Facts of the Case

The petitioner, M/s ESL Steel Limited, whose corporate insolvency resolution process was completed with NCLT, Kolkata Bench approving M/s Vedanta Limited's resolution plan on 17.04.2018, challenged an Order-in-Original dated 24.02.2023 confirming a demand of Rs.6,02,34,616/- under Section 74(9) of the CGST Act, 2017, for irregular availment of transitional credit for 2017-18. Of this, Rs.5,10,21,204/- related to transitional credit claimed by the earlier (pre-Resolution) management, and Rs.92,13,412/- related to credit on capital goods claimed via a revised TRAN-1 filed on 30.11.2022, pursuant to the window reopened by the Supreme Court's Filco Trade Centre judgment. The petitioner relied on the Supreme Court's ruling in Ghanshyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657, that no recovery/proceeding can continue against a resolution-plan company for dues of any period prior to the NCLT's approval date.

Issues Involved

  1. Whether recovery of transitional credit-related demand pertaining to the period before NCLT's approval of the resolution plan (17.04.2018) could be sustained against the post-resolution management, in light of Ghanshyam Mishra.
  2. Whether the new (post-resolution) management could, conversely, claim the benefit of transitional ITC accrued to the pre-resolution management via the revised TRAN-1 filed after the change of control.

Petitioner's Arguments

  • The petitioner argued that per Ghanshyam Mishra, no recovery or proceeding for dues of any period before 17.04.2018 could be continued against it, that the adjudicating authority ignored this binding precedent, and that this protection should not be twisted by the department into denying it credit which had, in fact, accrued to the company (as opposed to being a liability).

Respondent's Arguments

  • The department argued that the demand was correctly confirmed since the violations alleged (irregular TRAN-1 availment) were never denied by the petitioner in its reply, and that the impugned order had explained the reasons for denial in its paragraphs 4, 5 and 7.

Court Order / Findings

  • The Court agreed with the adjudicating authority's reasoning that just as liabilities of the earlier management cannot be shifted to the new management post-resolution, by the same logic the credit available to the earlier management also does not automatically pass to the new management, since the new management was not the taxpayer during the period the capital goods were procured.
  • The Court held that the Order-in-Original's confirmation of demand relating to Rs.5,10,21,204/- (dues of the pre-17.04.2018 period) was illegal and arbitrary, being contrary to Ghanshyam Mishra, and quashed it; but simultaneously held that the petitioner (post-resolution ESL Steel/Vedanta management) could not claim the balance Rs.92,13,412/- of transitional credit relating to capital goods procured before the change of management, since credit accrued to the earlier management does not pass to the new taxpayer either.
  • The writ application was accordingly allowed only in part, quashing the Order-in-Original while denying the petitioner's claim to the balance transitional credit amount.

Important Clarification

  • The protection under Ghanshyam Mishra — that no recovery can be made from a resolution-plan company for dues of the period before NCLT approval — is symmetrical: just as the new management cannot be saddled with the old management's tax liabilities from before the resolution date, it equally cannot claim the benefit of transitional input tax credit that accrued to the business during that same pre-resolution period, since it was not the taxpayer at that time.
  • A resolution applicant taking over via IBC therefore inherits neither the pre-resolution tax liabilities nor the pre-resolution unutilised transitional credit of the corporate debtor, a nuance that goes beyond the simpler proposition that all past dues are extinguished.

Sections Involved

  • Section 74(9) of the CGST Act, 2017 - the provision under which the demand was confirmed, following determination of tax under Section 74.
  • Section 140(1) of the CGST Act, 2017 - governs migration of transitional input tax credit, the subject of the TRAN-1 filings in dispute.
  • Section 31(1) and Section 238 of the Insolvency and Bankruptcy Code, 2016 - render an NCLT-approved resolution plan binding, with overriding effect over other laws including tax statutes.

Decision – In Favour of

The writ application stood partly allowed: in favour of the Assessee to the extent that the demand of Rs.5,10,21,204/- (pre-resolution dues) was quashed following Ghanshyam Mishra; in favour of the Department to the extent that the petitioner's claim to the remaining Rs.92,13,412/- transitional credit was rejected.

Case Details

High Court of Jharkhand at Ranchi, W.P.(T) No. 1995 of 2023; Coram: Hon'ble Mr. Justice Rongon Mukhopadhyay and Hon'ble Mr. Justice Deepak Roshan; decided on 11 July 2023.

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