Introduction

The case of Murli Industries Limited, Through Its Deputy Executive Director v. Assistant Commissioner of Income Tax and Others adjudicated by the Bombay High Court on December 23, 2021, marks a significant juncture in the interplay between the Income Tax Act, 1961 and the Insolvency and Bankruptcy Code (IBC), 2016. The crux of the dispute centered on whether the Income Tax Department could issue a notice under Section 148 of the Income Tax Act to a corporate debtor after the approval of a Resolution Plan under the IBC.

Parties Involved:

• Petitioner: Murli Industries Limited, a cement manufacturing company.
• Respondents: Various Income Tax authorities including the Assistant Commissioner of Income Tax and the Principal Commissioner of Income Tax.

The key issue revolved around the validity of a Section 148 notice issued post the approval of a Resolution Plan by the National Company Law Tribunal (NCLT), and whether such actions were permissible under existing legislative frameworks.

Summary of the Judgment

The Bombay High Court scrutinized the legality of the Income Tax Department's issuance of a notice under Section 148 of the Income Tax Act, 1961 to Murli Industries Limited after the company's Resolution Plan was approved under the IBC, 2016. The central argument from the petitioner was that once the Resolution Plan is sanctioned by the NCLT, all existing claims not included in the plan are extinguished, thereby precluding any subsequent attempts to levy additional taxes for prior assessment years.

Upholding the petitioner's stance, the High Court referenced the Supreme Court's decision in Ghanashyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited, asserting that post-approval claims not incorporated within the Resolution Plan cannot be pursued. Consequently, the High Court quashed the impugned notices issued on March 25, 2021, and March 24, 2021, effectively preventing the Income Tax Department from pursuing the specified tax claims.

Analysis

Precedents Cited

The judgment heavily relied on the landmark decision of the Supreme Court of India in the case of Ghanashyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited and others [(2021) 9 SCC 657]. This precedent clarified the binding nature of the Resolution Plan once approved by the Adjudicating Authority under Section 31 of the IBC. The Supreme Court ruled that all claims not included in the Resolution Plan stand extinguished, preventing any creditor, including statutory authorities like the Income Tax Department, from initiating or continuing proceedings for such claims post-approval.

Additionally, the High Court referenced decisions from the Rajasthan High Court in Ultra Tech Nathdwara Cement Ltd. v. Union of India & Ors. and the Calcutta High Court in Akshay Jhunjhunwala & Anr. v. Union of India through the Ministry of Corporate Affairs & Ors.. These cases reinforced the principle that statutory claims not part of the Resolution Plan cannot be pursued after its approval, aligning with the Supreme Court's stance.

Legal Reasoning

The High Court's reasoning hinged on the objective of the IBC to provide a clear and definitive pathway for corporate restructuring and revival. By approving a Resolution Plan, the NCLT ensures that all stakeholders are aware of the claims being honored, promoting certainty and preventing ambush claims that could undermine the recovery process.

The Court underscored that the Resolution Plan, once sanctioned, is binding on the corporate debtor and all its stakeholders, including statutory bodies like the Income Tax Department. The act of issuing a Section 148 notice post-approval contravenes the IBC's intent to freeze claims, thereby disrupting the corporate debtor's ability to revert to normal operations.

Further, the Court dismissed the respondent's argument that the statutory claim was not included in the Resolution Plan due to its late crystallization. It emphasized that the Income Tax Department had ample opportunity to include such claims during the CIRP proceedings and failed to do so, leading to the extinguishment of those claims upon the Resolution Plan's approval.

Impact

This judgment reinforces the sanctity of the Resolution Plan under the IBC, ensuring that once a plan is approved, debtors can proceed without the looming threat of unexpected claims. It provides clarity to corporate debtors and creditors alike, emphasizing the finality of the Resolution Plan and the limitations on post-approval claims.

For the Income Tax Department and other statutory authorities, this ruling delineates the boundaries within which they must operate during the CIRP process. It underscores the imperative to diligently raise and include all pertinent claims within the Resolution Plan to avoid forfeiture of such claims.

Moreover, the judgment may prompt legislative introspection to address potential gaps, such as mechanisms to handle undisclosed statutory claims, ensuring a more robust and comprehensive resolution framework.

Complex Concepts Simplified

Section 148 of the Income Tax Act, 1961

Section 148 allows the Income Tax Department to reopen a tax assessment if it has reason to believe that income has escaped assessment. Essentially, it serves as a tool for the department to flag and reassess potential tax evasions or omissions in previously filed returns.

Insolvency and Bankruptcy Code (IBC), 2016

The IBC is a comprehensive statute that consolidates and amends laws related to insolvency and bankruptcy. Its primary objective is to facilitate the resolution of insolvency of corporate entities in a time-bound manner, ensuring the revival of viable businesses and equitable distribution of assets among creditors.

Resolution Plan

A Resolution Plan, formulated during the Corporate Insolvency Resolution Process (CIRP), outlines how a distressed company will address its debts and revive its business. Once approved by the National Company Law Tribunal (NCLT), this plan becomes binding, freezing existing claims and preventing new ones from emerging outside the plan's scope.

Committee of Creditors (COC)

The COC comprises all financial creditors of the distressed company. They play a pivotal role in evaluating and approving the Resolution Plan, ensuring that the interests of various creditors are balanced and addressed adequately.

Conclusion

The Bombay High Court's decision in Murli Industries Ltd. v. ACAIT significantly bolsters the efficacy of the IBC by affirming the finality of the Resolution Plan once sanctioned by the NCLT. This judgment not only clarifies the limitations imposed on statutory authorities like the Income Tax Department in the aftermath of a Resolution Plan's approval but also reinforces the necessity for meticulous claim submissions during the CIRP process.

By ensuring that all claims are addressed within the Resolution Plan, the judicial pronouncement facilitates a more predictable and streamlined insolvency resolution framework. This, in turn, enhances the confidence of creditors and corporate entities in the IBC's mechanisms, promoting a healthier economic environment conducive to business revival and growth.