Avil Menezes (Liquidator) Vs. Principal Chief Commissioner of Income Tax, Mumbai - we hold that the Income Tax authority enjoys limited jurisdiction of continuing with assessment proceedings and in determining the quantum of Income Tax dues but does not enjoy the jurisdiction and power to suo motu initiate recovery of dues or execute their claim unilaterally by adjusting the ITR amount with past tax dues.

NCLAT (2024.07.12) in Avil Menezes (Liquidator) Vs. Principal Chief Commissioner of Income Tax, Mumbai [(2024) ibclaw.in 441 NCLAT, Company Appeal (AT) (Insolvency) No. 258 of 2024] held that; 

• In other words, though Section 33 contains provisions similar to Section 14 contemplating stay on suits/proceedings during liquidation, however, the reach and gamut of stay under Section 33 differs from Section 14 in that there is no moratorium on continuation of suits/proceedings already instituted earlier.

• Further the language of Section 245 (1) of the Income Tax Act does not create any charge or security interest in favour of the Respondent. The creation of a charge by operation of law must be apparent from the express words of the statute.

• We find that there is no restriction, prohibition or embargo placed by the IBC on the principle of set-off during liquidation proceedings. In fact, the right of set-off is available to the Respondent as maybe noticed at Regulation 29 of Liquidation Regulations,

• we hold that the Income Tax authority enjoys limited jurisdiction of continuing with assessment proceedings and in determining the quantum of Income Tax dues but does not enjoy the jurisdiction and power to suo motu initiate recovery of dues or execute their claim unilaterally by adjusting the ITR amount with past tax dues.

• However, while applying the principle of set-off, it must be kept in mind that no creditor ends up getting share disproportional to their dues.

• All claimants in the liquidation process are required to stake claims for distribution of proceeds of sale in consonance with Section 53 of IBC. Filing of claims for set-off is also mandated by Liquidation Regulations and cannot be bypassed.

• we are of the considered view that there has been a clear infirmity on the part of the Respondent in unilaterally and suo-motu appropriating the ITR amount by setting-off the said amount against the tax arrears of pre-CIRP period determined during the liquidation proceedings.

Excerpts of the order;

The present appeal filed under Section 61 of Insolvency and Bankruptcy Code 2016 (‘IBC’ in short) by the Appellant arises out of the Order dated 22.11.2023 (hereinafter referred to as ‘Impugned Order’) passed by the Adjudicating Authority (National Company Law Tribunal, Mumbai Bench-I) in I.A. No. 2968/(MB)/2022 in CP (IB) 2295/NCLT/MB/2018. By the impugned order, the Adjudicating Authority has dismissed I.A. 2968 of 2022 filed by the Appellant-Liquidator seeking return of Income Tax refund amount of two previous assessment years to the liquidation estate of the Corporate Debtor-Sunil Hitech and Engineers Ltd.

# 2. The Learned Counsel for the Appellant, Shri J. Rajesh making his submissions submitted that the Corporate Debtor was admitted into Corporate Insolvency Resolution Proceedings (‘CIRP’ in short) on 10.09.2018. Later, the Corporate Debtor was admitted into liquidation by the Adjudicating Authority on 25.06.2019 and the Appellant was appointed as the Liquidator of the Corporate Debtor. Following the appointment as Liquidator, a public announcement was made on 01.07.2019 inviting claims from the creditors in the liquidation process in terms of Regulation 12 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (‘Liquidation Regulations’ in short).

# 3. Submission was made that on vetting the Annual Information Statement (‘AIS’ in short) of the Corporate Debtor, it came to the notice of the Liquidator that the Corporate Debtor was entitled to receive Income Tax Refund (‘ITR’ in short) for the A.Y. 2021-2022 for an amount of Rs.5.84 cr. and interest thereon amounting Rs.11.46 lakhs. It was also noticed by the Liquidator that the above ITR amount was adjusted on 12.11.2021 by the Respondent against Income Tax demand for A.Y. 2010-2011 for Rs.2.98 cr. and for A.Y. 2011-2012 amounting Rs.2.85 cr. It has also been contended by the Appellant – Liquidator that the Corporate Debtor was also entitled to receive ITR of Rs.60.79 lakhs for A.Y. 2020- 2021 and that the said amount had also been adjusted by the Respondent against pre-CIRP Income Tax dues.

# 4. The Learned Counsel for the Appellant pointed out that the ITR amount could not have been adjusted by the Respondent towards Income Tax dues and that the said amount should have formed part of the liquidation estate of the Corporate Debtor. It was asserted that in terms of Section 36(3)(b) of the IBC, assets which may or may not be in possession of the Corporate Debtor also constitute part of the liquidation estate and hence the ITR amount available with the Respondent did not belong as such to the Respondent but belonged to the stakeholders and therefore should form part of the liquidation estate. Hence, the Liquidator had rightly requested the Respondent to return the refund amount so that the same could be distributed amongst the stakeholders in terms of Section 53 of IBC. In support of their contention, the Learned Counsel for the Appellant has relied on the judgment of this Tribunal in Devarajan Raman vs Principal Commissioner Income Tax, (Mumbai-1) in Company Appeal (AT) (Insolvency) No. 977 of 2023 that the Income Tax Department did not have the right to adjust past income tax demands with tax refunds since the ITR amount fell under the asset of the Corporate Debtor.

# 5. It has also been contended by the Appellant that Section 33(5) of the IBC provides that once a liquidation order has been passed, no suit or other legal proceedings shall be instituted by or against the Corporate Debtor. In the present case, since the liquidation order had already been passed by the Adjudicating Authority, recovery of income tax dues by invoking Section 245 of the Income Tax Act was illegal and improper.

# 6. It was also emphatically asserted that in view of the non obstante clause and over-riding provision of the IBC as contained in Section 238, the right of set-off of the Respondent – Income Tax Department was subject to the manner of set-off as prescribed under Regulation 29 of the Liquidation Regulations. In support of their contention, reliance was placed upon the judgment of Hon’ble Supreme Court in the case of Principal Commissioner of Income Tax Vs Monnet Ispat and Energy Ltd. (2018) 18 SCC 786 which held that Section 238 of IBC over-rides anything inconsistent contained in any other enactment including Income Tax Act, 1961.

# 7. Further contending that the Respondent–Income Tax Department is an Operational Creditor, it was argued by the Learned Counsel for the Appellant that the Respondent was required to file their claim with the Liquidator in Form D in accordance with Regulation 18 of Liquidation Regulations for recovery of dues in the requisite form and could not have suo-moto adjusted or set-off the ITR amount against past dues. The Respondent was bound to inform the Liquidator regarding any adjustment/set-off being made by them against purported dues. Emphasis was laid on the fact that the Respondent had erred in not filing any claim with the Liquidator despite the Liquidator having invited claim from all stakeholders through public announcement.

# 8. It is also the contention of the Appellant that for the Respondent to make adjustment of the ITR, it should have followed the due process as laid down under the IBC. In support of their contention, the Learned Counsel for the Appellant relied on the judgment of the Hon’ble Supreme Court in the matter of Sundaresh Bhatt, Liquidator of ABG Shipyard Vs Central Board of Indirect Taxes and Customs in CA No. 7667 of 2021 wherein it was held that once moratorium is imposed in terms of Section 33(5) of the IBC, the Customs Department enjoyed limited jurisdiction to assess and determine the quantum of tax dues but did not have the power to initiate recovery of those dues.

# 9. It was further pointed out that merely having a right to set-off does not automatically lead to having a charge over the property. Section 245 of the Income Tax Act does not expressly create a charge or a security interest. The language of Section 245 of the Income Tax Act does not indicate any such charge to have been created. It is also their contention that the finding of the Adjudicating Authority that the right to set-off under Section 245 of the Income Tax Act creates a charge is perverse as it is opposed to the scheme of IBC which recognises set-off and security interest as separate and distinct concept.

# 10. Refuting the contentions raised by the Appellant, the Learned Counsel for the Respondent, Shri Abhishek R. Mishra submitted that the dues of the Income Tax come under the ambit of security interest. It was also contended that the definition of secured creditor in IBC does not exclude government or governmental authority and hence the act of the Respondent for set-off was lawful. It was pointed that Section 3(30) of the IBC defines secured creditor to mean a creditor in favour of whom security interest is created and such security interest can be created by operation of law. The Respondent has relied upon the judgment of this Tribunal in Principal Commissioner of Income Tax and other Vs M/s Assam Company India Ltd in CA(AT)(Ins) No. 241 of 2022 to hold that the dues of the Income Tax Department are government dues and hence the Income Tax Department is a secured creditor. It is also been contended that since the dues of the Income Tax Department – Respondent are secured dues and have been availed by invoking Section 245(1) of the Income Tax Act wherein the Respondent has security interest, the provision of Section 238 of IBC would not apply. It was also pointed out that as required under Section 245(1) of the Income Tax Act, a notice for set-off was issued to the Corporate Debtor and to that extent there has been no breach of the procedure prescribed for set-off under the Income Tax Act. It was also stated that the set-off was rightly done by the Respondent in accordance with Regulation 37 of Liquidation Regulations.

# 11. We have duly considered the arguments advanced by the Learned Counsel for both the parties and perused the records carefully.

# 12. From the facts of the present case, it is clear that the Income Tax Department – Respondent appropriated the ITR amount on 12.11.2021 by adjusting/setting-off the same against pre-CIRP income tax dues. This act of appropriation by way of set-off/adjustment was clearly undertaken after commencement of liquidation proceedings on 25.07.2019. The first question for our consideration is therefore whether such continuation of pending proceedings is permissible after liquidation orders have been passed.

# 13. To analyse this issue, we may begin with perusing the relevant statutory provisions of moratorium as contained in the IBC during CIRP and during liquidation.

# 14. The relevant excerpts of moratorium on institution or continuation of pending suits or proceedings during CIRP as contained in Section 14 of the IBC which appears in Chapter II of Part II thereof is as follows: . . . . .

15. The provision of moratorium in respect of suits and legal proceedings during liquidation process as contained in Section 33(5) of IBC which appears in Chapter III of Part II of IBC is as extracted hereunder:

• 33. Initiation of liquidation.

• (4) On receipt of an application under sub-section (3), if the Adjudicating Authority determines that the corporate debtor has contravened the provisions of the resolution plan, it shall pass a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).

• (5) Subject to section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor:

• Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority.

# 16. From a reading of the above statutory provisions, it becomes clear that liquidation process comes into effect upon the failure to come up with a resolution plan or on a resolution plan not being approved by the Adjudicating Authority consequent upon which the Adjudicating Authority further passes the liquidation order under Section 33(4) of the IBC. The proviso to Section 14(4) of IBC also clarifies that moratorium ceases to have effect on receipt of approval of resolution plan or on passing of an order of liquidation. In the present facts of the case, on the order of liquidation having been passed, the moratorium placed under Section 14 came to an end. Instead, a fresh moratorium in terms of Section 33(5) of IBC came into place.

# 17. Thus, while moratorium under Section 14 applies to CIRP, Section 33 applies to moratorium in a liquidation process. A close examination of these two statutory provisions would reveal that both these sections are however entirely distinct in their sweep and application. In terms of the language employed in Sections 14 and 33 of IBC, while Section 14 prohibits both institution and continuation of pending suits or proceedings against the Corporate Debtor, Section 33(5) of IBC is only a bar on the institution of new suits during the liquidation process though the proviso to Section 33(5) further provides that if a fresh suit or legal proceeding is to be instituted, the Liquidator is required to obtain specific permission and prior approval of the Adjudicating Authority. There is however clearly no mention of any bar or embargo on continuation of pending suits or proceedings during the process of liquidation. In terms of Section 33(5) of the IBC, the moment liquidation proceedings commence, there would be a bar only in respect of fresh suits/proceedings while pending suits/proceedings can continue. The Liquidator can therefore continue to pursue or defend any already existing proceeding without having to seek any permission from the Adjudicating Authority in terms of Section 35(1)(k) of IBC. In other words, though Section 33 contains provisions similar to Section 14 contemplating stay on suits/proceedings during liquidation, however, the reach and gamut of stay under Section 33 differs from Section 14 in that there is no moratorium on continuation of suits/proceedings already instituted earlier.

# 18. To answer the question delineated at para 12 above, we hold that the words ‘continuation of pending suits or proceedings’ is consciously omitted in Section 33(5) of IBC in contrast to Section 14 of IBC where it is explicitly stated that moratorium applies both to the institution of suits or proceedings or the continuation of pending law suits or proceedings against the Corporate Debtor. Thus, to our minds, there is no bar in a suit or a legal proceeding continuing along with liquidation proceedings as pending suits or legal proceeding have not been included within the scope of moratorium under Section 33(5) of IBC. Having come to the above conclusion, we can safely conclude that the Respondent was legally entitled to continue with the Income Tax assessment proceedings during the liquidation process.

# 19. This brings before us the second set of issues for consideration as to whether the Respondent is a secured creditor having security interest under Section 245 (1) of the Income Tax Act, 1961 and whether there was any infirmity in the suo-motu action of the Respondent in appropriation of the ITR amount and in setting-off the said amount against the tax arrears of pre-CIRP period determined during the liquidation proceedings. As both these issues are closely intertwined, we will endeavour to deal with them together.

# 20. When we come to the impugned order, we find that the Adjudicating Authority after adverting attention to Regulation 37 of Liquidation Regulations, Section 3(31) of IBC and Section 245 of the Income Tax Act, 1961 held that the Income Tax Department acquires a statutory right to set off the ITR amount against taxes in arrears under any proceedings. Basis this finding, Adjudicating Authority did not find any infirmity in the action of the Income Tax Department in appropriation of refunds determined during the liquidation proceedings against the tax arrears of pre-CIRP period. The relevant extracts of the impugned order are as placed hereunder:

“4. We have heard the Counsel and perused the material available on records.

4.1. We find that the Income Tax Department has appropriated the refunds on 12.11.2021, and the Liquidation proceedings commenced in the case of Corporate Debtor on 25.07.2019, which implies that the refunds were appropriated towards income tax demand due from the Corporate Debtor after commencement of liquidation proceedings.

4.2. Regulation 37 of the IBBl (Liquidation Process) Regulations 2016 provides that “A secured creditor who seeks to realize its security interest under section 52 shall intimate the liquidator of the price at which he proposes to realize its secured asset”.

4.3. The security interest is defined in Section 3(31) of the Code as “security interest” means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person.”

4.4. Section 245 of the Income Tax Act, 1961 provides that –

”(1) Where under any of the provisions of this Act, a refund becomes due or is found to be due to any person, the Assessing Officer or Commissioner or Principal Commissioner or Chief Commissioner or Principal Chief Commissioner; as the case may be, may, in lieu of payment of the refund, set off the amount to be refunded or any part of that amount, against the sum, if any, remaining payable under this Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under this sub-section.

(2) Where a part of the refund is set off under the provisions of sub-section (1), or where no such amount is set off,’ and refund becomes due to a person, and the Assessing Officer, having regard to the fact that proceedings for assessment or reassessment are pending in the case of such person, is of the opinion that the grant of refund is likely to adversely affect the revenue, he may, for reasons to be recorded in writing and with the previous approval of the Principal Commissioner or the Commissioner; as the case may be, withhold the refund up to the date on which such assessment or reassessment is made.”

4.5. From the provisions of Section 245 of the Income Tax Act 1961, find that the Income Tax Department acquires a statutory right to set off the refunds determined in relation to any proceedings against the taxes in arrears under any proceedings. Accordingly, we are of considered view that the Income Tax Department acquires security interest in terms of section 245(1) of lncome Tax Act, 1961, on determination of refund in liquidation proceedings, in terms of section 3(31) of the Code, as section 3(31) also includes charge as well as encumbrances.

4.6. We further find that the Section 245(1) of the Income Tax Act, 1961 mandates prior notice, which is issued by the Income Tax Department on the log in account of each assessee. Accordingly, we do not find any infirmity in the action of the Respondent in appropriation of refunds determined during the liquidation proceedings against the tax arrears of pre-CIRP period, as such set-off has taken place during the Liquidation proceedings, wherein the right of set-off is available to the Creditors.”

# 21. Assailing the impugned order, it is the case of the Appellant that the action taken by the Respondent to make recovery of Income Tax demand by way of adjustment/set-off of ITR amount by invoking Section 245 (1) of the Income Tax Act, 1961 was beyond the provision of law and hence legally improper. Section 245 could not have been applied in the present case since Section 238 of the IBC endows the IBC with over-riding powers. It is also the case of the Appellant that the recovery of income tax dues, if any, of the Respondent had to abide by the procedure laid down by the IBC in the Liquidation Regulations which the Respondent clearly failed to comply with. The Respondent not having followed the mandatory procedure prescribed by the IBC acted unlawfully in adjusting the ITR amount without having filed any claim before the Liquidator though the Liquidator had published the public announcement inviting claims from the stakeholders of the Corporate Debtor. It is also canvassed that the ITR amount was part of the liquidation estate of the Corporate Debtor and by wrongful adjustment of the ITR against pre-CIRP income tax dues, the rights of other stakeholders of the Corporate Debtor stood violated.

# 22. Per contra, in affirmation of the impugned order, it has been the case of the Respondent that in terms of Section 52 of IBC, a secured creditor is allowed realization of security interest in liquidation proceedings. It has also been contended that the Income Tax Department being a Governmental authority is a secured creditor and in support this contention, reliance has been placed on the judgement of this Tribunal in Principal Commissioner of Income Tax Vs Assam Company India Ltd in CA(AT)(Ins) No. 241 of 2022 (‘Assam Company’ in short).

# 23. We find that in this judgment, reliance was placed on the judgement of the Hon’ble Supreme Court in State Tax Officer vs. Rainbow Papers Limited-Civil Appeal No. 1661 of 2020 to claim that the Income Tax Department being a Government authority is a secured creditor and entitled to realise security interest. However, we are of the view that this judgement does not assist the Respondent in view of a subsequent judgment of the Hon’ble Supreme Court in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. & Ors. in C.A. No. 7976 of 2019, wherein it has been held that the ratio of the Rainbow Papers supra has to be confined to the facts of that case. In the Rainbow Papers case, the Operational Creditor was held to be a secured creditor on the basis of relevant statutory provisions of Gujarat Value Added Tax, 2003. However, in terms of the provisions of the Income Tax Act including Section 245 thereof, there is no such basis to claim in the case of the Income Tax Department to be a secured Operational Creditor. Further the language of Section 245 (1) of the Income Tax Act does not create any charge or security interest in favour of the Respondent. The creation of a charge by operation of law must be apparent from the express words of the statute. Hence, the Assam Company judgement supra judgment does not come to the aid of the Respondent in the present case. It also flows therefrom that the Adjudicating Authority had erred in holding that the Respondent – Income Tax Department had acquired security interest in terms of Section 245 (1) of the Income Tax Act, 1961.

# 24. We now proceed to answer the adjunct issue as to whether there was any infirmity in the action of the Respondent in appropriation of the ITR amount and in setting-off the said amount against the tax arrears of pre-CIRP period determined during the liquidation proceedings. We have already indicated in the preceding paragraphs that there is no bar in a suit or a legal proceeding continuing along with liquidation proceedings as pending suits or legal proceeding have not been included within the scope of moratorium under Section 33(5) of IBC. The question that arises next is that if the Respondent was legally entitled to continue with the Income Tax assessment proceedings during the liquidation process, does the principle of set-off and the associated accounting principle of netting-of become applicable on the ITR amount determined during the liquidation proceedings.

# 25. We find that there is no restriction, prohibition or embargo placed by the IBC on the principle of set-off during liquidation proceedings. In fact, the right of set-off is available to the Respondent as maybe noticed at Regulation 29 of Liquidation Regulations, which is as reproduced below:

• “29. Mutual credits and set-off. Where there are mutual dealings between the corporate debtor and another party, the sums due from one party shall be set off against the sums due from the other to arrive at the net amount payable to the corporate debtor or to the other party.

• Illustration: X owes Rs. 100 to the corporate debtor. The corporate debtor owes Rs. 70 to X. After set off, Rs. 30 is payable by X to the corporate debtor.”

Clearly therefore, the concept of set-off in the liquidation process stands on the premise of mutual credits and dealings undertaken the between the parties. In this context, we must add here that there is a clear distinction between the facts of the case of Raman judgement supra and the facts of the present case. In the Raman judgement, set off was claimed while Corporate Debtor was undergoing CIRP and for reasons of set-off being claimed prior to passing of liquidation order, it was held to be contrary to law. However, in the present case, the set-off has been claimed after passing of the liquidation order which is legally permissible under Chapter III Part II of IBC. Hence the Raman judgement does not come to the aid of the Appellant in asserting that set-off was not permissible and the entire ITR amount should have become part of the liquidation asset of the Corporate Debtor.

# 26. However, what is under contention is whether on completion of assessment proceedings during liquidation, the Respondent-Income Tax Department could avail of the set-off automatically, on its own, by adjusting against pre-CIRP dues. In this regard we may refer to the Sundaresh Bhatt judgment supra wherein the Hon’ble Apex Court has held that while statutory authorities can take steps to determine the tax, interest, fines or any penalty which is due, it cannot enforce a claim for recovery of the tax due during the period of moratorium. Extending the ratio of this judgement, we hold that the Income Tax authority enjoys limited jurisdiction of continuing with assessment proceedings and in determining the quantum of Income Tax dues but does not enjoy the jurisdiction and power to suo motu initiate recovery of dues or execute their claim unilaterally by adjusting the ITR amount with past tax dues.

# 27. Furthermore, a set-off is a concept which entails setting-of monetary cross-claims between parties which results in producing a certain balance sum. The precept of set-off in liquidation proceeding would therefore mean adjusting a smaller claim owed to the Respondent against a still larger claim payable to the Respondent. However, while applying the principle of set-off, it must be kept in mind that no creditor ends up getting share disproportional to their dues.

# 28. All claimants in the liquidation process are required to stake claims for distribution of proceeds of sale in consonance with Section 53 of IBC. Filing of claims for set-off is also mandated by Liquidation Regulations and cannot be bypassed. Thus, in the present case, for recovery of the tax amount as determined in the assessment proceedings by set-off against ITR, it was also required of the Respondent to submit their claims in terms of the laid down procedure. They are required to file their claim with the Liquidator for recovery of the dues in the requisite form. The Income Tax Department by unilaterally adjusting the ITR amount cannot put itself in a better footing than what is permissible as their claim in the distribution matrix.

# 29. Thus, while the Adjudicating Authority has been partially correct in allowing the principle of set-off in the liquidation proceedings but partially incorrect in allowing the suo-motu set-off without the claims having been filed by the Respondent before the Appellant-Liquidator in terms of the Liquidation Regulations. Thus, to answer the question raised in para 18 above, we are of the considered view that there has been a clear infirmity on the part of the Respondent in unilaterally and suo-motu appropriating the ITR amount by setting-off the said amount against the tax arrears of pre-CIRP period determined during the liquidation proceedings.

# 30. We take notice that there is no material on record to show that the Adjudicating Authority while passing the impugned order has considered what amount was due to the Respondent in the context of Income Tax pre-CIRP dues for adjustment/set-off of ITR as against what was due to them as their claim under the liquidation proceedings. In the given circumstances, we feel it appropriate to remand the matter back to the Adjudicating Authority to examine afresh the quantum of set-off of ITR against pre-CIRP tax dues which has been allowed to the Respondent as against their claim entitlement in the liquidation proceedings. On revisiting the matter, in the event it is found by the Adjudicating Authority that the ITR amount set off by the Respondent – Income Tax Department exceeds their claim entitlement in the liquidation proceedings, the Respondent may be directed to refund the excess amount so adjusted, within a reasonable period to be decided by the Adjudicating Authority, which sum, may thereafter be added to the liquidation estate of the Corporate Debtor. If, however, the ITR amount adjusted by the Respondent is found to be less than their claim entitlement, the ITR adjustment so made will hold ground and remain undisturbed with the caveat that balance if any shall stand extinguished since the Respondent did not file their claims before the Liquidator in the liquidation proceedings. The appeal is disposed of in the above terms. Parties shall bear their own costs.

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Commissioner of State Tax Department Vs. Ramchandra Dallaram Chaudhary (Liquidator) - It has been brought out that the Claims of Assessment Orders passed during the moratorium under Section 14 & 33(5) of the Code, have been rightly considered and admitted as ‘Unsecured’ Operational Debt.

 NCLAT (2024.05.20) in Commissioner of State Tax Department Vs. Ramchandra Dallaram Chaudhary (Liquidator) [(2024) ibclaw.in 331 NCLAT, Comp. App. (AT) (Ins) No. 34 of 2024 & I.A. No. 105, 106, 990 of 2024] held that;

• It has been brought out that the Claims of Assessment Orders passed during the moratorium under Section 14 & 33(5) of the Code, have been rightly considered and admitted as ‘Unsecured’ Operational Debt.

Excerpts of the order;.

# 1. The present Appeal has been filed by Commissioner of State Tax Department (in short Appellant) under Section 61(1) of the Insolvency & Bankruptcy Code, 2016 (in short ‘Code’) in Company Appeal (AT) (Insolvency) No. 34 of 2024 against the Impugned Order dated 31.10.2023 passed by the National Company Law Tribunal, Ahmedabad Bench (in short ‘Adjudicating Authority’) in IA No. 735/NCLT/AHM/2023 in IA No. 435/NCLT/AHM/2023 in CP(IB) No. 66/NCLT/AHM/2017, whereby the Adjudicating Authority rejected the application of the Appellant to treat its claim as Secured Creditor during the liquidation under waterfall arrangement as stipulated in Section 53 of the Code.

# 2. Mr. Ramchandra Dallaram Chaudhary is the Liquidation (in short ‘Respondent’ herein) of M/s Anil Limited (‘Corporate Debtor’).

# 3. Heard the Counsel for the Parties and perused the records made available including the cited judgements.

# 4. It has been brought out that the Corporate Debtor was admitted into Corporate Insolvency Resolution Process (in short ‘CIRP’) vide the Adjudicating Authority its Order dated 23.08.2017 and moratorium came into effect same day.

# 5. The Resolution Professional published a public announcement on 28.08.2017 inviting claims from all by stipulating the last date of claim filing as on 06.09.2017. It has been stated that in the public announcement, it was indicated that the estimated date for closure of CIRP would be 19.02.2018.

# 6. It is further submitted that due to no resolution of the Corporate Debtor, the CoC decided to liquidate the Corporate Debtor and the Adjudicating Authority approved the Liquidation vide its order dated 25.10.2018. Subsequent to this, the Respondent again published public announcement on 27.10.2018 and last date of claims submission was 24.11.2018 and further indicated that date of closure of the liquidation process would be 20.05.2018.

# 7. It is a case of the Appellant that the prevailing moratorium under Section 14 of the Code ceased to have effect on 25.10.2018 and Section 33(5) of the Code came into effect. The Appellant submitted that the CIRP came to close on 20.05.2018.

# 8. The Appellant submitted that he passed an order for attachment for immovable properties of the Corporate Debtor vide attachment letter dated 16.10.2018 in terms of the Gujarat Vat Act, 2003 (in short ‘VAT Act’) for outstanding dues pertaining to Assessment Year (in short ‘AY’) 2007 to 2017. It was stated that the said attachment order dated 16.10.2018 was challenged by the Respondent before the Appellant in I.A. No. 501 of 2022.

# 9. The Appellant stated that he submitted his claims to the Respondent on 03.11.2018 for the AY 1994-95, 95-96, 96-97 and 97-98 and AY 2014-15 for Rs. 5,45,96,65,301/- and the same was admitted by the Respondent. The Appellant further stated that he filed an additional claims to the Respondent on 24.06.2020 for AY 2015-16 and 2016-17 for Rs. 4,55,75,67,058/-.

# 10. It has been brought out that on 17.07.2020 the Respondent communication admitted all the claims of Rs. 1001,72,32,359/- however, the Respondent vide his letter dated 28.07.2020 stated that the attachment order was bad in law due to moratorium of the Corporate Debtor and further stated that the alleged attached properties belonging to the liquidation estate.

# 11. It is the case of the Appellant as per section 48 of the VAT Act the dues of the Appellant have the first charge over the property of the Corporate Debtor and hence the Appellant ought to have been treated as Secured Creditors.

# 12. It has been brought out that the Appellant filed I.A. No. 501 of 2020 before the Adjudicating Authority and the Adjudicating Authority passed the Order dated 22.11.2022 in I.A. No. 501 of 2020 filed by the Respondent challenged the attachment order. The relevant portion of the order dated 22.11.2022 reads as under :-

• “Learned Counsel for respondent Commissioner of State Tax states that they have considered the aspect of applicability of the judgment passed by Hon’ble Supreme Court in Rainbow Papers Limited, and on the assurance from the liquidator to treat it as a secured creditor in view of the said judgment they have lift the attachment within a specific time period. Let the affidavit be filed within five days, and with the time line of lifting the attachments within a week.” (SIC.)

# 13. The Appellant elaborated that based on the Order of the Adjudicating Authority dated 22.11.2022, it was understanding on his part that the claims would be considered in the category of Secured Creditors. The Appellant submitted that to his shock the Respondent again sent a letter to the Appellant on 22.06.2023 and informed about the rejection of the Appellant’s claim for AY 1994 to 98 and for AY 2013 to 2017 and thereby admitting claims of the AY 2007 to 2012. The Respondent also sent a communication vide letter dated 26.06.2023 to the Appellant reiterating that the claims of the Appellant have been rejected.

# 14. The Appellant thereafter filed an I.A. No. 435 of 2023 seeking that he may be declared as Secured Creditors for his entire claims.

# 15. The Appellant gave the background of the case and stated that the Appellant had sent notices under Bombay Land Revenue Code (in short ‘BLRC’) and Section 48 of the Gujarat Sales Tax Act 1969 (in short ‘Sales Tax Act’) for the purpose of old Assessment years 1994 to 1998 attaching the immovable and movable properties of the Corporate debtor for these old assessment years which were much prior to the moratorium. The Appellant also submitted that notices dated 24.09.2009, 12.02.2010, 12.12.2011 and 03.02.2012 under Section 152 read with Section 200 of the BLRC were sent by him for attachment of movable and immovable property of the Corporate Debtor for the said assessment years, which had not been challenged by the Corporate Debtor.

# 16. It is the case of the Appellant that his claims are covered under the Judgment of State Tax Officer Vs. Rainbow Papers Limited [(2023) 9 SCC 545] and the Respondent could not have differentiated his claims for few Financial Years as Secured Creditors vis-à-vis other financial years as Unsecured Creditors.

# 17. The Appellant admitted that the Rainbow Paper (Supra) would not be applicable his claims for the AY 1994 to 1998, however the same does not mean that the Appellant is not a Secured Creditors for these years or such claims have bee given up by the Appellant.

# 18. It is the case of the Appellant that his claims AY 2013-14, 2014-15, 2015- 16 and 2016-17 are not hit by the moratorium and are not violated by Section 14 and Section 33(5) of the Code and should have been treated as Secured Financial Creditor under Section 33(1)(e) specially keeping in view the judgment of Rainbow Paper (Supra). It is the argument of the Appellant that the AY are from 1st April till 31st March of the next year as liability are crystalized as on 1st April of the next year as such these liabilities are for a period prior to moratorium. Further the claims of the Appellant of earlier AY being existing liabilities cannot be hit by moratorium and they are protected and treated as Secured as per Section 48 of the VAT Act.

# 19. The Appellant submitted that the Adjudicating Authority erred in the para 13 of the impugned order which relies on the judgment of Paschimanchal Vidyut Vitran Nigam Ltd v. Raman Ispat Pvt. Ltd. [(2019) SCC OnLine NCLAT 883] however the said judgment which sought to clarify the Rainbow Papers (Supra) and curtail its applicability is now interpreted in the review petition against Rainbow Papers (Supra) in Sanjay Kumar Agarwal v. State Tax Officer [(2024) 2 SCC 362], on the ground that such subsequent decision cannot be a ground for review and co-ordinate bench ought not to have commented bench/It upon decision of another co-ordinate bench.

# 20. The Appellant attempted to argue that his demands for the amount for AY 2013-14, 2014-15, 2015-16 and 2016-17 were sent after the date of closure of CIRP and thereafter it cannot be said that the merely because the Respondent was not able to adhere the timelines given the public announcement, the Appellant should have not filed his claims or legal demands due to alleged moratorium period.

# 21. The Appellant submitted that it is a failure of the Respondent not to complete the CIRP or liquidation process within the stipulated time and therefore the Appellant cannot be put to any adverse situation invoking continuing moratorium. The Appellant also stated that his attachment are legal and valid as per VAT Act and belong to the prior CIRP period hence should not have been affected by the moratorium.

# 22. The Appellant pleaded that the Code does not provide the recovery mechanism for tax which is covered by the VAT Act and therefore the Appellant took actions according to VAT Act and in terms of Section 34(9) of the VAT Act, audit assessments can be done anytime during a period of four years and as such all his actions was legal according to the VAT Act.

# 23. The Appellant also assailed the Impugned Order wherein the Adjudicating Authority alleged to have wrongly relied upon the Judgement of Hon’ble Supreme Court of India in the case of Sundaresh Bhat, Liquidator ABG Shipyard v. Central Board of Indirect Taxes [(2023) 1 SCC 472] held as follows, which has wrongly been followed in the present case,

• “45. We are of the clear opinion that the demand notices to seek enforcement of customs dues during the moratorium period would clearly violate the provisions of Sections 14 or 33(5) of the IBC, as the case may be. This is because the demand notices are an initiation of legal proceedings against the corporate debtor. However, the above analysis would not be complete unless this Court examines the extent of powers which the respondent authority can exercise during the moratorium period under the IBC.

• 47. Therefore, this Court in V.M. Deshpande case (S.V. Kandoakar v. V.M. Deshpande, (1972) 1 SCC 438] held that the authorities can only take steps to determine the tax, interest, fines or any penalty which is due. However, the authority cannot enforce a claim for recovery or levy of interest on the tax due during the period of moratorium. We are of the opinion that the above ratio squarely applies to the interplay between the IBC and the Customs Act in this context.

# 24. The Appellant submitted that in the present case there was no enforcement of taxes but the demand notices are issued only as assessment made by the Appellant which are legally payable dues by the Corporate Debtor and no further actions were taken by the Appellant post the demand notices.

# 25. The Appellant emphasized that in terms of Section 47 A of the Sales Tax Act, the Appellant gets power to recover the amount of tax or penalty as arrear of land revenue under BLRC. The Appellant pleaded that the import of these Sections can be found in Section 46(1)(i) of the VAT Act and therefore, the Appellant has first charge over the properties of the Corporate Debtor and assets of the Corporate Debtor in accordance with the BLRC and not Sales Tax Act.

# 26. The Appellant assailed the conduct of the Respondent as he has admitted the partial claims of the Appellant for the AY 2007-08, 2008-09, 2009-10, 2010- 11, 2011-12 and 2012-13 in terms of judgment of the Hon’ble Supreme Court of India in the matter of Rainbow Paper (Supra) according to which dues of the government are secured dues and has recognized as Secured Creditors by virtue of Section 48 of the VAT Act. The Appellant further submitted that the decision of Rainbow Paper (Supra) has been upheld in the revenue case of Sanjay Kumar Agarwal Vs. State Tax Officer & Ors. [(2024) 2 SCC 362]. However, the Respondent rejected the other claims of the Appellant on the ground that these years are covered by old laws of Sales Tax Act hence there is no pari-materia provisions like Section 48 of the VAT Act and therefore the Appellant was treated as Unsecured Creditors.

27. It is a case of the Appellant that merely because the equivalent provision of Section 48 of the VAT Act was not present in Sales Tax Act does not take away his rights to be treated as Secured Creditors.

# 28. The Appellant pleaded that it is a spirit and the intention of the statute which is important and not the wordings and prints and submitted that the spirit of all the concerned acts and the Codes to treat the claims of the Appellant as Secured Creditors and had to be treated at par with land revenue claims and as such the Respondent should have treated the Appellant as a Secured Financial Creditor for his tax dues.

# 29. The Appellant further assailed the conduct of the Respondent who rejected the claims of the remaining assessments years on the ground that these would be hit by Section 14 of the Code. It is the case of the Appellant that the estimated date of closure of CIRP was 19.02.2018 and thereafter the Appellant decided to issue demand notices after giving dates and thus the new demand notices were issued by the Appellant are not hit by Section 14 of the Code.

# 30. The Appellant stated that as per the scheme of the Code the CIRP is expected to be completed within 330 days and as such the claims of the Appellant were fully covered.

# 31. Concluding his remarks, the Appellant requested to allow his appeal and set aside the Impugned Order.

# 32. Per-contra, the Respondent denied all the averments of the Appellant, treating these as misleading, mischievous and without any merit.

# 33. The Respondent stated that the Appellant had only challenged the communication issued by the Respondent to the extent of treatment of the claim for the Assessment Years 2013-14 to 2016-17 and the decision taken by the Respondent in relation to the claims for the period of assessment carried out under the provisions of Gujarat Sales Tax Act, 1969 for the AY 1994-95 to 97-98 was not even under challenge before the Adjudicating Authority and therefore, seeking such reliefs in the guise of the present Appeal is not maintainable.

# 34. In this connection, the Respondent cited Judgment of the Hon’ble Supreme Court of India in the case of Bachhaj Nahar Vs. Nilima Mandal & Anr. in Civil Appeal Nos. 5798-5799 of 2008, where it was held that the Applicant case seek reliefs not pleaded.

We note the relevant para which reads as under :-

• “ 10. The object of issues is to identify from the pleadings the questions or points required to be decided by the courts so as to enable parties to let in evidence thereon. When the facts necessary to make out a particular claim, or to seek a particular relief, are not found in the plaint, the court cannot focus the attention of the parties, or its own attention on that claim or relief, by framing an appropriate issue. As a result the defendant does not get an opportunity to place the facts and contentions necessary to repudiate or challenge such a claim or relief. Therefore, the court cannot, on finding that the plaintiff has not made out the case put forth by him, grant some other relief. The question before a court is not whether there is some material on the basis of which some relief can be granted. The question is whether any relief can be granted, when the defendant had no opportunity to show that the relief proposed by the court could not be granted. When there is no prayer for a particular relief and no pleadings to support such a relief, and when defendant has no opportunity to resist or oppose such a relief, if the court considers and grants such a relief, it will lead to miscarriage of justice. Thus it is said that no amount of evidence, on a plea that is not put forward in the pleadings, can be looked into to grant any relief.”

# 35. The Respondent submitted that he has acted completely as per law and followed various sections of the Code and the relevant regulations. It is a case of Respondent that he also kept in view the relevant judgments including Rainbow Papers (Supra) therefore the Appellant could not have any grievance against the rejection of claim which was not covered by the Code or by the Rainbow Papers (Supra) .

# 36. The Respondent further submitted that he had issued the detailed letters to the Appellant on 22.06.2023 and 26.06.2023 and clarified position of the various claims of the Appellant which was in conformity that Rainbow Papers (Supra) which were appreciated by the Adjudicating Authority in the Impugned Order.

# 37. It is the case of the Respondent that the Appellant was treated as Secured Creditor to the extent that he was illegible and remaining portion of the claims were not treated as Secured Creditors but these were treated as Unsecured Creditors and would be also governed under Section 53 of the Code.

# 38. The Respondent assailed the conduct of the Appellant who attached the assets of the Corporate Debtor during the moratorium and liquidation order thereby violated under Section 14 of the Code and further assailed the conduct of the Appellant who issued demand notice for the AY 2015-16 and 2016-17 during moratorium violating Section 14 of the Code.

# 39. It is the allegation of the Respondent that the Appellant suppressed material facts and events in his own letter dated 23.06.2023 quo his acknowledgement, unequivocal acceptance and undisputed admission of the factum that AY 1994- 95 to 1997-98, the Rainbow Paper (Supra) is not applicable since Sales Tax Act had no provisions equivalent to Section 48 of the VAT Act., therefore, there is no charge in properties of the Corporate Debtor.

# 40. The Respondent submitted that the Appellant further concealed the correct facts and chosen not to place on record his own I.A. No. 735 of 2023 in which the Impugned Order was passed, to mislead the judicial forum.

# 41. The Respondent submitted that the Appellant is trying to enlarge the scope of the Appeal by bringing new issues averring that Sales Tax Act to be relied upon to consider the Appellant as Secured Creditors for the AY 1994-95 and 1997-98, despite non applicability of Rainbow Paper (Supra).

# 42. It is the case of the Respondent that the Appellant neither challenged the treatment of old assessment year by the Respondent nor pleaded for consideration before the Adjudicating Authority in I.A. No. 735 of 2023 and no reliefs were sought by the Appellant from the Adjudicating Authority. Hence, at this stage, such pleading need to be rejected.

# 43. The Respondent submitted that through I.A. No. 735 of 2023, the Appellant, in fact, acknowledged and admitted that the treatment of its claim by the Liquidator being correct on the rationale that the old Assessment orders were under Section 67 of the Gujarat Sales Tax Act, 1969 and as the said enactment doesn’t contain pari-materia stipulation akin to Section 48 of the Gujarat Value Added Tax Act, 2003, creating a first charge on the payable amount, therefore the decision of Apex Court rendered in case of Rainbow Paper Judgment would not be applicable to claims the of old Assessment Years.

# 44. The Respondent admitted that in terms of the Judgement of Rainbow Papers (Supra) few claims of the Appellant are covered under VAT Act, which are to be treated as secured debts and same treatment has been given by the Respondent.

# 45. It is strong pleading of the Respondent that the cases which are not covered either by Section 48 of the VAT Act and by Rainbow Papers (Supra) could not have been considered by him as Secured Creditors.

# 46. The Respondent took pains to explain that all remaining claims of the Appellant have been admitted and treated, albeit, as Unsecured Creditors. The Respondent gave detailed analysis, year by year, as the Respondent claims have been classified and treated by the Appellant .

# 47. The Respondent also refuted the cited judgements of the Appellant during pleadings as these are not applicable in the present appeal.

# 48. Concluding his remarks, the Respondent submitted that the appeal may be dismissed with cost.

Finding

# 49. The point which emerges from the pleadings is regarding treatment of claims as Secured claims vis-a -vis Unsecured claims.

# 50. We note that the Adjudicating Authority in its Impugned Order dated 31.10.2023 has captured the details of the claims and treatment given by the Respondent which reads as under :-

This give bird’s eye view of Financial Year, total claims, which classified as Secured and Unsecured Debts and reason for such classification by the Respondent

# 51. After perused of all records and pleading of the parties, we can bifurcate the Appellant’s claims into three period

• (i) Tax dues arising out of AY 2007 to 2013:

• There is no dispute between the Appellant and the Respondent as the Respondent has treated all these claims as Secured Creditors as covered under relevant statute.

• (ii) Tax dues arising out of AY 1994 – 1995 and 1997 – 98:

• There is dispute regarding statues of such outstanding claims. The Appellant claims these as Secured whereas the Respondent has treated as Unsecured, since they are not protected by statues of relevant period.

• (iii) Tax dues arising out of AY 2013-14 to 2016-17:

• These are also disputed. The Appellant submitted that as per law, he was entitled to carry on assessment since estimated CIRP period was over, his claims should have been treated as Financial Creditor. On the other hand, the Respondent stated that there are squarely covered during moratorium period, hence illegal.

# 52. The Gujarat Sales Tax Act, 1969 does not contain any part-materia stipulation akin to Section 48 of the Gujarat Value Added Tax Act, 2003, therefore, the claim of the Appellant for the AY 1994-95 to 1997-98 were considered by the Respondent as an unsecured dues and accordingly the Appellant herein was declared as Unsecured Creditor by the Respondent vide communication dated 22.06.2023 in relation to the said claim. The Appellant also vide letter dated 23.06.2023 confirmed its status as Unsecured Creditor for the aforesaid period.

# 53. The Respondent has considered the claim of the Appellant for the period from AY 2007-08 to 2012-13 as a ‘Secured Creditor’. As regards, the AY 2007- 08 the assessment order was passed on 17.03.2012, in relation to the AY 2008-09 the assessment order was passed on 20.09.2012, in relation to the AY 2009-10 the assessment order was passed on 15.06.2013, in relation to the AY 2010-11 the assessment order was passed on 31.03.2015 and in relation to the AY 2012-13, the assessment order was passed on 31.03.2017.

# 54. As all the assessment orders were passed before the initiation of CIRP of the Corporate Debtor particularly before declaration of moratorium under the provisions of the Code, the said claim for the aforesaid Assessment Year from AY 2007-08, 2008-09, 2009-10, 2010-11 and 2012-13, were considered as a Secured Creditor in view of the judgment passed by the Hon’ble Supreme Court of India in the matter of Rainbow Paper (Supra).

# 55. The claims of the aforesaid duration is undisputed by the Appellant. It is noted that the Appellant filed its claims for the AY 2013-14 wherein the Assessment Order was passed on 30.03.2018 by the Appellant, AY 2014-15 wherein the Assessment Order was passed on 31.07.2018 by the Appellant, AY 2015-16 wherein the Assessment Order was passed on 29.11.2019 by the Appellant and AY 2016-17 wherein the Assessment Order was passed on 23.03.2020 by the Appellant.

# 56. The CIRP of the Corporate Debtor came to be initiated vide order dated 23.08.2017 and accordingly moratorium was declared same day.

# 57. It has been brought to the notice of this Appellate Tribunal that pursuant to the initiation of liquidation process of the Corporate Debtor, the effect of moratorium is continued as per Section 33(5) of the Code which is also confirmed by the Hon’ble Supreme Court of India in the matter of Sundaresi Bhatt Vs. Central Board of Indirect Taxes and Custom [(2023) 1 SCC 472].

# 58. Thus, it is undisputed that the Assessment Order dated 29.11.2019 for the AY 2015-16 and the Assessment Order dated 23.03.2020 for the AY 2016-17 came to be passed by the Appellant during liquidation process of the Corporate Debtor.

# 59. It is observed that during the course of proceeding of IA No. 435 of 2023, the Adjudicating Authority vide its order dated 15.06.2023 directed the Respondent to intimate the Appellant regarding their treatment as Secured Creditor in view of Rainbow Paper (Supra). The Respondent in compliance of the directions the Respondent vide its letter dated 22.06.2023 informed the Appellant that in the light of judgement of Hon’ble Supreme Court in Rainbow Papers (Supra), the State Tax Department has been considered as a “Secured Creditor” with the admitted claim amount of Rs 42,99,15,943/- -as secured portion under Section 53 of the Code and as per the relevant provisions of the Liquidation Regulations, 2016 and the balance admitted claim amount of Rs.958,73,16,448/- as unsecured portion under the category of Operational Creditor under Section 53 of the Code

# 60. The Respondent submitted that pursuant to the letter dated 22.06.2023, the Appellant vide its letter dated 23.06.2023 claims in respect of AY 1994-95 to 1997-98 would not fall within the preview of “Secured Creditor” in the light of judgement of Hon’ble Supreme Court of India in Rainbow Papers (Supra) and further did not dispute the fact that assessment order with respect to claim of AY 2015-16 and 2016-17 were passed in Moratorium Period and further, the Appellant requested the Respondent to consider the claim with respect to period of AY 2013-14 and 2014-15 as “Secured claim”.

# 61. It seems that the Reply of the Appellant to the Respondent vide letter dated 23.06.2023 is very significant and directly connected to present appeal. Hence, it would be desirable to look into same and the letter reads as under :-

Hence the Appellant clearly acknowledged in Para 2 that AY 1994-95 to 1997 to 98 do not full as Secured Creditor.

• “2. Considering the said calculation, the claim of the department for AY 1994-95 to 97-98, undisputedly falls under the Gujarat Sales Tax Act, 1969 and not under the Gujarat Value Added Tax Act, 2003. Hence, for the said period State Tax Department would not fall within the purview of “Secured Creditor” as per the decision of the Hon’ble Apex Court in the case of Rainbow Paper being Civil Appeal No. 1661 of 2020.”        (Emphasis Supplied)

Similarly the Appellant accepted that the issue AY 2014-15, 2015-16 and 2016-17 is post moratorium period :-

• “5. It is necessary to further clarify that the claim of the State Tax Department amounting to Rs.3,80,70,08,255/- for AY 2014-15 accrued vide Assessment Order dated 31.07.2018 which is post the period of Moratoriums.

• 8. The department does not dispute the fact that for AY 2015- 16 and 2016-17, the assessment can be said to have been carried out during the moratorium period which commenced from the date when the Hon’ble Tribunal passed the Liquidation order on 25.10.2018 which came to be passed in I.A. 291 of 2018.

• Thus, considering the above mentioned details the department, hereby requests the Liquidator to consider the state tax department for the period of AY 2013-14 and 2014- 15 as “secured creditor”. On the same being duly considered. the state tax department shall lift the attachment in due compliance the interim order passed by the Hon’ble National Company Law Tribunal on 15.06.2023 in IA 435 of 2023 in IA 501 of 2020..”   (Emphasis Supplied)

# 62. It seems from above that the Appellant knew his legal rights very well. Only point of the Appellant is contained in Para 6, which reads as under :-

• “6. The Notice for demand of amount assessed for AY 2013-14 and 2014-15 would not fall within the moratorium period as mentioned by the Liquidator in the details provided on 22.06.23 as the public announcement dated 28.08.2017 issued by the IRP, mentions the estimated dated of closure of CIRP to be 19.02.2018 being 180 days from the date of commencement of Insolvency process in terms of the provisions of Section 12 of IBC 2016.”   (Emphasis Supplied)

This argument of the Appellant does not seem to be convincing and we are not inclined to accept the pleadings of the Appellant on this account.

# 63. We observe that the Respondent vide its letter dated 22.06.2023 had considered the claims for Assessment Year (2007-08 to 2010-11 & 2012-13) and admitted the same as ‘Secured’ in view of the Judgment passed by the Apex Court in Rainbow Paper (Supra).

# 64. We understand that the assessment orders for the AY 2013-14 & 2014-15 was passed by the Appellant on 30.03.2018 & 31.07.2018, respectively after the imposition of Moratorium under Section 14 of the Code i.e., 23.08.2017, which tantamount to violation of Section 14 of the Code as Section 14(b) of the Code prohibits transferring, encumbering. alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein’ from the declaration of Moratorium. For this reason, the assessment order dated 30.03.2018 & 31.07.2018 is found to be in contravention of Section 14(b) of the Code. The submission of the Appellant that the CIRP period ends on the 19.02.2018 as per estimated date of closure of CIRP provided in Form A ‘Public Announcement of the Corporate Debtor cannot be accepted.

# 65. It is also observed that the assessment orders for the AY 2015-16 & 2016- 17 came to be passed by the Appellant on 29.11.2019 & 23.03.2020, respectively after passing of order of liquidation of Corporate Debtor i.e., 25.10.2018 which was not permitted as per Section 33(5) of the Code which provides that Subject to section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the Corporate Debtor. Therefore, after liquidation order has been passed by the Adjudicating Authority the moratorium under Section 33(5) of the Code comes into effect which is further confirmed by the Apex Court in the matter of Sundaresi Bhatt (Supra). The relevant portion of this judgement reads as under :-

• “44. At the cost of repetition, we may note that the demand notices issued by the respondent are plainly in the teeth of Section 14 of the IBC as they were issued after the initiation of the CIRP proceedings. Moratorium under Section 14 of the IBC was imposed when insolvency proceedings were initiated on 1-8-2017 [ICICI Bank Ltd. v. ABG Shipyard Ltd., 2017 SCC OnLine NCLT 554] . The first notice sent by the respondent authority was on 29-3-2019. Further, when insolvency resolution failed and the liquidation process began, NCLT passed an order on 25-4-2019 [Sunil Kumar Jain v. Sundaresh Bhatt, 2019 SCC OnLine NCLT 9931] imposing a moratorium under Section 33(5) of the IBC. It is only after this order that the respondent issued a notice under Section 72 of the Customs Act against the corporate debtor. The various demand notices have therefore clearly been issued by the respondent after the initiation of the insolvency proceedings, with some notices issued even after the liquidation moratorium was imposed.

• 45. We are of the clear opinion that the demand notices to seek enforcement of customs dues during the moratorium period would clearly violate the provisions of Sections 14 or 33(5) of the IBC, as the case may be. This is because the demand notices are an initiation of legal proceedings against the corporate debtor. However, the above analysis would not be complete unless this Court examines the extent of powers which the respondent authority can exercise during the moratorium period under the IBC.”    (Emphasis Supplied)

Hence, Assessment orders passed on 29.11.2019 & 23.03.2020 by the Appellant after passing of liquidation order under VAT Act violates the moratorium under provision of 33(5) of the Code.

# 66. We understand and appreciate that the Appellant during the moratorium period could determine the tax, interest, fine or any penalty which is due, however, the Appellant could not enforce his claims for recovery or levy of interest on the tax due during the period of Moratorium. It has been brought out that the Claims of Assessment Orders passed during the moratorium under Section 14 & 33(5) of the Code, have been rightly considered and admitted as ‘Unsecured’ Operational Debt. It is significate to take into consideration that the Appellant vide its own letter dated 23.06.2023 acknowledged the fact that for A.Y. 2014-15, 2015-16 & 2016-17, the assessments were carried on during moratorium.

# 67. It has been brough to notice that the Appellant passed attachment orders on the property of the Corporate Debtor i.e., 16.10.2018 in alleged and contravention of Section 14 of the Code & Regulation therein, even after order dated 15.06.2023 passed by Adjudicating Authority whereby, the Appellant was directed to lift the attachment within ten days of receipt of such intimation from the Respondent, however, till date, the Appellant continues illegally and unlawfully attachment on the subject property of the Corporate Debtor. This obviously is not in consonance with the law .

# 68. We also find logic in the pleadings of the Respondent that allowing such attachment over property during the subsistence of the moratorium, would undermine resolution of the Corporate Debtor and well prejudice the interests all stakeholders. This is found to be against the spirit of the Code.

# 69. We consciously note that the Appellant fairly conceded that his case to be partly covered by the Rainbow Paper (Supra) and the same fact has not been disputed by the Respondent. We also observe that the Respondent pleaded that he has treated the claims as Secured Creditors which are protected under of the VAT Act keeping in view of the Rainbow Paper (Supra) .

3 70. We understand from the information given by the parties that total 13 claims were submitted by the Appellant for the period 1994-95 onwards with total tax dues amounting to Rs. 1001,72,32,359/- and the Respondent considered the tax demands of Rs. 42,99,15,943/- relating to AY 2007-08, 2008-09, 2009-10, 2010-11, 2011-12, 2012-13 as Secured Creditors and the remaining claims of the Appellant were accepted but not as Secured Creditors and have treated as Unsecured Creditors which amount to Rs. 958,73,16,448/-. We find this to be in accordance with the Code and judgment of the Courts.

# 71. As regards, the arguments of the Appellant that the CIRP/liquidation process should have been completed within 330 days and therefore dues to reasoning that the Appellant and conclude the resolution of the Corporate Debtor the Appellant cannot be put to disadvantage. We are of the view that time period of 330 days prescribed in the Code is indicative and directory in nature and not mandatory. In fact, large number of cases, due is several reasons, are not able to be resolved within such stipulated period and if the contentions of the Appellant is accepted then the Resolution Process of the Corporate Debtor, in most of the cases, may not take off at all. Thus, the pleadings of the Appellant on this grand, stand rejected.

# 72. We observe that there was a gap in the claims made by the Appellant pertaining to AY 2011-12 which has not been claimed by the Appellant. A pointed query was raised by us to the Appellant to explain the same particularly whether there is no claim or the claim has been settled. However, we did not get any answer to this from the Appellant.

# 73. Another pointed query was raised by this Tribunal to the Appellant as to why such arrears were allowed to continue which pertaining to all almost 20 years old way back from 1994-95. We also pointed out that in accordance with the earlier BLRC and now Gujarat Land Revenue Record, or VAT Act, why the Appellant allowed to accumulate such huge claims of more than 1000 Crores. We also asked, as to what action the Appellant had taken to recover his dues from the Corporate Debtor. However, despite our repeated queries we did not get any concrete and convincing reply.

# 74. Since, ratio of Rainbow Paper (Supra) has been used by both , we will go through it and note the relevant paras. These reads as under :-

• “2. The short question raised by the appellant in this appeal is, whether the provisions of IBC and, in particular, Section 53 thereof, overrides Section 48 of the GVAT Act which is set out hereinbelow for convenience:

• “48. Tax to be first charge on property.— Notwithstanding anything to the contrary contained in any law for the time being in force, any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case may be, such person.”

• 29. As argued by the learned Solicitor General, the term “secured creditor” as defined under IBC is comprehensive and wide enough to cover all types of security interests, namely, the right, title, interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction, which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person.

• 30. The learned Solicitor General rightly argued that in view of the statutory charge in terms of Section 48 of the GVAT Act, the claim of the Tax Department of the State, squarely falls within the definition of “security interest” under Section 3(31) IBC and the State becomes a secured creditor under Section 3(30) of the Code.

• 55. In our considered view, NCLAT clearly erred in its observation that Section 53 IBC overrides Section 48 of the GVAT Act. Section 53 IBC begins with a non obstante clause which reads:

• “53. Distribution of assets.—(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority….”

• 56. Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 or any other provisions of IBC. Under Section 53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, are to rank equally with other specified debts including debts on account of workman’s dues for a period of 24 months preceding the liquidation commencement date.

• 57. As observed above, the State is a secured creditor under the GVAT Act. Section 3(30) IBC defines “secured creditor” to mean a creditor in favour of whom security interest is credited. Such security interest could be created by operation of law. The definition of “secured creditor” in IBC does not exclude any Government or Governmental Authority.

• 58. We are constrained to hold that the appellate authority (NCLAT) and the adjudicating authority erred in law in rejecting the application/appeal of the appellant. As observed above, delay in filing a claim cannot be the sole ground for rejecting the claim.”    (Emphasis Supplied)

# 75. From above, we note that the Rainbow Paper (Supra) held that tax dues covered under section 48 of the VAT Act which clearly stipulate the Appellant’s right over the assets of the Corporate Debtor as first charge. We also note this similar provisions, however, was not available in Gujarat Sales Tax Act and therefore, the tax claims were not treated as Secured Creditors. To the credit of the Appellant, he fairly concluded that this period was not covered in the ratio of Rainbow Paper (Supra).

Hence the Respondent classified remaining admissible outstanding dues as Unsecured debts. The Adjudicating Authority, therefore, also passed the Impugned Order accordingly based on Resolution Plan put up for approval by CoC through the Respondent.We do not find any infirmity in the Impugned Order on this account.

# 76. In view of above detailed discussions, we do not find any merit in the appeal. The appeal stands dismissed. No Costs. Interlocutory Application(s), if any, are Closed.

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