Facts of the Case

The Revenue Department filed multiple Income Tax Appeals before the Delhi High Court against the order of the Income Tax Appellate Tribunal (ITAT) concerning the tax liability of Monnet Ispat & Energy Ltd. During the pendency of these appeals, proceedings under the Insolvency and Bankruptcy Code, 2016 were initiated against the assessee-company.

The National Company Law Tribunal (NCLT), exercising jurisdiction as the Adjudicating Authority under Section 5(1) of the Insolvency and Bankruptcy Code, admitted the insolvency petition filed by State Bank of India under Section 7 of the Code and declared a moratorium under Section 14.

The principal question before the High Court was whether the pending income tax appeals could continue despite the moratorium imposed under the Insolvency and Bankruptcy Code.

 Issues Involved

  1. Whether pending Income Tax Appeals against a corporate debtor can continue after declaration of moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016?
  2. Whether the overriding effect under Section 238 of the Insolvency and Bankruptcy Code prevails over proceedings under the Income-tax Act?
  3. Whether the Revenue Department can prosecute tax litigation during the Corporate Insolvency Resolution Process (CIRP)?

 Petitioner’s Arguments (Revenue Department)

The Revenue Department argued that unlike earlier insolvency statutes, the Insolvency and Bankruptcy Code does not provide a mechanism for obtaining permission from the NCLT to continue pending proceedings in other judicial forums.

It was contended that tax proceedings are distinct in nature and the Department should be permitted to continue the appeals in order to safeguard revenue interests.

 Respondent’s Arguments (Assessee Company)

The respondent contended that once the insolvency petition was admitted and the moratorium under Section 14 came into operation, all pending proceedings against the corporate debtor were required to be stayed.

It was argued that by virtue of Section 238 of the Insolvency and Bankruptcy Code, the Code overrides all inconsistent laws, including proceedings under the Income-tax Act.

 Court Findings / Order

The Delhi High Court examined Sections 14 and 238 of the Insolvency and Bankruptcy Code and held that the moratorium declared by the NCLT prohibits the institution or continuation of all pending proceedings against the corporate debtor, including tax litigation pending before the High Court.

The Court relied upon the Supreme Court decision in Innoventive Industries Ltd. vs ICICI Bank, wherein the overriding effect of the Insolvency and Bankruptcy Code was recognized.

The Court held that the Income Tax Department could not continue prosecuting the pending appeals during the currency of the moratorium. Accordingly, the appeals were disposed of with liberty to the Revenue Department to revive them subject to further orders of the NCLT.

 Important Clarification

The judgment clarifies that:

  • Income Tax proceedings fall within the scope of “proceedings” under Section 14(1)(a) of the Insolvency and Bankruptcy Code.
  • The moratorium applies even to tax-related appellate proceedings.
  • Section 238 gives overriding effect to the Insolvency and Bankruptcy Code over the Income-tax Act in case of inconsistency.
  • Revenue authorities must await the outcome of CIRP or liquidation before reviving tax litigation.

 Sections Involved

Insolvency and Bankruptcy Code, 2016

  • Section 7 – Initiation of Corporate Insolvency Resolution Process
  • Section 14 – Moratorium
  • Section 31 – Approval of Resolution Plan
  • Section 33 – Liquidation
  • Section 238 – Overriding Effect of the Code
  • Section 5(1) – Adjudicating Authority

Income-tax Act, 1961

  • Appellate provisions relating to tax disputes before ITAT and High Court

 Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:8936-DB/SMD04092017ITA5332017_162641.pdf

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