Income Tax Cannot Be Reassessed After Insolvency Plan Approval Even If New Information Emerges: Bombay High Court

The Bombay High Court has recently reiterated that the Income Tax Department cannot reassess a company's income for a period before its insolvency resolution plan was approved. This applies even when the Department receives fresh information suggesting fraudulent transactions.

A Division Bench of Justice B.P. Colabawalla and Justice Farhan P. Dubash quashed reassessment proceedings initiated against Swan Defence and Heavy Industries Ltd., formerly Reliance Naval and Engineering Ltd. The proceedings related to the 2020-21 assessment year.

The court held that no liability could be fastened on the company for actions predating approval of its resolution plan.

“We observe that the Income Tax Department could not have proceeded against the Petitioner after approval of Resolution Plan by the NCLT for a period prior to approval of such Plan, notwithstanding the fact that some new information was received by the Income Tax Department. At this stage, no liability can be fastened on the Petitioner for any actions prior to approval of the Resolution Plan,” the court observed.

The dispute arose after the Income Tax Department issued fresh notices seeking to reassess Swan Defence's income for the 2020-21 assessment year.

The company challenged the notices, pointing out that the NCLT had approved its resolution plan on December 23, 2022. It argued that all past claims, including statutory dues, stood extinguished under the plan.

The Bombay High Court had also quashed reassessment proceedings for the same year in August 2025. However, the Department issued fresh notices based on information from the Enforcement Directorate about alleged fraudulent transactions, reversal trades involving shell entities and possible tax evasion.

The Department maintained that it only wanted to investigate these transactions, not recover past tax dues.

It further argued that insolvency proceedings should not be used to escape responsibility for alleged fraud or other illegal activities. The Department submitted that the authorities needed to investigate the transactions and could take appropriate action against the directors responsible at the time, if warranted by law.

The High Court rejected the Department's submissions. It questioned how fresh reassessment proceedings could be initiated after it had already quashed proceedings for the same assessment year.

Independently examining the matter, the court held that the Department could not proceed against the company for the period before approval of the resolution plan. This applied notwithstanding the fresh information received by the Department.

The court relied on the Supreme Court's ruling in Ghanshyam Mishra & Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd. and its own decision in Alok Industries Ltd. v. Assistant Commissioner of Income Tax.

It quashed the show-cause notice issued on March 31, 2026, the order passed on June 29, 2026, and the reassessment notice issued the same day under the Income Tax Act.

However, the court clarified that the Department could still take legal action against the company's former management, if permitted by law.

For Petitioners: Advocates Sham V. Walve, Abhishek Khandelwal and Bhavik Chheda

For Department: Advocate Swapna Gokhale appeared for the Income Tax Department