In a noteworthy ruling, the Bombay High Court addressed an important issue concerning tax liabilities arising after a Corporate Insolvency Resolution Process (CIRP) in Uttam Value Steel Ltd. & Anr. Vs ACIT & Ors[1]. This case illuminates the tension between an approved Resolution Plan under the Insolvency and Bankruptcy Code, 2016 (IBC) and the actions of Income Tax Authorities.
Key Facts
The petitioner, Uttam Value Steel, successfully navigated the CIRP, culminating in an approved Resolution Plan by the National Company Law Tribunal (NCLT). The company asserted that this approval effectively nullified all tax liabilities incurred prior to the initiation of the CIRP. Conversely, the tax authorities contended that liabilities that arose before the CIRP but crystallized afterward remained subject to enforcement.
Legal Reasoning (Ratio)
The Division Bench concluded that once a Resolution Plan is ratified, it binds all stakeholders, including government entities. In reaching this conclusion, the court leaned heavily on the Supreme Court’s judgment in Ghanshyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., which clarifies that the legislative intent is to extinguish all debts owed to governmental bodies, including tax authorities.
Findings
The court held that the proceedings initiated by the Income Tax Department were untenable under law. The approval of the Resolution Plan unequivocally brought closure to all claims pursued by the Income Tax Department, thereby reinforcing the binding nature of such plans and emphasizing the necessity for statutory authorities to comply with them.
Confusion Among Statutory Authorities
This case is emblematic of a broader issue, statutory bodies frequently initiate proceedings in disregard of established legal frameworks. This misalignment is particularly acute in GST contexts, where bona fide purchasers are unjustly targeted for tax liabilities stemming from suppliers who have undergone CIRP. These purchasers, often innocent parties, find themselves liable for defaults not of their own making, underscoring the urgent need for statutory authorities to grasp the full implications of legal resolutions.
Need for Remedy
The misapplication of legal principles by statutory authorities not only spawns unnecessary litigation but also inflicts significant hardships on businesses. It is imperative that these bodies cultivate a deeper awareness of the interplay between various legal statutes to effectively discharge their duties and mitigate adverse impacts on corporate entities in the aftermath of resolution.
Ranit Basu | Partner
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Views expressed are personal to the author and do not constitute as legal advice.
[1] Uttam Value Steel Ltd. & Anr. Vs ACIT & Ors. (W.P (L) No. 9420 of 2022)
