Automated Set-Off Of Income Tax Refunds During Moratorium Violates IBC: NCLT Indore

The National Company Law Tribunal (NCLT) at Indore recently held that even automated adjustment of income tax refunds during the IBC moratorium is illegal, directing the Income Tax Department to refund Rs 30.16 lakh set off against pre-CIRP tax dues of Sanwaria Consumer Limited.

“The mere fact that the adjustment was effected through an automated or system-driven process does not alter its legal character. The effect of the action remains the same, namely recovery of pre-CIRP dues during the moratorium, which is expressly prohibited under Section 14 of the Code.”

The order was passed by Judicial Member Brajendra Mani Tripathi and Technical Member Man Mohan Gupta on an application filed by the Resolution Professional of Sanwaria Consumer Limited under Sections 25 and 60(5) of the Insolvency and Bankruptcy Code.

The Corporate Insolvency Resolution Process against the company began on May 29, 2020. A moratorium under Section 14 came into effect from that date.

During the moratorium, the Income Tax Department adjusted refunds for assessment years 2021-22, 2022-23 and 2023-24. The amounts were set off against tax demands from the period before the insolvency process. The total adjusted sum was ₹30,16,790.

The Resolution Professional argued that these refunds are assets of the corporate debtor. He said they form part of the insolvency estate and must be preserved. He contended that the adjustment amounted to recovery of dues in preference to other creditors.

He also said the action violated the principle of equitable distribution under the Code. Despite written representations, the department did not reverse the adjustment.

The Income Tax Department opposed the plea. It said the adjustment related to admitted dues of approximately Rs. 15 crore. It argued that the process was carried out through the CPC system and did not amount to coercive recovery.

It also said prior intimation was given and no objection was filed within the stipulated time.

The tribunal rejected these contentions. It held that the moratorium under Section 14 has a wide scope. It bars any action that results in recovery or enforcement of claims against the corporate debtor.

The bench said the moratorium applies to all creditors, including statutory authorities. It said the bar operates automatically and does not depend on notice or response.

The tribunal held that income tax refunds are assets of the corporate debtor. These must be preserved during the insolvency process.

It said adjustment of refunds against earlier dues amounts to appropriation of assets. This, in effect, is recovery of pre-CIRP dues during the moratorium.

The tribunal set aside the adjustment. It directed the Income Tax Department to reverse the set-off and refund Rs. 30,16,790 to the company within 30 days