Absence Of Charge Defeats Income Tax Department's Secured Creditor Status: NCLAT New Delhi
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Rakesh Kumar Jain (Judicial Member) and Mr. Naresh Salecha (Technical Member), has held that in the absence of a charge, the Income Tax Department cannot be treated as a secured creditor in insolvency or liquidation proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC).
Background
The appeal was filed by Mr. Parag Sheth, the Liquidator of M/s Origin Formulation Pvt. Ltd., challenging the order dated 09.05.2024 passed by the National Company Law Tribunal (NCLT), Ahmedabad Bench, which had dismissed his application seeking the dissolution of the corporate debtor under Section 54 of the IBC. The liquidation proceedings had been initiated after a Section 7 application filed by M/s Prutha Enterprises (Financial Creditor) was admitted on 17.09.2019. Since no resolution plan was approved, the corporate debtor was ordered to be liquidated on 28.09.2020, and the appellant was appointed as liquidator.
Following liquidation, the proceeds from the sale of assets were distributed among the stakeholders in accordance with the Code. The liquidator thereafter filed I.A. No. 541 of 2022 seeking dissolution of the corporate debtor.
During the pendency of that application, the Income Tax Department filed a claim of ₹7.71 crore, representing alleged tax dues. The NCLT, however, rejected the dissolution plea, relying on the Supreme Court’s ruling in State Tax Officer (1) v. Rainbow Papers Ltd., Civil Appeal Nos. 1661 & 2568 of 2020 and on Principal Commissioner of Income Tax v. M/s Assam Company India Ltd., Company Appeal (AT) (Insolvency) No. 243 of 2022, holding that the Income Tax Department should be treated as a secured creditor.
Appellant’s Submissions
The appellant contended that the NCLT had erred in treating the Income Tax Department as a secured creditor, as no charge or attachment order was ever created on the assets of the corporate debtor. It was further submitted that the reliance on Rainbow Papers (Supra) was misplaced because that judgment pertained to Section 48 of the Gujarat Value Added Tax (GVAT) Act, which expressly created a charge, whereas the Income Tax Act, 1961 does not create any such automatic charge without an attachment order. The appellant also referred to a statement made by counsel for the Income Tax Department before the NCLT on 28.06.2023, expressly admitting that no charge existed against the tax demand and that Rainbow Papers would not apply. This statement, the appellant pointed out, was never challenged by the Department.
NCLAT’s Observations
The NCLAT observed that despite notice being duly served, no representative appeared on behalf of the Income Tax Department before the Appellate Tribunal. The Bench noted that the Department’s counsel had earlier made a clear statement before the NCLT that no charge was created against the demand for income tax, and that statement stood uncontroverted. The Bench observed: “The statement made by counsel for the Income Tax Department that the Department has no charge against the demand of income tax remains unchallenged. The Adjudicating Authority, therefore, committed an error in presuming that the Department was a secured creditor based on Rainbow Papers and Principal Commissioner of Income Tax decisions.”
The Tribunal distinguished both cases relied upon by the NCLT:
In Rainbow Papers, the statutory framework under the GVAT Act created a specific charge in favor of the tax authorities.
In Principal Commissioner of Income Tax v. Assam Company India Ltd., an order of attachment had been passed, which amounted to creation of a charge — a fact absent in the present case.
Hence, the Tribunal concluded that the NCLT’s reliance on those precedents was misplaced, as the Income Tax Department had neither a statutory charge nor an attachment order, and thus could not claim secured creditor status.
The NCLAT held that in the absence of a charge or attachment, the Income Tax Department’s claim ranks only as an operational debt and not as a secured one. The NCLT’s order refusing to dissolve the corporate debtor on the presumption that the Department was a secured creditor was therefore unsustainable. Accordingly, the Appellate Tribunal allowed the appeal, set aside the NCLT’s order, and remanded the matter to the NCLT, Ahmedabad Bench, to pass an order of dissolution in accordance with law.
Appearance
For Appellant: Ms. Natasha Dhruman Shah, Advocate
For Respondent: Mr. Karan Valecha, Vishal Singhal, Adv. for R2
Cause Title: Parag Sheth vs. Union of India & Ors.
Case No: Comp. App. (AT) (Ins) No. 1395 of 2024
Coram: Justice Rakesh Kumar Jain (Judicial Member), Mr. Naresh Salecha (Technical Member)
