Insolvency Code has overriding effect on I-T Act: HC

Saurabh Malik

Chandigarh, January 7

In a significant judgment, the Punjab and Haryana High Court has ruled that the provisions of the Insolvency and Bankruptcy Code (IBC) would have an overriding effect on any other law, including the Income Tax Act.

The ruling by Justice Sandeep Moudgil came in a case where insolvency proceedings were initiated against a firm before the appointment of a resolution professional. The income tax authorities filed a complaint in the matter under the provisions of the I-T Act.

Justice Moudgil also quashed order dated March 27, 2015, passed by Gurugram Commissioner of Income Tax (Central), granting sanction under the provisions of the Act for filing a complaint against the petitioners-directors of the firm for ‘wilful’ evasion of tax of Rs 12,85,13,650.

Justice Moudgil further quashed order dated September 12, 2022, vide which a Chief Judicial Magistrate dismissed the petitioner’s plea for staying the proceedings arising out of order dated March 27, 2015, on the ground that moratorium automatically stood declared regarding legal proceedings against them following the filing of the application by a bank for initiating insolvency resolution process.

After hearing advocates Sunil Mukhi and Viren Sibal on the petitioner’s behalf, Justice Moudgil asserted it was amply clear that the income tax authorities were under the informed knowledge of insolvency proceedings against the company, and that the petitioners were not in a position to clear their tax liability since the company’s assets ceased to be under their control after the resolution professional’s appointment. As such, Section 279(1) of the I-T Act was invoked without application of mind, and without following the principle of natural justice. It could not have been invoked in the peculiar circumstances of the case.

Justice Moudgil added it was evident that the income tax authorities were well conversant with the company’s status and had then only raised a claim before the resolution professional. “That being so, it does not lie in the mouth of the income tax authorities to file complaint under Section 279(1) of the I-T Act as the appropriate remedy was to approach the National Company Law Tribunal (NCLT) or the resolution professional appointed to look after the financial assets of the corporate debtor company”.

Justice Moudgil further said the central government was entitled to the tax and due compliance by the assessee with the Act’s statutory provision not as a creditor, but authority acting under a statute. Tax liability was not a tax, but a legal obligation.

But sight could not be lost of the fact that the company’s assets ceased to be under their control, when the insolvency proceedings were initiated and resolution professional appointed. All the claims of the financial creditors, including crown debt of the Central government, became subject to approval and acceptance by the resolution professional, which would have overriding effect over the Income Tax Act.

THE CASE

The ruling by Justice Sandeep Moudgil came in a case where insolvency proceedings were initiated against a firm before the appointment of a resolution professional. The income tax authorities filed a complaint in the matter under the provisions of the I-T Act.