ITAT Quashes Assessment and Penalty Orders Passed During IBC Admission Period
Pranav B Prem
In a significant ruling, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has quashed assessment and penalty orders passed during the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC) admission period. The tribunal held that once a resolution plan is approved by the National Company Law Tribunal (NCLT), all previous tax liabilities become unenforceable and any subsequent demands raised by the Income Tax Department are rendered void. The bench, comprising Hon'ble Mr. M. Balaganesh (Accountant Member) and Hon'ble Mr. Anubhav Sharma (Judicial Member), emphasized that the National Faceless Assessment Centre (NFAC) should have quashed the assessments instead of dismissing the appeals as non-maintainable while allowing the Assessing Officer (AO) to simply follow the NCLT's order.
Background of the Case
The appellant, M/s. Jasrati Education Solutions Ltd. (formerly known as M/s. Educomp Infrastructure & Schools Management Ltd.), underwent Corporate Insolvency Resolution Process (CIRP) under the IBC. The NCLT passed an order approving the Resolution Plan on December 14, 2020, which permanently settled all government dues by attributing a NIL value to them. Despite the approval of the Resolution Plan, the Income Tax Department issued notices and completed assessments under the following circumstances:
Assessment Year (AY) 2013-14: Notice under Section 148 issued on March 20, 2020.
AY 2016-17: Notice under Section 148 issued on March 19, 2020.
AY 2018-19: Notice under Section 143(2) issued on September 22, 2019.
The NFAC, in its order dated February 5, 2024, dismissed the assessee's appeals as non-maintainable on the grounds that the Resolution Plan had already been approved by the NCLT. This decision was challenged by the assessee before the ITAT.
Key Arguments by the Assessee
The assessee argued that:
Binding Effect of the Resolution Plan: The Resolution Plan approved under Section 31(1) of the IBC is binding on the Corporate Debtor and all stakeholders, including government agencies. As such, no tax liability for periods prior to the approval date could be enforced.
Extinguishment of Dues: The plan explicitly states: "Upon approval of this Resolution Plan by the NCLT, all dues under the provisions of Income Tax Act, 1961, in relation to any period prior to the Insolvency Commencement Date, shall stand permanently settled by attributing a NIL value to them."
Legal Precedents: The assessee relied on the Supreme Court's ruling in Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited, which held: "Once a resolution plan is duly approved by the Adjudicating Authority under Section 31, all claims not part of the resolution plan shall stand extinguished, and no person is entitled to initiate or continue any proceedings in respect to such claims."
ITAT’s Observations and Ruling
The Tribunal held that once the NCLT approved the Resolution Plan, all pre-existing tax liabilities stood extinguished and no further proceedings could be initiated. It observed: "As there was no claim of department adjudicated during resolution proceedings and in fact the dues or demands of the department were quantified at NIL, the NFAC should have quashed the impugned assessments instead of dismissing the appeals as non-maintainable, and then giving AO liberty to just follow the NCLT order."
The Tribunal further pointed to legislative changes introduced by the Finance Act, 2022, specifically Section 156A of the Income Tax Act, 1961, which mandates that the Assessing Officer must modify the demand payable in accordance with the NCLT’s approved Resolution Plan. The Tribunal stated: "The order passed by the AA approving a Resolution Plan shall be complied by the Assessing Officer and the revised demand notice in accordance with the resolution plan duly approved by the AA shall be issued by the Assessing Officer under Section 156 of the Income Tax Act, 1961."
The Tribunal also referred to a prior ruling in ACIT (OSD) v. GAIL Mangalore Petrochemicals Ltd., ITA No. 2843/Del/2024, where it was held that any assessment conducted after the approval of a Resolution Plan is invalid and unenforceable.
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Verdict
The ITAT quashed the assessment orders for AY 2013-14, AY 2016-17, and AY 2018-19, reinforcing that once a Resolution Plan is approved, the Income Tax Department cannot revive or enforce any claims arising before the plan's approval. The ruling aligns with established legal precedents and statutory provisions introduced through the Finance Act, 2022, ensuring that businesses emerging from insolvency proceedings begin on a "clean slate."
Appearance
For the Assessee : Shri Gaurav Jain, Advocate & Shri Rahul Prabhakar, Advocate
For Revenue : Shri Dayainder Singh Sidhu, CIT-DR
Cause Title: Jasrati Education Solutions Ltd. V. NFAC
Case No: ITAs No.1147, 1149 & 1148/Del/2024
Coram: Anubhav Sharma [Member (Judicial)], Balaganesh [Member (Accountant)]
[Read/Download order]
