NCLAT New Delhi Rules, Absence Of Charge Defeats Income Tax Department's Secured Creditor Status
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Rakesh Kumar Jain (Judicial Member) and Naresh Salecha (Technical Member), has held that the Income Tax Department cannot be treated as a secured creditor in the absence of a valid charge created over the assets of the corporate debtor. The bench observed that a mere claim for tax dues does not automatically create a charge under law, and therefore, the Income Tax Department cannot assert priority over other creditors without proving the existence of such charge.
Background
The case arose from an appeal filed by Parag Sheth, the liquidator of M/s Origin Formulation Pvt. Ltd., challenging the NCLT Ahmedabad Bench’s order dated May 9, 2024, which had rejected his application under Section 54 of the Insolvency and Bankruptcy Code, 2016 (IBC) seeking dissolution of the corporate debtor. The corporate debtor’s Corporate Insolvency Resolution Process (CIRP) had commenced on September 17, 2019, on a Section 7 application filed by M/s Prutha Enterprises. Since no resolution plan was approved, the adjudicating authority ordered liquidation on September 28, 2020, appointing the appellant as the liquidator.After completion of the liquidation process and distribution of sale proceeds among stakeholders, the liquidator filed I.A. No. 541 of 2022 seeking dissolution of the corporate debtor. During pendency of this application, the Income Tax Department lodged a claim of ₹7.71 crore for tax dues.
NCLT’s Order
The NCLT, Ahmedabad, relying on the Supreme Court’s decision in State Tax Officer (1) v. Rainbow Papers Ltd., Civil Appeal No. 1661 of 2020, and the NCLAT ruling in Principal Commissioner of Income Tax v. Assam Company India Ltd. [CA (AT) (Ins) No. 243 of 2022], held that the Income Tax Department qualifies as a secured creditor and should not have been treated as an unsecured creditor. On this reasoning, the NCLT rejected the liquidator’s dissolution application, observing that the Registrar of Companies (RoC) and the Income Tax Department had not issued a written no-objection due to pending tax dues.
Liquidator’s Arguments Before NCLAT
The appellant contended that the NCLT erred in relying on Rainbow Papers (Supra), as the facts in that case were entirely different and pertained to Section 48 of the Gujarat Value Added Tax Act, which specifically provides for creation of a charge. It was further argued that the reliance on Principal Commissioner of Income Tax v. Assam Company was misplaced since, in that case, an order of attachment had been passed, thereby creating a charge on the corporate debtor’s property. In contrast, in the present case, no such order of attachment or creation of charge existed. The liquidator emphasized that the Income Tax Department’s own counsel had admitted before the NCLT on June 28, 2023, that no charge had been created in respect of the tax demand, and consequently, the Rainbow Papers decision would not apply. This statement, the appellant noted, remained unchallenged by the department.
Proceedings Before NCLAT
During the appeal, the NCLAT issued notice to the Income Tax Department, which was duly served. However, the department failed to appear despite being given opportunities during both pre-lunch and post-lunch sessions. The bench noted that the likely reason for non-appearance was that the department had already conceded before the NCLT that no charge existed in relation to its claim.
NCLAT’s Observations
The appellate bench held that the absence of a charge over the assets of the corporate debtor was fatal to the Income Tax Department’s claim of secured creditor status. The NCLAT clarified that Rainbow Papers (Supra) applied only to cases where a statutory charge exists under a specific law, such as the GVAT Act, and not where no such charge is created under the Income Tax Act, 1961.The order noted: “The statement made by counsel for the Income Tax Department before the NCLT that no charge has been created against the demand of income tax remains unchallenged. Hence, the Tribunal has committed a patent error in presuming that the department is a secured creditor.” Accordingly, the bench held that the NCLT erred in rejecting the dissolution application solely on the assumption that the Income Tax Department was a secured creditor.
Setting aside the NCLT’s order dated May 9, 2024, the NCLAT allowed the appeal, holding that the Income Tax Department could not claim secured creditor status in the absence of any charge or attachment order. The appellate tribunal remanded the matter to the NCLT, directing it to pass an order of dissolution of the corporate debtor in accordance with law. “The Tribunal has committed a patent error in rejecting the application by presuming that the Income Tax Department is a secured creditor. The impugned order is set aside and the matter remanded for passing an order of dissolution,” the bench concluded.
Appearance
For Appellant: Ms. Natasha Dhruman Shah, Adv.
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), Naresh Salecha (Technical Member)
