NCLT Ahmedabad Bars Income Tax Department From Adjusting Refund Against Pre-CIRP Dues During Moratorium

NCLT Ahmedabad Bars Income Tax Department From Adjusting Refund Against Pre-CIRP Dues During Moratorium

Moratorium Shield Prevails: NCLT Strikes Down IT Department's Refund Adjustment

The Ahmedabad bench of the National Company Law Tribunal (NCLT) has delivered a significant ruling reinforcing the protective ambit of the moratorium under the Insolvency and Bankruptcy Code (IBC) . The Tribunal held that the Income Tax Department cannot adjust an income-tax refund that crystallised after the commencement of the Corporate Insolvency Resolution Process (CIRP) against pre-CIRP tax dues during the subsistence of the statutory moratorium . The bench, comprising Judicial Member Shammi Khan and Technical Member Sanjeev Sharma, directed the Department to reverse an adjustment of ₹41.64 lakh and release the amount to the corporate debtor's account under the Resolution Professional 's control.

The Case: A Tax Refund Caught in Insolvency Proceedings

Demac Technologies Private Limited was admitted into CIRP on January 20, 2026 , following a petition filed by operational creditor Sarens Heavy Lift India Private Limited . The Income Tax Department held a pre-CIRP tax demand of ₹35.11 lakh for Assessment Year 2023-24 . Meanwhile, the corporate debtor's income-tax return for Assessment Year 2025-26 , filed before CIRP, was processed under Section 143(1) of the Income-tax Act on February 12, 2026 —after the insolvency commencement date —resulting in a refund of ₹56.07 lakh.

On February 13, 2026 , the Centralised Processing Centre issued a notice under Section 245 of the Income-tax Act proposing to adjust the refund against the outstanding pre-CIRP demand. The Department claimed that the then Interim Resolution Professional (IRP) communicated consent on March 2, 2026 . Relying on this, the Department on March 5, 2026 adjusted ₹35.11 lakh towards the principal tax demand and ₹6.53 lakh towards interest under Section 220(2), aggregating ₹41.64 lakh, and released only the balance of ₹14.43 lakh. The IRP subsequently objected to the adjustment and sought its reversal through multiple communications, later authorising legal proceedings through the Committee of Creditors .

Arguments: Consent or Coercion?

The Resolution Professional , Mr. Varun Anil Chopra , argued that the refund, having been determined after CIRP, constituted an asset or receivable of the corporate debtor. Adjusting it towards a pre-CIRP claim during the moratorium effectively amounted to recovery outside the collective insolvency process , violating Section 14 of the IBC . He emphasised that the Department had already submitted its claim in the CIRP and could not unilaterally appropriate assets.

The Income Tax Department countered that the adjustment was carried out in accordance with Section 245 of the Income-tax Act after due intimation and expiry of the response period. It relied heavily on the IRP's March 2 communication as a no-objection to the adjustment.

Legal Reasoning: IBC Overrides Income Tax Act

The NCLT clarified that it was not examining the correctness or quantum of the underlying tax demand. The sole question was whether the Department could recover pre-CIRP dues by appropriating a refund during the moratorium . The Tribunal invoked Section 238 of the IBC , which gives the Code overriding effect over inconsistent provisions in other laws, including the Income-tax Act .

Drawing on the Supreme Court 's ruling in Principal Commissioner of Income Tax v. Monnet Ispat and Energy Ltd. and Sundaresh Bhatt, Liquidator of ABG Shipyard Ltd. v. Central Board of Indirect Taxes and Customs , the bench distinguished between the determination of a statutory liability and its recovery. The former may continue, but recovery during the moratorium must conform to the IBC's collective mechanism.

The Tribunal found that the refund crystallised only after CIRP commenced and therefore formed part of the insolvency estate . The Department's action, by giving itself a preferential recovery , undermined the equal treatment of creditors and the object of value maximisation . The alleged consent from the IRP was held irrelevant, as "a statutory moratorium operates by force of law and cannot be waived or contracted out of so as to prejudice the collective rights of the creditors ."

Key Observations from the Bench

The judgment contains several pivotal observations:

"The fact that the refund related to a return filed for an assessment year preceding the commencement of CIRP does not alter the character of the receivable which crystallised only after commencement of CIRP. What is material for the present controversy is that the refund became payable/determined after the insolvency commencement date and was appropriated during the moratorium towards a pre-CIRP liability ."

"The operation of Section 245 is necessarily subject to Section 238 of the IBC to the extent of inconsistency."

"In substance and effect, the impugned action resulted in appropriation of an asset/receivable of the Corporate Debtor towards satisfaction of a pre-CIRP claim during the subsistence of the moratorium ."

Final Order: Refund Must Be Restored

The NCLT allowed the interlocutory application , setting aside the adjustment of ₹41.64 lakh. It directed the Income Tax Department to reverse the adjustment and credit the full amount to the corporate debtor's designated bank account under the RP's control within two weeks. The applicant is also entitled to statutory interest under Section 244A of the Income-tax Act , if admissible, as determined by the competent authority.

The Tribunal made clear that this order does not adjudicate the validity of the underlying tax demand. The Department remains free to pursue its claim of ₹35.11 lakh and other legally admissible amounts in accordance with the IBC. The ruling reinforces that during the moratorium , no statutory authority can unilaterally recover pre-CIRP dues by appropriating assets that form part of the insolvency estate .