Fraudulent Use of Insolvency Proceedings to Evade Tax Liabilities: Analysis of NCLT Kolkata’s Decision in Jayam Vyapaar Pvt. Ltd.

Introduction

The relationship between insolvency law and tax enforcement has emerged as one of the most contentious areas in India’s corporate legal framework. The National Company Law Tribunal (NCLT) Kolkata Bench’s decision in Jayam Vyapaar Pvt. Ltd. stands as a watershed moment in addressing the fraudulent use of insolvency proceedings to circumvent legitimate tax obligations. [1] This judgment, delivered by Judicial Member Ms. Bidisha Banerjee and Technical Member Mr. Arvind Devanathan, represents the judiciary’s firm stance against companies attempting to weaponize the Insolvency and Bankruptcy Code, 2016 (IBC) as a shield against tax recovery efforts.

The case illuminates several critical issues at the intersection of corporate insolvency and tax compliance. It demonstrates how companies, facing substantial tax liabilities, may attempt to manipulate legal frameworks designed for genuine financial distress. The tribunal’s decision serves as both a deterrent and a guide, clarifying the boundaries within which insolvency protection operates and establishing that such protection cannot be extended to entities acting in bad faith.

What makes this case particularly significant is its timing and context. Filed eight years after the initial tax assessment and over four years after appellate rejection, the insolvency petition raised immediate red flags about the company’s true motivations. The tribunal’s analysis went beyond surface-level examination, delving into the pattern of conduct that suggested strategic manipulation rather than genuine financial distress. This approach sets an important precedent for how similar cases should be evaluated in the future.

Background and Factual Matrix

Corporate Structure and Business Operations

Jayam Vyapaar Pvt. Ltd. was incorporated on August 8, 1994, as a private limited company under the Companies Act, bearing Corporate Identification Number U51219WB1994PTC064381. [2] The company’s registered office was located at 4, Dr. Rajendra Prasad Sarani, 3rd Floor, Room No. 303, Kolkata, West Bengal. Its primary business activities centered on wholesale trading of agricultural raw materials, live animals, food, beverages, and tobacco products. This business profile placed the company in a sector requiring substantial compliance with various regulatory frameworks, including taxation laws.

The company operated in a business domain that typically involves high-volume transactions with relatively thin profit margins. Such businesses require meticulous financial record-keeping and tax compliance. However, the subsequent events would reveal significant discrepancies in the company’s tax affairs, suggesting either poor financial management or deliberate tax evasion strategies.

Tax Assessment and Appellate Proceedings

The controversy originated during the assessment year 2012-13 when the Income Tax Officer, Ward 1(2) Kolkata, conducted a detailed scrutiny of Jayam Vyapaar’s financial statements and tax returns. This examination was not a routine assessment but appeared to involve deeper investigation into the company’s financial transactions. On March 25, 2015, following this thorough examination, the tax authorities issued an assessment order that would prove pivotal to all subsequent proceedings.

The assessment order imposed a substantial tax demand of Rs. 2,86,44,540 (approximately Rs. 2.86 crores) against Jayam Vyapaar Pvt. Ltd. This amount included not only the principal tax liability but also applicable interest and penalties. The magnitude of this demand indicated serious concerns about the company’s tax compliance. Such substantial assessments typically arise from either significant underreporting of income, claiming of illegitimate deductions, or involvement in transactions designed to evade tax liabilities.

Exercising its statutory right to challenge the assessment, the company filed an appeal before the Commissioner of Income Tax (Appeals) Kolkata. This appellate process provided the company with an opportunity to present its case and challenge the findings of the assessing officer. However, on December 18, 2018, the appellate authority comprehensively rejected the company’s contentions and upheld the original tax demand in its entirety.

More significantly, the appellate authority made specific findings that fundamentally characterized the nature of the tax evasion. The authority determined that the income had escaped taxation due to money laundering activities. [3] This finding elevated the matter beyond a simple tax dispute into the realm of financial misconduct and deliberate concealment of income through illicit financial transactions. Such findings carry serious implications not only for tax liability but also for potential criminal proceedings and director liability under various statutory provisions.

The money laundering finding suggested a sophisticated scheme to disguise income through multiple layers of transactions, possibly involving shell companies or benami accounts. This aspect of the case would later become crucial in the tribunal’s assessment of the company’s bona fides when it sought insolvency protection.

Strategic Timing of Insolvency Petition

In what the tribunal would later characterize as a calculated and malicious move, Jayam Vyapaar Pvt. Ltd. filed a petition under Section 10 of the IBC on March 25, 2023. The timing of this application was particularly suspicious for several reasons. First, it came exactly eight years after the original tax assessment order, suggesting that the filing date was deliberately chosen to coincide with this anniversary. More importantly, it came over four years after the appellate authority had comprehensively rejected the company’s appeal and upheld the tax demand with findings of money laundering.

During these intervening years, the Income Tax Department would have initiated various recovery proceedings to collect the outstanding dues. These proceedings typically include attachment of bank accounts, seizure of assets, and in cases involving director liability, personal recovery proceedings against directors. The filing of the insolvency petition at this juncture appeared designed to create a legal impediment to these ongoing recovery efforts.

Section 10 of the IBC provides a mechanism for corporate debtors to voluntarily initiate insolvency proceedings against themselves. The provision is intended to enable financially distressed companies to seek structured resolution before their situation becomes irreversible. However, the legislative intent behind this self-initiated insolvency process presumes good faith and genuine financial distress. It was never designed to serve as an escape mechanism for companies seeking to avoid legitimate statutory obligations.

The tribunal noted that during the eight-year period between the tax assessment and the insolvency filing, the company had not demonstrated any genuine inability to conduct its business operations. There was no evidence of operational shutdown, inability to pay trade creditors, or other typical markers of financial distress that would justify insolvency proceedings. The application appeared to be motivated solely by the desire to frustrate tax recovery efforts rather than any genuine insolvency concerns.

Legal Framework and Statutory Provisions

Section 10 of the Insolvency and Bankruptcy Code

Section 10 of the IBC establishes the framework for corporate debtors to voluntarily initiate insolvency proceedings. The provision states: “Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.” [4] The section mandates that the corporate applicant furnish detailed information including books of account, financial statements, and information regarding the proposed interim resolution professional.

The legislative history of Section 10 reveals important safeguards introduced through amendments. The 2018 amendment introduced a crucial requirement for approval from shareholders or partners before filing such applications. This amendment was specifically designed to prevent management from unilaterally initiating insolvency proceedings without proper corporate authorization. The amendment recognized that insolvency proceedings carry significant consequences for all stakeholders, including shareholders, creditors, and employees, and therefore should not be subject to management’s unilateral decision.

The intent behind Section 10 is to provide a lifeline to companies facing genuine financial distress, enabling them to seek structured resolution through the insolvency framework. It recognizes that early intervention, when a company first faces default, can often lead to better outcomes than waiting until the situation becomes irreversible. However, this provision presumes good faith on the part of the applicant. It is not intended to serve as a tactical tool for companies seeking to avoid legitimate financial obligations, particularly those arising from statutory compliance requirements such as tax payments.

The provision creates a temporary moratorium on recovery proceedings once insolvency is initiated, which can provide breathing space for genuine restructuring efforts. However, this moratorium protection can be misused by companies seeking to delay or avoid payment of legitimate debts. The Jayam Vyapaar case illustrates precisely this type of misuse, where the moratorium was sought not for genuine restructuring but to obstruct tax recovery.

Section 65: Penalty for Fraudulent or Malicious Initiation

Section 65 of the IBC serves as the primary deterrent against fraudulent use of insolvency proceedings. The provision states: “If any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees.” [5]

This provision operates on the fundamental principle that insolvency law is designed for genuine resolution of financial distress and not as a tool for avoiding legitimate obligations. The terms “fraudulently” and “malicious intent” require careful judicial interpretation. “Fraudulent” typically implies deliberate deception or dishonesty in the initiation of proceedings, while “malicious intent” suggests proceedings initiated with the purpose of causing harm to creditors or other stakeholders rather than achieving genuine resolution.

Courts have consistently held that for Section 65 to be invoked, there must be clear evidence that insolvency proceedings were initiated with ulterior motives rather than for genuine resolution of insolvency. The burden of establishing fraudulent or malicious intent lies with the party making such allegations. However, once a prima facie case is established, the burden shifts to the applicant to demonstrate genuine intent.

The penalty range under Section 65—from Rs. 1 lakh to Rs. 1 crore—provides tribunals with flexibility to calibrate the punishment based on the severity of the misconduct. [6] Factors that may influence the quantum of penalty include the amount of debt sought to be evaded, the sophistication of the scheme, the harm caused to creditors, and whether the conduct involved professional advisors or was a standalone act of the company.

Section 179 of the Income Tax Act: Director Liability Framework

Section 179 of the Income Tax Act, 1961, creates a crucial mechanism for tax recovery from directors of private companies. The provision establishes that where tax due from a private company cannot be recovered, “every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.” [7]

This provision serves multiple purposes in the tax enforcement framework. First, it prevents directors from simply allowing companies to become insolvent to avoid tax obligations. Second, it incentivizes directors to ensure proper tax compliance during their tenure. Third, it provides tax authorities with an alternative avenue for recovery when company assets prove insufficient.

The provision requires that recovery efforts against the company must first be exhausted before directors can be held personally liable. This sequencing ensures that director liability serves as a backup mechanism rather than the primary recovery tool. The provision also includes an important defense—directors can escape liability by proving that the non-recovery cannot be attributed to their gross neglect, misfeasance, or breach of duty. This defense recognizes that directors should not be held liable for tax obligations arising from circumstances beyond their control or actions taken before their appointment.

In the context of the Jayam Vyapaar case, the appellate authority’s finding of money laundering would make it extremely difficult for directors to establish the defense under Section 179. Money laundering by its very nature involves active participation and knowledge at the highest levels of management. Directors involved in or aware of money laundering activities would find it nearly impossible to prove absence of gross neglect or breach of duty.

Judicial Analysis and Tribunal Findings

Assessment of Fraudulent use of Insolvency Proceedings

The NCLT Kolkata Bench undertook a meticulous examination of the circumstances surrounding the filing of the insolvency petition. The tribunal’s analysis focused on identifying markers that distinguished genuine financial distress from strategic manipulation of the insolvency framework. Several factors collectively indicated fraudulent intent in this case.

First and foremost, the timing of the application raised immediate concerns. Filed exactly eight years after the tax assessment and well after the appellate process had concluded, the application appeared to be triggered not by any sudden financial crisis but by the intensification of tax recovery efforts. The tribunal observed that companies facing genuine insolvency typically file for protection when they first encounter financial difficulties, not years after obligations have been established and recovery proceedings initiated.

Second, the tribunal noted the complete absence of any evidence demonstrating genuine inability to meet financial obligations. The company had not shown that it was unable to pay trade creditors, that it lacked working capital, or that its business operations had become unviable. These are the typical indicators of genuine insolvency that would justify protection under the IBC. The sole “financial stress” appeared to be the tax demand, which the company was actively trying to avoid rather than resolve.

Third, the background of money laundering findings colored the tribunal’s entire assessment of the company’s bona fides. The appellate authority’s specific finding that income had escaped taxation due to money laundering indicated a pattern of deliberate non-compliance with tax obligations. This was not a case of inadvertent error or honest disagreement over tax interpretation; it involved sophisticated schemes to conceal income. Such conduct demonstrated that the company’s approach to statutory obligations was fundamentally opportunistic rather than compliant.

The tribunal also considered the behavior pattern following the tax assessment. Over the eight-year period, there was no evidence that the company had made any good faith efforts to resolve the tax dispute through legitimate channels. The company had not sought compromise settlements, proposed payment plans, or engaged in any conduct suggesting genuine intent to meet its obligations. Instead, it appeared to have simply waited until recovery pressure intensified and then sought the shield of insolvency protection.

Application of Section 65 and Penalty Imposition

Based on its comprehensive analysis, the tribunal concluded that the case fell squarely within the parameters of Section 65 of the IBC. The tribunal held that “the Applicant’s application is not for the resolution of its insolvency but rather is to scuttle the efforts of the Income tax department for recovery of its dues.” [1] This finding was crucial as it established that the primary motivation for the insolvency filing was not genuine financial distress but rather an attempt to frustrate legitimate tax recovery proceedings.

The tribunal emphasized an important jurisdictional principle in assessing the fraudulent use of insolvency proceedings: “NCLT is not a recovery Tribunal.” [1] This observation underscores the limited scope of the NCLT’s jurisdiction and the inappropriate nature of using insolvency proceedings as a substitute for proper tax dispute resolution mechanisms. The IBC framework is designed for resolution and restructuring of genuinely distressed companies, not as a forum for disputing or avoiding legitimate debts, particularly statutory obligations like taxes.

In support of its analysis, the tribunal relied on precedent established in Monotrone Leasing Private Limited vs. PM Cold Storage Private Limited. [8] This case had established important principles regarding the distinction between genuine insolvency and strategic default. The Monotrone Leasing precedent emphasized that the ability to pay debts and the willingness to pay debts are separate considerations that must be evaluated independently. A company may have resources but refuse to pay legitimate obligations—such conduct does not qualify for insolvency protection.

Having found fraudulent initiation, the tribunal proceeded to impose penalties under Section 65. The tribunal imposed a fine of Rs. 1,00,000 on Jayam Vyapaar Pvt. Ltd., representing the minimum penalty available under the provision. [3] The tribunal directed that this amount be deposited to the Prime Minister’s National Relief Fund (PMNRF) within ten days. While this represented the minimum quantum, the tribunal’s decision to impose any penalty at all sends a powerful message about the consequences of fraudulent use of insolvency proceedings.

The direction to deposit the penalty amount to the PMNRF rather than to the government exchequer reflects a thoughtful approach. It ensures that the punitive measure serves a broader public welfare purpose rather than simply augmenting government revenues. This approach also prevents any perception that penalties are being imposed primarily for revenue generation rather than as genuine deterrence.

Regulatory Framework and Compliance Mechanisms

IBC Regulations and Procedural Safeguards

The Insolvency and Bankruptcy Board of India (IBBI) has established detailed regulations governing the initiation and conduct of insolvency proceedings. The IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, prescribe specific procedural requirements for Section 10 applications. These requirements include mandatory disclosures about the company’s financial position, detailed explanations of the reasons for seeking insolvency protection, and comprehensive information about the proposed resolution strategy.

These regulations serve as the first line of defense against frivolous or malicious applications. They require applicants to provide sufficient documentation and explanation to enable adjudicating authorities to assess the genuineness of the application. However, as the Jayam Vyapaar case demonstrates, motivated applicants may still attempt to manipulate the system despite these safeguards. This necessitates vigilant judicial oversight at the admission stage itself.

The regulations also prescribe timelines and procedures that must be followed during the insolvency process. These procedural requirements are designed to ensure that the process moves efficiently toward resolution while maintaining fairness to all stakeholders. Any deviation from these prescribed procedures can result in dismissal of the application or other adverse consequences.

Interface with Tax Enforcement Mechanisms

The intersection of insolvency law with tax enforcement creates complex jurisdictional and procedural challenges. The Income Tax Act provides various mechanisms for recovery of tax dues, including attachment of assets, garnishment of bank accounts, appointment of tax recovery officers, and in extreme cases, prosecution for tax evasion. Each of these mechanisms operates under specific statutory frameworks with prescribed procedures and safeguards for taxpayers.

The initiation of insolvency proceedings can potentially interfere with these enforcement mechanisms by creating an automatic moratorium on recovery actions under Section 14 of the IBC. This moratorium prohibits creditors from taking any action to enforce their claims during the insolvency process. However, the law recognizes certain exceptions to this moratorium, particularly for government dues and certain categories of secured creditors.

The challenge lies in ensuring that genuine insolvency proceedings receive appropriate protection through the moratorium while preventing misuse of moratorium provisions to frustrate legitimate recovery efforts. Courts have grappled with this balance, developing jurisprudence that examines the underlying purpose and timing of insolvency applications to determine whether moratorium protection should be granted.

In cases like Jayam Vyapaar, where the insolvency application appears motivated primarily by desire to avoid tax payments, courts have been willing to lift the corporate veil and examine the true intent behind the filing. This approach ensures that the moratorium provisions serve their intended purpose of facilitating genuine restructuring rather than becoming a tool for avoiding statutory obligations.

Broader Implications for Corporate Governance and Tax Compliance

Enhanced Due Diligence Requirements for Directors

The Jayam Vyapaar decision reinforces the critical importance of enhanced due diligence in corporate decision-making, particularly regarding the initiation of insolvency proceedings. Directors and management must carefully evaluate the genuine necessity for insolvency protection and ensure that such decisions are not motivated by attempts to avoid legitimate obligations. This case serves as a stark reminder that decisions to file for insolvency carry significant legal and reputational consequences.

Corporate boards must implement robust governance frameworks that include independent assessment of financial distress before resorting to insolvency proceedings. This assessment should involve consulting with independent financial and legal advisors who can provide objective evaluation of the company’s financial position and available alternatives. The assessment should document the reasons why insolvency proceedings are necessary and why other alternatives, such as operational restructuring or negotiated settlements with creditors, are not viable.

Directors must also be mindful of their personal exposure under provisions like Section 179 of the Income Tax Act. In cases involving tax liabilities, directors should ensure that all legitimate efforts have been made to resolve disputes through appropriate channels before considering insolvency proceedings. Filing for insolvency to avoid tax obligations can expose directors to personal liability not only for the original tax dues but also for penalties under Section 65 of the IBC and potential prosecution for fraudulent use of Insolvency proceedings .

Impact on Tax Recovery Strategies

For tax authorities, the Jayam Vyapaar decision provides important guidance on challenging potentially fraudulent use of insolvency proceedings. The case demonstrates the effectiveness of Section 65 as a tool for preventing the misuse of insolvency law to frustrate tax recovery efforts. Tax authorities can use this precedent to argue for penalties in similar cases where companies appear to be using insolvency proceedings as a shield against tax enforcement.

The decision highlights the importance of maintaining detailed records of tax recovery efforts and documenting the specific circumstances that led to the initiation of insolvency proceedings. Such documentation can be crucial in establishing the fraudulent nature of insolvency applications. Tax authorities should be prepared to present comprehensive evidence showing the timing of insolvency filings relative to recovery proceedings, the absence of genuine financial distress indicators, and any pattern of conduct suggesting manipulation of legal processes.

The judgment also encourages tax authorities to be vigilant during insolvency proceedings and to actively oppose applications that appear motivated by tax avoidance rather than genuine financial distress. This requires coordination between different departments within the tax administration and development of expertise in insolvency law among tax officials.

Deterrent Effect and Future Conduct

The imposition of penalties under Section 65, even at the minimum level, serves an important deterrent function. The decision sends an unequivocal message to companies and their advisors that attempts to misuse the insolvency framework will be met with appropriate sanctions. This deterrent effect is enhanced by the public nature of tribunal proceedings and the permanent record created by such decisions, which can affect the reputation of companies and their promoters in future dealings.

The requirement to deposit penalty amounts to public welfare funds adds another dimension to the deterrent effect. It ensures that the consequences of fraudulent behavior extend beyond mere financial penalties to include a contribution to social welfare, emphasizing the societal harm caused by such conduct.

Looking forward, the decision is likely to make companies and their advisors more cautious about filing insolvency applications without genuine cause. Professional advisors, including lawyers and insolvency professionals, will need to conduct more thorough due diligence before agreeing to file or support such applications, knowing that they too could face professional consequences if they participate in fraudulent proceedings.

Conclusion

The NCLT Kolkata’s decision in Jayam Vyapaar Pvt. Ltd. represents a significant milestone in the maturation of India’s insolvency jurisprudence. The tribunal’s robust application of Section 65 of the IBC demonstrates the judiciary’s commitment to preserving the integrity of the insolvency framework and preventing its abuse by entities seeking to escape statutory obligations. This decision will serve as an important reference point for future proceedings involving suspected fraudulent initiation of insolvency proceedings.

The case establishes clear standards for identifying and addressing fraudulent use of insolvency proceedings. It clarifies that timing of applications, absence of genuine distress indicators, and background of financial misconduct are all relevant factors in assessing whether an application is made in good faith. The decision reinforces the principle that insolvency law is designed to facilitate genuine business rescue and debt resolution, not to provide a shield for companies seeking to avoid legitimate obligations, particularly statutory dues like taxes.

For the broader corporate community, this decision serves as both a warning and a guide. It cautions against attempts at fraudulent use of insolvency proceedings for improper purposes while providing guidance on the factors tribunals will consider in assessing the bona fides of applications. Companies facing financial difficulties must ensure that their approach to insolvency proceedings is driven by a genuine need for restructuring rather than opportunistic avoidance of obligations.

The implications extend beyond the immediate parties to encompass the entire ecosystem of corporate insolvency practice in India. As the IBC continues to evolve and mature, decisions like Jayam Vyapaar contribute to developing a robust jurisprudence that balances the needs of genuine corporate rescue with the imperative of preventing system abuse. The decision strengthens the credibility of India’s insolvency framework by demonstrating that it has adequate safeguards against misuse while remaining accessible to companies facing genuine financial distress.

References

[1] LiveLaw. (2023). NCLT Kolkata: CIRP Petition U/S 10 Avoiding Income Tax Liability Not Maintainable Under The IBC. Available at: https://www.livelaw.in/ibc-cases/nclt-kolkata-cirp-petition-us-10-avoiding-income-tax-liability-not-maintainable-under-the-ibc-243604 

[2] Zauba Corp. JAYAM VYAPAAR PVT LTD – Company Information. Available at: https://www.zaubacorp.com/company/JAYAM-VYAPAAR-PVT-LTD/U51219WB1994PTC064381 

[3] IBC Laws. (2023). CIRP application filed u/s 10 of IBC to avoid Income Tax liability is not maintainable – Jayam Vyapaar Pvt. Ltd. Available at: https://ibclaw.in/jayam-vyapaar-pvt-ltd-nclt-kolkata-bench/ 

[4] IBC Laws. Section 10 of IBC – Initiation of corporate insolvency resolution process by corporate applicant. Available at: https://ibclaw.in/section-10-initiation-of-corporate-insolvency-resolution-process-by-corporate-applicant-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corp/ 

[5] IBC Laws. Section 65 of IBC – Fraudulent or malicious initiation of proceedings. Available at: https://ibclaw.in/section-65-fraudulent-or-malicious-intiation-of-proceedings/ 

[6] AZB Partners. (2023). Preventing Fraudulent and Malicious Initiation of Insolvency Proceedings in India. Available at: https://www.azbpartners.com/bank/preventing-fraudulent-and-malicious-initiation-of-insolvency-proceedings-in-india/ 

[7] TaxGuru. (2022). Liability of directors of private company under section 179 of Income Tax Act. Available at: https://taxguru.in/income-tax/liability-directors-private-company-section-179-income-tax-act.html 

[8] TaxScan. (2025). Case Digest on Rulings of NCLT under IBC. Available at: https://www.taxscan.in/complete-case-digest-on-nclt-rulings-under-the-ibc-part-2/490655/ 

[9] India Code. Section 65 – Insolvency and Bankruptcy Code, 2016. Available at: https://www.indiacode.nic.in/show-data?actid=AC_CEN_2_11_00055_201631_1517807328273&sectionId=844&sectionno=65&orderno=87

Authorized and Edited by Prapti Bhatt