25 May 2023
NCLT Upholds the Delayed Claim of Income Tax Authorities
In a recent case1, the Chandigarh Bench of the National Company Law Tribunal (NCLT) upheld the delayed claim submitted by the Income Tax Authorities (the Department) and directed the liquidator to consider the claim of the Department. In the current case, the insolvency resolution process was initiated against Tara Chand Rice Mills Private Limited (Corporate Debtor), and due to the failure of the resolution process, the liquidation process was initiated. This alert summarizes the key aspects of the aforesaid ruling.
Facts of the Case
  • The claim was submitted by the Department to the liquidator in relation to the liquidation process of the Corporate Debtor. However, the liquidator rejected the same on the pretext that the claim is time-barred since it was submitted late with a delay of 1023 days.

  • The liquidator argued that most of the part of the claim pertains to demand raised during the moratorium period, which is in contravention of the moratorium provisions. The liquidator further argued that by the time the Department filed its claim during liquidation, the proceeds under liquidation had already been distributed, and there was no justification for admitting such a belated claim.

  • Aggrieved by the rejection of the claim by the liquidator, the Department filed an appeal before the NCLT for adjudication of their claim. The Department filed an appeal relying on the decision of the Co-ordinate Kolkata Bench in CA(IB) No. 31/KB of 2018 Titled "In re, UCO Bank," wherein it is stated that a similar delay by the Income Tax Appellant got condoned and the Appellant was allowed to file its claim before the liquidator.
NCLT Ruling

The NCLT ruled in favor of the Department on the following grounds:
  • With regard to the issue of demands raised in contravention of the provisions of the moratorium, the Hon'ble NCLT relied on the decision on a similar issue in the case of Hon'ble Apex Court in the case of Sundaresh Bhatt, Liquidator of ABG Shipyard vs Central Board of Indirect Taxes and Customs, decided on 26 August 2022, wherein it has been held to the effect that the Department can take steps to determine the tax, interest, fines, or any penalty which is due from the Corporate Debtor during the moratorium period. However, the Department cannot enforce a claim for recovery or levy of interest on the tax due during the period of moratorium.

  • The NCLT also placed reliance upon the decision of the Hon'ble Apex Court in the case of State Tax Officer vs Rainbow Papers Limited decided on 6 September 2022, wherein it was held that the State is to be treated as a "Secured Creditor".

  • On the issue of belated filing of the claim before the liquidator, as held in Rainbow Papers (Supra), the NCLT held that the Department is not required to file its claim before the liquidator, and the statutory debts, including the Income Tax dues, reflected in the books of accounts of the Corporate Debtor, need to be considered by him.

  • The NCLT noted that in the present case, the liquidator has failed to consider the claims of the applicant Department and has gone ahead with the distribution of the proceeds during liquidation. It further noted that the liquidator has failed to carry out the distribution of amounts in the liquidation process as per the provisions of the Insolvency and Bankruptcy Code (IBC).

  • The liquidator is, therefore, directed to re-distribute the proceeds from the realization of the liquidation process as per the provisions of Section 53 of the Code by treating the Department as a secured creditor within three weeks of this order. It also directed the stakeholders who have received money beyond their entitlement to return the money as per the provisions.
1. Principal Commissioner of Income Tax vs Rakesh Ahuja (Liquidator of Tara Chand Rice Mills Pvt. Ltd. CP (IB) No. 121/Chd/Hry/2017
Our Comments
The recent decision re-emphasizes the ratio laid down by the Hon'ble Supreme Court in Rainbow Papers (Supra) of the Department being a secured creditor. After the said decision, the NCLT and National Company Law Appellate Tribunal (NCLAT) have held the Department as a secured creditor claiming priority equally with secured creditors and workers.

The NCLT also previously held in the case of Re: Resolution Professional of Recorders & Medicare Systems Pvt. Ltd., that the Department is a secured creditor having regard to Rule 93 of Part VI (Miscellaneous) of the Second Schedule of the Income Tax Act, 1961.

It is also important to note that the NCLT has not only directed the liquidator to re-distribute the liquidation proceeds but also directed stakeholders to return the proceeds as they were not entitled to receive it as per the provisions.

As we anticipated in our previous alerts, it is now clear that the Statutory Authorities are actively pursuing their claims considering the favorable judgments. However, this may not align with the intent and the explicit purpose of IBC as, due to the judicial precedents, crown debt finds precedence at par with secured creditors under IBC. Furthermore, the connotation that timelines under IBC are not sacrosanct and they are directory in nature has started impacting the overall process.
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