Introduction
In a significant judgment, the National Company Law Appellate Tribunal (NCLAT) addressed the issue of whether the Income Tax Department can set-off tax dues with refunds during the intervening period when the Corporate Insolvency Resolution Process (CIRP) timeline has expired, but a liquidation order has not yet been passed. The judgment also examined if a secured creditor could realize secured assets after the expiry of the CIRP period and before the liquidation order is issued. Additionally, it explored if the Income Tax Department, as a government authority, can be considered a secured creditor entitled to realize security interest.
Case Background
The case involves Kotak Urja Pvt Ltd, which was admitted into CIRP on November 18, 2019, with Mr. Devarajan Raman appointed as the Resolution Professional (RP). The Income Tax Department adjusted a tax refund of Rs. 90.42 lakhs against outstanding tax dues while the moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC) was in effect. The RP filed an application seeking a refund of this amount, which was dismissed by the Adjudicating Authority. The RP then appealed to the NCLAT.
Key Issues Addressed : Set-off tax After the CIRP Expired
- Set-Off by Income Tax Dept. During Interregnum Period
– The central question was whether the Income Tax Department could set-off tax dues with refunds during the period after the CIRP timeline had expired but before the liquidation order was passed. The NCLAT clarified that the moratorium under Section 14 of the IBC continues until the liquidation order is passed or the resolution plan is approved by the Adjudicating Authority.
“From a bare reading of Section 14(1)(a), (b) and (c) of the IBC, the legislative intent seems to be quite clear that during the period of moratorium qua the Corporate Debtor, there shall be a stay on the commencement and continuation of all legal proceedings against the Corporate Debtor and prohibition of action whatsoever of foreclosure, recovery or enforcement of any ‘security interest’ which has been created by the corporate debtor vis-a-vis its property.”
- Realization of Secured Assets by Secured Creditors
– The NCLAT addressed whether a secured creditor could realize secured assets after the CIRP period had expired but before the liquidation order was passed. The tribunal held that secured creditors could only exercise their right to realize security interests after the liquidation proceedings had commenced.
“The option to realize security interests becomes available to a secured creditor only after liquidation proceedings commence in terms of Section 33 of IBC with the passing of the liquidation order.”
- Status of Income Tax Department as Secured Creditor
– The NCLAT examined whether the Income Tax Department could be considered a secured creditor entitled to realize security interest. The tribunal noted that the Income Tax Department could not claim the status of a secured creditor merely by being a government authority.
“The Respondent representing the Income Tax Department cannot be treated as a secured creditor. It was pointed out that there is no provision in the Income Tax Act which vests on them a statutory charge in respect of the tax liability.”
Conclusion: Clarifying Set-off Tax Concerns Post CIRP Expiry
The NCLAT’s judgment clarified that the moratorium under Section 14 of the IBC continues until the liquidation order is passed, preventing creditors from setting off or adjusting tax refunds against dues during this period. The tribunal also reaffirmed that the realization of security interests by secured creditors is permissible only after the commencement of liquidation proceedings. Furthermore, the Income Tax Department cannot claim the status of a secured creditor merely by virtue of being a government authority.
Key Takeaways
– The moratorium under Section 14 of the IBC remains in effect until the liquidation order is passed or the resolution plan is approved.
– Secured creditors can only realize security interests after the liquidation proceedings commence.
– The Income Tax Department does not automatically qualify as a secured creditor.
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