2025 (6) TMI 2015 - HC - Income Tax

Reopening of assessment against company insolvent/dissolved -petitioner having undergone the Corporate Insolvency Resolution Process (CIRP) and the resolution plan having been approved by NCLT - Extinguishment of liabilities post approval of resolution plan - raudulent transactions/purchases noted - HELD THAT - Reasons for which the reopening of the assessment has been proposed and initiated. Going by the information collected it was found that the petitioner is said to have undertaken both sale as well as purchase trades from at least eight contracts. On further scrutiny certain characteristics were reflected and all these characteristics are what have been reflected in the paragraph No.4 of this order. The authorities found that the transactions inter se between all these eight contracts were of similar nature inasmuch as the quantity purchased and sold were identical. In all the cases there is huge variation between the purchased price and the sale price. The trades carried out between the same party and the counter party also had similar facts. The time gap between the purchase and sale is very momentary and that it lasts at time for only a few seconds if not more than an hour. Likewise there was insignificant change in the price of the underlying scrip as compared to the changes in buying and selling rates. Similarly another characteristic which was revealed was that of repeated trading in deep in-the-money auctions and deep out-of-the-money auctions on individual stocks which were thinly traded. Based upon these information collected the authorities found that there are strong reasons to believe that all these fraudulent transactions reflected the illegalities those are going on and the object behind it is to evade payment of tax and the income chargeable to tax roughly amounts to over Rs.3 crores for the assessment year 2024-15. Reopening of assessment - This Court is of the firm view that there is no doubt as regards non-sustainability of a recovery initiated subsequent to the Corporate Insolvency Resolution Process having been initiated and approval of the resolution plan which is otherwise impermissible. Nonetheless if the Department wants to have reassessment of the assessment order the same is not barred under law even after the resolution process having been finalized and the resolution plan having been given effect to. The action of the respondents may be only bad in law in the event if after reopening of the assessment and a fresh assessment is done the authorities if go in for recovery proceedings. Authorities cannot be found fault with if they intend to do scrutiny of the proceedings to ascertain whether there has been any illegal fraudulent and fake transactions carried out and if yes at least appropriate proceedings can be initiated against the director / directors who were then responsible in managing the affairs of the business. Moreover nowhere does any judgment bar initiation of the proceedings subsequent to the approval of the resolution plan. Even otherwise what needs to be appreciated is that the Corporate Insolvency Resolution Process should not be permitted to be used as a mechanism to overcome any misdeeds misappropriations or illegalities deliberately done with an intention to evade tax. In the instant case the suspicion is there appears to be a large number of transactions and reverse transactions made by the petitioner in the name of shell companies. It is this which needs to be verified scrutinized and enquired. If everything is genuine and in accordance with law even if there is tax evasion the order of NCLT approving the resolution plan would come to the rescue of the petitioner. For all the aforesaid reasons the present writ petitions in its given form stand rejected reserving the right of the petitioner to take appropriate remedies that are available under the provisions of the Income Tax Act.

Summary

1. ISSUES PRESENTED and CONSIDERED

(a) Whether the reopening of income tax assessments for the assessment years 2014-15, 2015-16, and 2016-17 under Sections 148, 148A(b), and 144B of the Income Tax Act, 1961 ("the Act") is sustainable in light of the petitioner having undergone the Corporate Insolvency Resolution Process (CIRP) and the resolution plan having been approved by the National Company Law Tribunal (NCLT) under Section 31 of the Insolvency and Bankruptcy Code, 2016 ("IBC")?

(b) Whether the approval of the resolution plan by the NCLT extinguishes all liabilities, including tax liabilities, thereby barring the Income Tax Department from reopening assessments or initiating recovery proceedings?

(c) Whether the Income Tax Department is entitled to reopen assessments and initiate proceedings post-approval of the resolution plan where there are allegations of fraudulent or manipulative transactions aimed at tax evasion?

(d) Whether the reopening notices and consequent proceedings violate the fundamental rights guaranteed under Articles 14 and 19 of the Constitution of India?

(e) Whether the proceedings under the Income Tax Act are barred or restricted by the provisions of the Insolvency and Bankruptcy Code, 2016, particularly Section 31?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Sustainability of reopening assessments post-approval of resolution plan under IBC

The legal framework involves the interplay between the Income Tax Act, 1961, and the Insolvency and Bankruptcy Code, 2016. Section 148 of the Income Tax Act empowers the assessing officer to reopen an assessment if there is reason to believe that income chargeable to tax has escaped assessment. Section 31 of the IBC provides that upon approval of the resolution plan by the NCLT, the plan shall be binding on the corporate debtor and its creditors, including the Central Government and local authorities.

The petitioner contended that since the NCLT approved the resolution plan on 31.01.2020, all liabilities, including tax dues, stand extinguished, barring the Income Tax Department from reopening assessments or initiating recovery. Reliance was placed on the Supreme Court judgment in Ghanshyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited, which clarified the binding nature of the resolution plan.

The Court acknowledged that ordinarily, the approval of a resolution plan extinguishes liabilities to creditors, including government authorities. However, it distinguished between recovery proceedings and reassessment proceedings. While recovery post-CIRP may be impermissible, reassessment to verify the genuineness of transactions and detect tax evasion is not barred. The Court emphasized that reopening assessments under Section 148 is permissible if there is material indicating escapement of income, even after approval of the resolution plan.

The Madras High Court decision in Dishnet Wireless Ltd. vs. Assistant Commissioner of Income-tax was cited to support the view that the IBC cannot be interpreted to dilute the Income Tax Department's right to reopen assessments. The Court held that the Income Tax Department is not precluded from reopening assessments even after CIRP and approval of the resolution plan.

Thus, the Court reasoned that the reopening notices issued under Section 148 and related provisions are sustainable insofar as they are based on material indicating tax evasion or fraudulent transactions. The approval of the resolution plan does not confer immunity from scrutiny or reassessment.

Issue (c): Entitlement of Income Tax Department to initiate proceedings post-approval of resolution plan in case of alleged fraudulent transactions

The Income Tax authorities initiated reassessment proceedings based on information received under Project Falcon and other investigative inputs, which revealed suspicious trading patterns involving manipulative reversal trades in currency derivatives. Characteristics included identical purchase and sale quantities, huge variation in prices, trades between the same parties with minimal time gaps, and transactions involving shell companies.

The Court noted that these suspicious transactions raised strong reasons to believe that income chargeable to tax had escaped assessment. The Department's action to reopen assessments was thus founded on credible material indicating tax evasion through fraudulent transactions.

The Court emphasized that the CIRP and approval of the resolution plan cannot be used as a shield to protect against investigation and scrutiny of such alleged malpractices. The reopening of assessments is a preliminary step to ascertain the veracity of the transactions. If found genuine, the resolution plan's approval may provide protection; if found fraudulent, the Department is entitled to take appropriate action.

The Court rejected the petitioner's contention that the reopening was barred, holding that the Income Tax Department's right to scrutinize and reassess is preserved to prevent misuse of the insolvency process as a cover for tax evasion.

Issue (d): Alleged violation of Articles 14 and 19 of the Constitution

The petitioner argued that the reopening of assessments and consequential proceedings violated the right to equality (Article 14) and the right to carry on business (Article 19). However, the Court did not find merit in these contentions, as the reopening was based on specific material and reasons recorded by the Income Tax authorities, and was not arbitrary or discriminatory.

The Court observed that the reassessment proceedings are statutory and subject to safeguards under the Income Tax Act. The petitioner's rights are not infringed merely because the Department exercises its statutory powers to reopen assessments upon credible information of escapement of income.

Issue (e): Whether IBC bars Income Tax proceedings

The Court held that the provisions of the Insolvency and Bankruptcy Code cannot be interpreted to override or dilute the powers of the Income Tax Department to reopen assessments under the Income Tax Act. The resolution plan approved under the IBC binds the parties with respect to liabilities that existed as on the insolvency commencement date, but does not immunize against fresh proceedings initiated on the basis of new material or information indicating tax evasion or fraudulent transactions.

The Court emphasized that the IBC and Income Tax Act operate concurrently, and the rights and powers under one statute cannot be nullified by the other. The approval of the resolution plan does not bar the Income Tax Department from exercising its statutory functions, including reassessment and scrutiny.

3. SIGNIFICANT HOLDINGS

"Under the normal circumstances, upon issuance of an order of approval of the resolution plan by the NCLT under the Insolvency and Bankruptcy Code, all the liabilities that stood due to all the creditors would stand extinguished upon passing of the resolution plan by the NCLT. The said aspect would be applicable in the instant case as well..."

"...if the Department wants to have reassessment of the assessment order, the same is not barred under law even after the resolution process having been finalized and the resolution plan having been given effect to."

"The authorities cannot be found fault with if they intend to do scrutiny of the proceedings to ascertain whether there has been any illegal, fraudulent and fake transactions carried out and, if yes, at least appropriate proceedings can be initiated against the director / directors who were then responsible in managing the affairs of the business."

"The provisions of Insolvency and Bankruptcy Code, 2016 (IBC) cannot be interpreted in a manner which is inconsistent with any other law in the time being in force."

"Corporate Insolvency Resolution Plan sanctioned and approved cannot impinge on the rights of the Income Tax Department to pass any fresh Assessment Order under Section 148 read with Sections 143(3) and 147 of the Income Tax Act, 1961."

"The Corporate Insolvency Resolution Process should not be permitted to be used as a mechanism to overcome any misdeeds, misappropriations or illegalities deliberately done with an intention to evade tax."

Final determinations:

- The reopening of assessments under the Income Tax Act is sustainable notwithstanding the approval of the resolution plan under the IBC.

- The Income Tax Department is entitled to scrutinize and reassess transactions post-CIRP approval if there is credible material indicating tax evasion or fraudulent transactions.

- The approval of the resolution plan does not bar reassessment proceedings but may bar recovery proceedings if the liability is extinguished.

- The petitioner's fundamental rights under Articles 14 and 19 are not violated by the reopening of assessments based on valid reasons.

- The IBC and Income Tax Act operate concurrently, and the rights and powers under both statutes must be harmoniously interpreted without one overriding the other.