Supreme Court Reiterates Position: I&B Code, 2016 Prevails Over the Income Tax Act, 1961

[Siddharth Kumar is a 3rdyear B.B.A. LL.B.(Hons.) student at Vivekananda Law School, Delhi]

The Supreme Court of India, by its order dated 10 August 2018 in Pr. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd. has held that the provisions of the moratorium stipulated under section 14 of the Insolvency and Bankruptcy Code, 2016 (“ Code”)  would override anything inconsistent contained in any other enactment, including the Income Tax Act, 1961, thereby upholding the judgment of the Delhi High Court to the same effect in 2017, which had been challenged before the Supreme Court.

Decision of the High Court of Delhi

In the instant case, the National Company Law Tribunal (“NCLT”) had admitted an application under section 7 of the Code against Monnet Ispat and Energy Ltd. A challenge was brought forth by Principal Commissioner of Income Tax-6 as to the applicability of the moratorium order to the proceedings of the Income Tax Appellate Tribunal (“ITAT”) against the corporate debtor. The High Court of Delhi had held that an order of moratorium is made by the NCLT under section 14 of the Code, and the same would also apply to the proceedings and orders of the Income Tax Appellate Tribunal in respect of the tax liability of the assessee. It arrived at this reasoning by making a reference to the decision of the Supreme Court in Innoventive Industries Ltd. v. ICICI Bank and Anr. wherein the Supreme Court had held that it is clear that the provisions of the Code will prevail over any other law where a conflict exists by the bare perusal of the non-obstante provision contained in section 238 of the Code, which unambiguously provides that the Code will apply notwithstanding anything inconsistent therewith contained in any other law for the time being in force.

The High Court of Delhi, following the above-mentioned reasoning, concluded that the execution of the order given by the ITAT in respect of the tax liability will be stayed until the approval of the resolution plan. Further, the High Court of Delhi negatived similar contentions subsequently brought forth by the CCT South Delhi challenging the applicability of the moratorium proceedings upon their adjudicatory claim of tax liability against the same corporate debtor following identical reasoning.

Legal Analysis

Section 14(1)(a) of the Code stipulates that the order of moratorium shall come in force from the “insolvency commencement date” upon an order of the NCLT prohibiting, inter alia, the institution of suits or continuation of pending suits or proceedings against the corporate debtor including the execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority.

According to the to the Report of the Bankruptcy Law Reforms Committee, the intent behind an order for moratorium is to ensure stability of the  financial position of the corporate debtor so as to facilitate  the assessment of its financial position as stipulated under the Code as it exists on the date of the commencement of insolvency. Further, the Insolvency Law Committee in its Report in 2018 had noted that the purposes of the moratorium extends to keeping the corporate debtor’s assets together during the insolvency resolution process and facilitating orderly completion of the processes envisaged during the insolvency resolution process. Therefore, any claim or execution of claim by the tax authorities is clearly barred under section 14(1)(a) of the Code.

The Supreme Court, in arriving at its decision in this matter, made reference to its decision in the case of Dena Bank v. Bhikhabhai Prabhudas Parekh and Co. wherein it was held that income tax dues, being in the nature of crown debts, do not take precedence even over secured creditors who are private persons. It is necessary to note in the course of this analysis that the Code affirms in its preamble the alteration in the order of priority of payment of Government dues. Therefore, it is necessary for the undisturbed assessment of the financial position and integrity of the corporate debtor that the government dues sought by the tax authorities, as in this case, be barred under the order of moratorium as provided in the Code.

An exception to this rule exists in the form of section 14(3)(a) of the Code where it is stipulated that the order of moratorium under section 14(1) of the Code shall not apply to such transactions as may be notified by the Central Government in consultation with any financial regulator. The Insolvency Law Committee has made the following observations in this regard:

5.4 Thus, if a purposive interpretation is given to section 14, a moratorium on the mere determination of the amount (and not its enforcement) may not have been the intent of the Code. However, the same was deliberated in the Committee and in light of absence of concrete empirical evidence of any hardship being faced by any authority or court in this regard, the Committee agreed that it may not be prudent to provide explicit carve-outs from section 14 without on-ground evidence, at this stage. The power of the Central Government under section 14(3) to notify transactions which may be exempt from the moratorium may be explored to address this issue on the basis of demonstrated hardship in the future.

The Challenge

As is the case presently, the order of moratorium under the Code stipulates not only the halting of execution or recovery of claims against the corporate debtor but also to the determination of the existence or quantum of the dues. The prohibition of the latter creates procedural inefficiencies after the approval of the resolution plan stretching the time required for the completion of the insolvency proceedings under the Code only to determine the position of the dues after the fact and not consecutively.

Only the determination of the claim and not its recovery or execution serves the purpose of the insolvency proceedings as firstly,the determination of the quantum of all the claims and dues that the company is liable for only goes towards empowering the resolution professional with the accurate source of claims and position of stakeholders, to form a better and more accurate resolution plan in the interest of all. Secondly, with the determination of the existence or non-existence of the dispute, the possibility of consideration of any frivolous claims from the items for consideration in the course of the insolvency resolution process and in formulating the resolution plan can be effectively removed.  

Therefore, the determination of the existence or quantum of liability when the order of moratorium is in force serves the ambitious object envisaged under the Code where it stipulates for the timely processing and disposal of cases under section 12 which provides for the completion of insolvency resolution process within 180 days.

Conclusion

The Supreme Court has appropriately reiterated its stance that the provisions of the Code would prevail over any other statute where there exists a conflict between them, keeping in view the object of the Code. The object of the order of moratorium under the Code is to ensure the fair and clear assessment of the current financial position of the corporate debtor so as to effectuate the insolvency proceedings in the best interest of all parties. Therefore, the law is clear in its imposition and there is sound reasoning behind such holding of the Supreme Court to uphold the stay on the proceedings for the execution of an order of the ITAT imposing a tax liability on the corporate debtor. However, the Central Government is free to identify such transactions as would not be covered by the order of moratorium under the Code, but it is submitted that the same ought to be driven by cogent reasoning and sufficient evidence behind it and this decision must be in furtherance of the Code and be efficacious in its operation, keeping in mind the working of the Code as compared to other laws in force.  

Siddharth Kumar

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