28 December 2022
NCLT reiterates that the tax department is a secured creditor
Recently, the National Company Law Tribunal (NCLT), Chandigarh Bench has allowed an application filed by the income tax department under Insolvency & Bankruptcy Code, 2016 (IBC) inter alia appealed for directions to Resolution Professional of Recorders & Medicare Systems Pvt. Ltd. (Corporate Debtor), to consider tax department’s claim w.r.t the outstanding amount and other reliefs as deemed fit by the NCLT. The issue involved in this important ruling is summarized in the following paragraphs.
Brief facts:
  • The aforesaid ruling emanates from an application filed by the Assistance Commissioner of the Income Tax Department (ITD) against the Resolution Professional of the Corporate Debtor.
  • The ITD appealed to issue directions to the Resolution Professional to consider the claims of ITD with regard to the outstanding amount and other reliefs as deemed fit by the adjudicating authority.
  • The ITD had filed their claim in requisite form with the Resolution Professional, who communicated that the new management has taken over the Corporate Debtor’s affairs and the liability of ITD as outstanding has been waived off.
  • The ITD appealed to the National Company Law Appellate Tribunal (NCLAT), which held that the impugned order passed by the NCLT, relating to waiver of income tax is without jurisdiction and directed NCLT that the same shall be considered as operational debt and the amount to be paid should not be less than the amount payable to an operational creditor as per Section 53 of IBC.
  • Thereafter, ITD filed an application under Section 60(5) (c) of the IBC, seeking directions from NCLT.
Summary of NCLT ruling:
  • NCLT took note that Rule 93 of Part VI (Miscellaneous) of the Second Schedule of the Income Tax Act, 1961 prescribes the first charge upon any asset. The said rule states as follows:
    • “93. Saving regarding charge- Nothing in this schedule shall affect any provisions of this Act whereunder the tax is the first charge upon any asset.”
  • NCLT noted the averment of ITD that Rule 93 of Part VI (Miscellaneous) of the Second Schedule of the Income Tax Act, 1961 prescribed the first charge upon any asset and that Rule 93 of Part VI of the Second Schedule of the Income Tax Act and Section 48 of the Gujarat Value Added Tax, 2003 were pari-materia, hence, the government dues including Income Tax dues, were to be treated pari-passu with secured creditors and workmen's dues.
  • NCLT relied on the judgment of Hon’ble Supreme Court in the case of State Tax Officer (1) Vs. Rainbow Papers Limited (Civil Appeal Nos. 1661 of 2020 and 2568 of 2020 dated 6 September 2022), and reiterated that the dues of the ITD have the first charge over the assets of the Corporate Debtor.
  • Therefore, NCLT directed the Resolution Professional to consider the claims of ITD, after verifying the said claims with respect to the materials produced before him, under Section 53(1)(b)(ii) of IBC, at par with the debts owed to a secured creditor, ranking equally with other specified debts.
Accordingly, the claim of ITD stands allowed.
Our Comments
In State Tax Officer vs. Rainbow Papers Ltd. (Supra), Hon’ble Supreme Court had inter alia held that “If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan.” In our alert on the aforesaid judgment , we anticipated that this judgment is significant and likely to have far-reaching consequences as it categorized government dues as a secured creditor. The tax statutes with pari materia provisions, like Gujarat Value Added Tax Act, 2003, are likely to state this as a precedent to treat themselves as a secured creditor; thus, this particular issue will have far-reaching consequences on the IBC process. As rightly apprehended, the ITD has placed reliance on the aforesaid judgment of Hon’ble Supreme Court and appealled to NCLT to direct Resolution Professional to consider its claim as a secured creditor, and accordingly NCLT allowed ITD’s claim basis that.
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