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Quashes Income-Tax Reassessment Against McNally Bharat Citing IBC Resolution Plan
In a significant ruling that underscores the primacy of resolution plans under the , the has quashed income-tax reassessment proceedings initiated against . The Court held that the tax authorities failed to satisfy the mandatory statutory conditions under , and acted in blatant disregard of the company’s resolution plan approved by the . The decision reinforces the binding nature of NCLT-approved plans and the of the IBC over inconsistent laws.
Background: Corporate Insolvency and Tax Notice
McNally Bharat filed its income-tax return for in , declaring a loss of ₹747.68 crore. The return was processed in , and a refund of ₹19.49 crore was sanctioned. Subsequently, the company underwent the Corporate Insolvency Resolution Process (CIRP) following an application by . In , the NCLT approved a resolution plan submitted by , which included a clause barring any proceedings or inquiries against McNally Bharat for the period before its effective date.
Despite this, the issued a notice in alleging bogus sales worth ₹164.98 crore involving and certain shell companies. The Department thereafter passed an order under Section 148A(d) permitting reassessment and issued a notice under Section 148 of the Income Tax Act. The company challenged these actions before the .
Arguments: Parties Weigh In
Advocates and , representing McNally Bharat, contended that the reassessment proceedings violated the approved resolution plan and the IBC, which overrides all inconsistent laws under Section 238. They argued that the alleged transactions were fully disclosed in audited financial statements and that the tax authorities had neither conducted a proper preliminary inquiry nor considered the company’s objections.
On the other hand, Advocate , appearing for the Revenue, submitted that the reassessment was based on credible information concerning bogus transactions. The Revenue argued that the resolution plan did not prohibit proceedings initiated before the appointed date and relied on the judgment in to assert that insolvency proceedings did not extinguish the Department’s reassessment powers.
Court’s Findings: Procedural Lapses and Overriding IBC
Justice Smita Das De allowed the writ petition, setting aside the notice, the order, and all consequential proceedings. The Court found that the tax authorities had failed to conduct the preliminary inquiry required under Section 148A(a) of the Income Tax Act. Instead, they relied entirely on external reports without independently examining the material, and denied the company complete access to the third-party statements relied upon. This denial violated .
The Court further held that the NCLT-approved resolution plan was binding on all stakeholders, including the , and had under . Relying on the ’s decision in , the Court observed that claims not included in the approved plan stand extinguished, and proceedings concerning pre-approval statutory dues cannot continue.
In a key observation, the Court stated:
“On perusal of the documents brought before the Court and considering the submissions made on behalf of the parties, this Court is of the view that the initiation of reassessment proceedings under Sections 148A(b) and 148A(d) of the and the subsequent issuance of the notice under Section 148, were in violation of the under the Act. The respondents failed to conduct a preliminary inquiry under Section 148A(a) and acted solely on external reports without demonstrating independent application of mind, thereby rendering the proceedings .”
Additionally, the Court noted that the reassessment was beyond the , further vitiating the proceedings.
Legal Analysis: The Interplay Between IBC and Tax Laws
The judgment marks a clear application of the doctrine of pari passu and the under the IBC. By relying on Ghanashyam Mishra , the Court reinforced that once a resolution plan is approved by the NCLT, all claims, including statutory dues, must be dealt with in accordance with the plan. The cannot unilaterally reopen assessments for periods prior to the effective date, especially when the plan expressly bars such proceedings.
The ruling also highlights the importance of adhering to procedural safeguards before issuing notices under Section 148. The failure to conduct a preliminary inquiry and the reliance on external reports without independent application of mind rendered the entire reassessment process arbitrary. The Court’s emphasis on natural justice—denying the assessee access to material relied upon—further strengthens the taxpayer’s right to a fair hearing.
Impact on Legal Practice
This decision sends a strong message to tax authorities and other statutory bodies that IBC resolution plans must be respected. For corporate insolvency practitioners, the judgment provides clarity that resolution plans have , and any attempt to pursue pre-resolution claims outside the plan will be struck down. Tax lawyers can cite this case to challenge reassessment notices issued against companies that have undergone CIRP, particularly where the plan contains a clause barring proceedings.
For the , the ruling serves as a reminder to conduct thorough preliminary inquiries before reopening assessments and to ensure compliance with Section 148A. The decision may also lead to increased litigation where the Department attempts to resurrect claims after a resolution plan is approved.
Conclusion
The ’s judgment in the McNally Bharat case is a landmark reaffirmation of the primacy of the IBC over other statutes. By quashing the reassessment proceedings on grounds of procedural failure and conflict with the resolution plan, the Court has protected the sanctity of the insolvency resolution process. The ruling will likely influence future disputes between tax authorities and companies undergoing insolvency, ensuring that the finality of approved plans is not undermined by belated statutory actions.
