2025 (5) TMI 1592 - HC - Income Tax

Penalty proceedings against company dissolved - notices issued post-approval of the resolution plan - HELD THAT - Admittedly the impugned notices are issued for the assessment year 2017-18 much after approval of the resolution plan on 1.1.2020 the notices for the assessment year 2017-18 are required to be quashed and set aside and accordingly the same are quashed and set aside.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether recovery notices issued by the Income Tax Department for the assessment year 2017-18 after approval of the resolution plan under the Insolvency and Bankruptcy Code (IBC) 2016 are valid and enforceable.

- Whether the penalty orders under sections 271(1)(c) and 270A of the Income Tax Act, which were not served upon the petitioner, can form the basis for recovery notices post-approval of the resolution plan.

- Whether statutory dues of the Income Tax Department are to be treated as secured claims in the insolvency resolution process and thus recoverable notwithstanding the resolution plan approval.

- The legal effect of an approved resolution plan under section 31 of the IBC on outstanding claims, including statutory dues, that are not part of the resolution plan.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Recovery Notices Issued Post-Approval of Resolution Plan

Relevant Legal Framework and Precedents:

The Insolvency and Bankruptcy Code, 2016, particularly section 31, governs the approval and binding effect of resolution plans. The Apex Court's decision in Ghanashyam Mishra and Sons Pvt. Ltd. vs. Delweiss Asset Reconstruction Co. Ltd. (2021) and Vaibhav Goel vs. Deputy Commissioner of Income Tax (2025) clarified that once a resolution plan is approved, claims not included therein stand extinguished and no proceedings can be initiated or continued in respect of such claims.

Court's Interpretation and Reasoning:

The Court observed that the resolution plan in the present case was approved on 1.1.2020 by the NCLT, Ahmedabad. The recovery notices challenged were issued much later, on 4.3.2024 and 9.4.2024, for the assessment year 2017-18, which predates the resolution plan approval. The Court relied heavily on the Apex Court's pronouncement that claims not forming part of the resolution plan are extinguished upon approval.

Key Evidence and Findings:

The petitioner produced the NCLT order approving the resolution plan and correspondence showing the issuance of recovery notices post-approval. The respondent did not controvert these documents.

Application of Law to Facts:

Since the recovery notices relate to dues for a period prior to the resolution plan approval and were not included in the plan, the Court held that such demands are legally unenforceable.

Treatment of Competing Arguments:

The respondent argued that statutory dues of the Income Tax Department are secured claims and can be recovered notwithstanding the resolution plan. However, the Court distinguished this position based on the Apex Court's binding authority, which clarified that all claims, including statutory dues, if not part of the approved plan, stand extinguished.

Conclusions:

The recovery notices issued post-approval for pre-approval dues are invalid and liable to be quashed.

Issue 2: Service of Penalty Orders Under Sections 271(1)(c) and 270A of the Income Tax Act

Relevant Legal Framework:

Procedural fairness under the Income Tax Act requires that penalty orders be served upon the assessee before enforcement actions are taken.

Court's Interpretation and Reasoning:

The Court noted that neither the penalty order dated 18.10.2021 under section 271(1)(c) nor the penalty order dated 24.11.2021 under section 270A were served on the petitioner. This procedural lapse undermines the validity of the recovery notices based on these penalty orders.

Key Evidence and Findings:

The petitioner's submissions and record showed absence of service of penalty orders, which the respondent did not dispute.

Application of Law to Facts:

Since the penalty orders were not served, recovery based on them cannot be sustained.

Treatment of Competing Arguments:

The respondent did not specifically contest the non-service issue but relied on the general validity of the demands.

Conclusions:

The recovery notices premised on unserved penalty orders are procedurally defective and invalid.

Issue 3: Treatment of Statutory Dues as Secured Claims in CIRP

Relevant Legal Framework and Precedents:

The respondent cited the judgment in Rainbow Private Limited, which held that statutory dues of the Income Tax Department are to be treated as secured claims in insolvency resolution.

Court's Interpretation and Reasoning:

The Court acknowledged this position but clarified that the subsequent and more recent Apex Court rulings in Ghanashyam Mishra and Vaibhav Goel cases supersede this view by emphasizing the extinguishment of claims not included in the resolution plan.

Key Evidence and Findings:

The resolution plan did not include the disputed statutory dues for the assessment year 2017-18.

Application of Law to Facts:

Accordingly, notwithstanding the classification of statutory dues as secured claims, the claims not included in the approved plan cannot be enforced post-approval.

Treatment of Competing Arguments:

The Court gave precedence to the binding Apex Court rulings over earlier or conflicting interpretations.

Conclusions:

Statutory dues not incorporated in the resolution plan stand extinguished and cannot be recovered thereafter.

3. SIGNIFICANT HOLDINGS

"Once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan."

This pronouncement establishes the core principle that approval of a resolution plan under the IBC has a conclusive effect of freezing and extinguishing claims not included in the plan, including statutory dues.

Final determinations:

- The recovery notices dated 4.3.2024 and 9.4.2024 issued for the assessment year 2017-18 are quashed and set aside as unenforceable post-approval of the resolution plan.

- Penalty orders under sections 271(1)(c) and 270A of the Income Tax Act, not served on the petitioner, cannot form a valid basis for recovery.

- Statutory dues not included in the approved resolution plan stand extinguished and cannot be pursued thereafter.