The Hon’ble National Company Law Appellate Tribunal (NCLAT), vide judgment dated July 12, 2024, in the matter of Avil Menezes v. Principal Chief Commissioner of Income Tax, Mumbai, inter alia, addressed significant issues vis-à-vis mechanism of set-off of pre-insolvency process dues during the liquidation process. The present appeal was filed challenging the order of the Hon’ble National Company Law Tribunal, Mumbai (NCLT), in terms of which the application filed by an Appellant / Liquidator seeking refund of income tax refund amounts, which was adjusted by the income tax department (Respondent) against certain pre-CIRP income tax dues, was rejected.

 

The main point of contention was the applicability of Section 245 of the Income Tax Act, 1961 (ITA) which granted that entitled the income tax department to set-off the ITR with any prior dues of an Assessee and applicability of Regulation 29 Liquidation Regulations, which allows set off during liquidation. The NCLAT clarified in cases wherein an Assessee is undergoing restructuring under the IBC regime, Section 238 of the IBC shall apply and a set-off in a liquidation process, including the income tax dues, could only be availed under Section 52 of the IBC read Regulation 37 of the IBBI (Liquidation Process) Regulations, 2016 (Liquidation Regulations), if such creditor held any security or charge against the Corporate Debtor. Since Section 245 of the ITA does not create any charge or security interest, any set-off of any outstanding dues under the ITA could not be undertaken.

 

For the applicability of Regulation 29 of the Liquidation regulation, the NCLAT adopted the approach of proportionality and held that since set-off is a concept which entails adjusting monetary crossclaims between parties which results in producing a certain balance sum, no creditor shall be allowed to seek a share disproportional to their dues.

 

Holding the above, the NCLAT remanded the matter back to the Hon’ble NCLT to re-examine the quantum of set-off and directed that if the amount of claim was higher than the ITR, the said balance shall be extinguished as the income tax department failed to file the claim with the liquidator.

 

The present judgment is another extension to the law already settled regarding the provisions of the IBC being paramount and can be said to be an extension of the law settled in State Tax Officer v. Rainbow Papers Ltd., with respect to the setting off of claims by statutory authorities in priority than the other creditors. This clarity is crucial for ensuring that all stakeholders in the liquidation process are treated equitably and that the distribution of assets is conducted in accordance with the IBC.

Authors & Contributors

Partner:

Abhishek Swaroop

 

 

Associates:

Bhawana Sharma

Kirti Talreja

Shreya Chandhok

Rounak Doshi