Introduction

In a significant judgment, the National Company Law Appellate Tribunal (NCLAT) addressed the issue of whether the Income Tax Department can set-off tax dues with refunds during the intervening period when the Corporate Insolvency Resolution Process (CIRP) timeline has expired, but a liquidation order has not yet been passed. The judgment also examined if a secured creditor could realize secured assets after the expiry of the CIRP period and before the liquidation order is issued. Additionally, it explored if the Income Tax Department, as a government authority, can be considered a secured creditor entitled to realize security interest.

Case Background

The case involves Kotak Urja Pvt Ltd, which was admitted into CIRP on November 18, 2019, with Mr. Devarajan Raman appointed as the Resolution Professional (RP). The Income Tax Department adjusted a tax refund of Rs. 90.42 lakhs against outstanding tax dues while the moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC) was in effect. The RP filed an application seeking a refund of this amount, which was dismissed by the Adjudicating Authority. The RP then appealed to the NCLAT.

Key Issues Addressed : Set-off tax After the CIRP Expired

1. Set-Off by Income Tax Dept. During Interregnum Period

   – The central question was whether the Income Tax Department could set-off tax dues with refunds during the period after the CIRP timeline had expired but before the liquidation order was passed. The NCLAT clarified that the moratorium under Section 14 of the IBC continues until the liquidation order is passed or the resolution plan is approved by the Adjudicating Authority.

 “From a bare reading of Section 14(1)(a), (b) and (c) of the IBC, the legislative intent seems to be quite clear that during the period of moratorium qua the Corporate Debtor, there shall be a stay on the commencement and continuation of all legal proceedings against the Corporate Debtor and prohibition of action whatsoever of foreclosure, recovery or enforcement of any ‘security interest’ which has been created by the corporate debtor vis-a-vis its property.”

2. Realization of Secured Assets by Secured Creditors

   – The NCLAT addressed whether a secured creditor could realize secured assets after the CIRP period had expired but before the liquidation order was passed. The tribunal held that secured creditors could only exercise their right to realize security interests after the liquidation proceedings had commenced.

   “The option to realize security interests becomes available to a secured creditor only after liquidation proceedings commence in terms of Section 33 of IBC with the passing of the liquidation order.”

3. Status of Income Tax Department as Secured Creditor

   – The NCLAT examined whether the Income Tax Department could be considered a secured creditor entitled to realize security interest. The tribunal noted that the Income Tax Department could not claim the status of a secured creditor merely by being a government authority.

   “The Respondent representing the Income Tax Department cannot be treated as a secured creditor. It was pointed out that there is no provision in the Income Tax Act which vests on them a statutory charge in respect of the tax liability.”

Conclusion: Clarifying Set-off Tax Concerns Post CIRP Expiry

The NCLAT’s judgment clarified that the moratorium under Section 14 of the IBC continues until the liquidation order is passed, preventing creditors from setting off or adjusting tax refunds against dues during this period. The tribunal also reaffirmed that the realization of security interests by secured creditors is permissible only after the commencement of liquidation proceedings. Furthermore, the Income Tax Department cannot claim the status of a secured creditor merely by virtue of being a government authority.

Key Takeaways

– The moratorium under Section 14 of the IBC remains in effect until the liquidation order is passed or the resolution plan is approved.

– Secured creditors can only realize security interests after the liquidation proceedings commence.

– The Income Tax Department does not automatically qualify as a secured creditor.

For further details, you can refer to here.

[Full Judgement]

The post Can Income Tax Dept. Set-Off or Realize Secured Assets During Interregnum Period, Expiry of CIRP Period, and Initiation of Liquidation? appeared first on Bhatt & Joshi Associates.

Introduction

The treatment of loose sheets found during survey and search operations by the Income Tax Department has been a subject of legal scrutiny. These sheets often contain notations, calculations, and other entries that are not part of the regular books of accounts. This article aims to explore the evidentiary value of such loose documents, the relevant provisions of law, and the application of the Latin doctrine “noscitur a sociis” in interpreting them.

Evidentiary Value of Loose Sheets

Supreme Court’s Stance

The Hon’ble Supreme Court in the case of CBI v. V.C. Shukla has ruled that loose documents have no evidentiary value unless corroborated by other independent and reliable evidence.

High Court and ITAT Rulings

Similarly, the Delhi High Court in CIT vs. Smt. Sunita Jain (2010) 327 ITR 666 (Del) and the ITAT in ACIT v. Ganpati Developers ITA No. 1348/JP/2018 have reinforced that loose sheets are not conclusive evidence by also echoing similar sentiments, further solidifying the position that loose sheets are not conclusive evidence.

Burden of Proof

The onus is on the Income Tax Department to establish the authenticity and veracity of the loose documents. Additions made on the basis of these sheets without corroborative evidence are not sustainable.

Statutory Provisions

Section 132(4A) of the Income Tax Act, 1961, and Rule 112(2) set the time limits for the retention of seized documents, which includes loose documents. These provisions must be adhered to strictly to maintain the legality of the search and seizure operation.

Definition of Books of Accounts

Section 2(12) of the Income Tax Act, 1961, provides a comprehensive definition of what constitutes books of accounts. Loose sheets do not fall under this definition and thus cannot be treated as formal records of the assessee.

Application of the Doctrine “Noscitur a Sociis”

Case Law

In the case of Commissioner of Income Tax v. Bharti Cellular, the doctrine was applied to interpret the term ‘technical services’ used in Section 194J of the Income Tax Act, 1961.

Implication for Loose Sheets

The doctrine does not absolve the department from the burden of proof. Additions based on loose sheets still require corroborative evidence to be sustainable.

Conclusion

Loose sheets found during survey and search operations are not conclusive evidence of undisclosed income or transactions. They must be corroborated by other material evidence to establish their authenticity and veracity. The Latin doctrine “noscitur a sociis” serves as a rule of interpretation but does not alleviate the department’s burden of proof. 

The post Legal Implications of Loose Sheets in Income Tax Survey and Search Operations appeared first on Bhatt & Joshi Associates.