pre-IBC Resolution Income Tax Proceedings Against Binani Cement

The Calcutta High Court has quashed income tax notices, orders, and proceedings relating to the period before UltraTech Cement took over management of Binani Cement under an approved IBC resolution plan.

The Court held that claims not forming part of the resolution plan could not survive after its approval.

The Court also directed the Income Tax Department to refund amounts adjusted against such pre-transfer tax demands, along with applicable interest.

Justice Smita Das De was dealing with a writ petition filed by UltraTech Cement Limited and its wholly owned subsidiary, which had emerged as the successful resolution applicant for Binani Cement Limited under the IBC.

The Corporate Insolvency Resolution Process (CIRP) of Binani Cement commenced on July 25, 2017, following admission of a Section 7 application filed by Bank of Baroda. A public announcement inviting claims was subsequently issued by the Resolution Professional.

The resolution plan submitted by UltraTech Cement was unanimously approved by the Committee of Creditors and subsequently approved by the National Company Law Appellate Tribunal (NCLAT) on November 14, 2018. The Supreme Court affirmed the NCLAT's order on July 26, 2019. The effective date for takeover of management was November 20, 2018.

The petition challenged various orders and notices issued by the Income Tax Department in December 2019 and January 2020, as well as adjustments of refunds against outstanding demands pertaining to assessment years prior to the transfer date.

The amounts adjusted included ₹1.43 crore, ₹67.69 lakh and ₹1.12 crore, being refunds for AY 2019-20 adjusted against an outstanding demand for AY 2011-12, relating to the period from AY 2007-08 to AY 2015-16.

The petitioners contended that such action was contrary to the approved resolution plan, which provided that the assets of the corporate debtor would be free from claims and encumbrances and that litigation arising before the transfer date would stand withdrawn and extinguished.

The petitioners relied upon the Supreme Court's judgment in Ghanashyam Mishra and Sons (P) Ltd. v. Edelweiss Asset Reconstruction Company Ltd., wherein it was held that once a resolution plan is approved under Section 31 of the IBC, claims provided in the plan become binding on all stakeholders, including the Central and State Governments, while claims not forming part of the plan stand extinguished.

Reliance was also placed on the Supreme Court's decision in JSW Steel Ltd. v. Pratistha Thakur Haritwal, wherein continuation of proceedings by authorities in respect of claims extinguished under an approved resolution plan was held to be illegal.

It was also submitted that the Income Tax Department had itself submitted a claim of ₹24.06 crore before the Resolution Professional, which, after collation, was rejected.

The Income Tax authorities, however, defended the adjustment of the refund under Section 245 of the Income Tax Act, 1961. It was submitted that the Centralized Processing Centre had issued an intimation under Section 245(1) and thereafter adjusted the AY 2019-20 refund against the outstanding demand for AY 2011-12.

The High Court, after considering the submissions and the records, found that the petitioners had made out a case for interference.

Relying upon Ghanashyam Mishra, Essar Steel and Vaibhav Goyal, the Court held that the Income Tax authorities had no right to adjust refunds against claims relating to a period which had stood frozen upon approval of the resolution plan.

The Court observed that when the resolution plan was approved by the NCLAT on November 14, 2018, all claims stood frozen and any claim which did not form part of the resolution plan could not survive.

It further held that the Income Tax authorities could not initiate fresh proceedings in respect of demands raised prior to the transfer date.

The Court also referred to Section 238 of the IBC, which gives the Code overriding effect over anything inconsistent contained in any other law.

“Income tax dues being 'crown debts', have no priority over secured creditors and are extinguished upon approval of the Resolution Plan if not included therein,” the Court observed.

Consequently, the Court held that the notices proposing fresh proceedings, along with consequential orders and proceedings pertaining to the period prior to the transfer date, were arbitrary, illegal and unsustainable in law, and quashed and set them aside.

"The Income Tax Authorities can also not initiate any fresh proceedings in respect of demands raised prior to the Transfer Date i.e. upto A.Y. 2019-20.", the Court said.

The Court further directed the authorities to allow the petitioners to carry forward unabsorbed depreciation and accumulated losses as reflected in the returns filed prior to the transfer date and utilise them to set off future tax obligations in accordance with law.

The Income Tax Department was directed to accept the returns filed for the period prior to the transfer date and was restrained from initiating reassessment or any other proceedings under the Income Tax Act for that period.

The Court further directed the Department to refund, without adjustment, amounts due to the petitioners which had not been granted or had been wrongfully recovered by adjusting them against demands pertaining to the pre-transfer period, along with applicable interest.

The Department was specifically directed to refund amounts already adjusted against demands for the period prior to the transfer date within six weeks, along with interest in accordance with law.

The Court also observed that Income Tax authorities ought to be “more circumspect, prudent and vigilant” after approval of a resolution plan under the IBC and should forthwith withdraw demands pertaining to the pre-transfer period instead of persisting with proceedings that unnecessarily burden the courts.

The writ petition and all connected applications were accordingly disposed of.

For Petitioner: Senior Advocate D.N. Sharma along with Advocates Ajay Bhargava, Anunoy Basu

For Union of India: Prithu Dudhoria