Tax Assessment Can Continue During Liquidation, Penalty Proceedings Cannot: NCLT Kolkata

The National Company Law Tribunal (NCLT), Kolkata, on 16 October held that tax authorities can continue assessment proceedings to determine a company's tax liability during liquidation but cannot initiate penalty proceedings against the corporate debtor through show-cause notices under Section 33(6) of the Insolvency and Bankruptcy Code, 2016 (IBC).

A Bench of Technical Member Rekha Kantilal Shah and Judicial Member Labh Singh allowed an application filed by the liquidator of Gujarat NRE Coke Limited challenging the Income Tax Department's show-cause notices proposing penalties for Assessment Year 2020-21. It held:

“Accordingly, we hold that, prior to the insertion of Rule 12AA in the IT Rules, 1962, the Liquidator was not required to file the Income-tax Return of the Corporate Debtor undergoing liquidation. The issue shall accordingly be governed by the principle laid down in Om Prakash Agrawal v. Chief Commissioner of Income Tax (2021) ibclaw.in 54 NCLAT”.

Gujarat NRE Coke Limited was admitted into the Corporate Insolvency Resolution Process (CIRP) in 2017. After no resolution plan was approved, the NCLT ordered liquidation in 2018 and appointed Sumit Binani as the liquidator.

During liquidation, the Income Tax Department initiated assessment proceedings for Assessment Year 2020-21. In February 2025, it issued two show-cause notices proposing penalties under Sections 270A and 271AAC(1) of the Income Tax Act, 1961.

The Tribunal examined Sections 139 and 140 of the Income Tax Act and Rule 12AA of the Income Tax Rules, 1962, which identify the liquidator as a competent person to verify the company's return.

However, it noted that Rule 12AA came into force in August 2021, whereas the relevant financial year was 2019-20. The Rule could not retrospectively create a statutory default for failure to file a return whose due date had expired before its commencement.

The Bench also relied on the National Company Law Appellate Tribunal's decision in Om Prakash Agrawal v. Chief Commissioner of Income Tax in holding that Rule 12AA did not independently impose an obligation on the liquidator to file the return for the relevant period.

On the question of assessment proceedings during liquidation, it relied on the NCLAT's decision in Employees' Provident Fund v. Jaykumar Pesumal Arlani, which recognised that Section 33(5) of the IBC does not prohibit statutory authorities from conducting assessments to determine a corporate debtor's tax liability.

However, relying on the Supreme Court's decision in Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs (2022) SCC OnLine SC 1101, the Tribunal distinguished assessment proceedings from proceedings to enforce a demand or impose penalties.

The Supreme Court had held that demand notices seeking enforcement of customs dues during the moratorium would violate Sections 14 or 33(5) of the IBC, as applicable, by initiating legal proceedings against the corporate debtor.

Applying this principle, the Bench held that the show-cause notices dated 19 February 2025, insofar as they proposed penalty proceedings under Sections 270A and 271AAC(1) of the Income Tax Act, contravened Section 33(6) of the IBC.

Accordingly, the NCLT set aside the two penalty show-cause notices dated 19 February 2025 but declined to set aside the assessment order, holding that assessment proceedings could continue during liquidation.