AO can determine tax liabilities even during insolvency proceedings
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The Insolvency and Bankruptcy Code, 2016 (IBC) restricts the continuation of certain legal proceedings against the corporate debtor under the moratorium period explained in section 14, including tax assessment. While tax assessments can continue up to the point of a moratorium, any actions that credit new liabilities or deplete the corporate debtor’s assets during the moratorium period are prohibited. The Assessing Officer’s (AO’s) power are significant in income tax matters, but tax liabilities even during insolvency, their actions are subject to the moratorium, and the resolution professional (RP) takes control of the corporate debtor’s assets.
Understanding the Role of AO under Income Tax Act
As per the Income Tax Act, 1961, an AO in the Income Tax Department is responsible for evaluating and processing income tax returns. Appointed by the tax authorities, an income tax assessing officer ensures that taxpayers comply with all tax laws and accurately report their income and deductions. According to this Income Tax Act, the AO has the duty to issue notices, conduct assessments, determine the demands, and initiate recovery.
IBC Moratorium Scope and Limitations
The moratorium under section 14 of the IBC aims to provide a “breathing space” for the corporate debtor by halting legal actions that could hinder the tax liabilities even during insolvency resolution process. Tax assessment proceedings are allowed to continue during the moratorium as they are considered part of the process of determining the corporate debtor’s liabilities. However, the recovery of such tax liabilities, such as through coercive measures or enforcement of demands, is stayed, thereby meaning that tax authorities cannot take steps to collect the assessment amount during the moratorium period.
Judicial View AO’s Role During CIRP
The Supreme Court’s ruling in the Ghanashyam Mishra & Sons Case reinforced by subsequent NCLAT and High Court decisions, clarifies that AOs can issue assessment orders during the tax liabilities even during insolvency process, but cannot enforce demands, like attachment or recovery for claims not included in the approved resolution plan. This is based on the “clean slate” principle aiming to provide a fresh start for the corporate debtor. Hence, courts have affirmed that AOs can issue assessment orders during CIRP to determine the tax liability, as this does not conflict with the moratorium or the resolution process. However, if a claim is not part of the approved resolution plan, the AO cannot pursue its recovery, ensuring that the approved lan is binding and the corporate debtor can operate without the burden of unforeseen liabilities.
CBDT Clarification on AO’s Role During Insolvency
The Income Tax (24th Amendment) Rules, 2021 introduced new rules for tax liabilities even during insolvency professionals under the Income Tax Act:
- AO can continue with ongoing assessment and reassessment proceedings during CIRP, even if they were initiated before the moratorium. This is to determine the exact amount of tax liability, which is necessary for the RP to consider the claim. The AO can raise tax demands based on the assessment or reassessment conducted, which can be submitted as part of the CIRP claims.
- AO cannot take steps to recover the tax dues by attaching assets or initiating other coercive measures during the moratorium.
- All creditors, including tax authorities, are required to submit their claims to the RP within the timelines specified in the public announcement, which is 90 days or longer, if specified.
AO’s Determination vs Realization Under IBC
According to the IBC, the AO’s determination of a liability is recognised as the formal establishment of the debt. While the liability is recognised, its actual payment, realization, is subject to the approval of a resolution plan by the Committee of Creditors (CoC) and the NCLT. The resolution plan outlines how the corporate debtor’s debts will be settled, including those of the Income Tax Department, which is classified as an operational creditor under the IBC. Thus, their participation in the tax liabilities even during insolvency is limited read more Section 34 of Arbitration Act
Practical Challenges in Reconciling Tax and IBC Frameworks
The conflict between the two frameworks of tax law and insolvency legislations manifests in issues like the treatment of tax claims during the insolvency resolution process and the application of the clean slate principle, leading to challenges such as:
- If a tax demand is raised after the resolution plan is approved by the NCLT, it may not be considered part of the resolution plan and are extinguished.
- If the tax department does not file its claim with the RP during the tax liabilities even during insolvency process, the dues might be extinguished upon the plan’s approval.
- The AO might not be aware of the ongoing CIRP or the approved resolution plan, thereby, leading to a failure to file claims on time.
- The RP might not have complete information about all outstanding tax liabilities, potentially leading to the exclusion of certain dues from the plan.
Key Takeaways for Insolvency Professionals and Tax Departments
The statutory and procedural hindrances that arise due to the conflicts between the two legislations, can be reduced by insolvency professionals and AOs by certain actions, such as:
- RPs must verify and admit tax claims appropriately and within the prescribed time frames to avoid delays.
- The Tax authorities must proactively file claims in CIRP and stay updated with the status of the tax liabilities even during insolvency process.
- The AO should limit actions to assessment and not recovery during moratorium.
Conclusion
The interplay between tax laws and the IBC is crucial and the tax authorities need to determine the tax liability, but the resolution process must not be unduly unhampered by aggressive recovery actions. This requires a balanced approach where the tax department can assess and finalise claims while the insolvency process proceeds smoothly. While IBC imposes a moratorium during insolvency proceedings it does not prevent the AO from determining tax liabilities. However, the recovery of tax dues is restricted and must adhere to the specific procedures outlined in the IBC. This creates a balance between ensuring tax compliance and facilitating the smooth resolution of insolvency cases.
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