The National Company Law Tribunal (NCLT), Kolkata, has ruled that tax authorities are permitted to continue assessment proceedings to determine the tax liability of a company undergoing liquidation, while simultaneously barring the initiation of penalty proceedings without express judicial leave. The order addresses a significant conflict between the taxing powers of the government and the protective moratorium framework mandated under the Insolvency and Bankruptcy Code (IBC), 2016. In a case involving Gujarat NRE Coke Limited, the bench clarified that while the determination of tax debt is a valid administrative function during liquidation, the issuance of show-cause notices for penalties represents a legal proceeding that violates the insolvency framework.

The dispute arose after Sumit Binani, the liquidator for Gujarat NRE Coke Limited, sought to quash an assessment order and accompanying show-cause notices issued by the Income Tax Department for the 2020-21 assessment year. The corporate debtor, which had been in liquidation since January 2018 following the failure of its Corporate Insolvency Resolution Process (CIRP), argued that the tax department’s actions were incompatible with the liquidation process. The liquidator contended that the IBC does not impose an obligation to file tax returns in the manner required by the Income Tax Act, citing earlier precedents.

Upon reviewing the matter, the tribunal examined whether the liquidator was required to file tax returns for a period post-dating his appointment. The bench noted that Rule 12AA of the Income Tax Rules, which explicitly authorizes liquidators to sign and verify returns, was introduced only in August 2021. Because the assessment year in question—2020-21—fell prior to this regulatory update, the tribunal concluded that the retrospective imposition of such a procedural requirement was not sustainable. However, the bench emphasized that this did not grant a blanket exemption for companies in liquidation from the assessment process itself.

Regarding the authority of tax bodies to conduct assessments, the tribunal distinguished between the quantification of tax liabilities and the initiation of coercive legal actions. Relying on established jurisprudence, the court observed that assessment proceedings are not fundamentally blocked by the liquidation process. As the tribunal stated: "The initiation and continuation of assessment proceedings by the Income Tax Department , for the purpose of determining the tax liability of the Corporate Debtor , cannot be said to be prohibited merely on account of the liquidation ." By interpreting Section 33(5) of the IBC , the bench concluded that the moratorium under the liquidation regime does not serve as an absolute shield against the administrative assessment of taxes by statutory authorities.

Distinguishing Penalties from Assessments

A critical divergence in the tribunal’s reasoning focused on the distinction between the assessment of tax liability and the imposition of penalties. The Income Tax Department had issued show-cause notices proposing penalty proceedings under Section 270A and Section 271AAC(1) of the Income Tax Act, 1961, alleging under-reporting and unexplained income. The tribunal analyzed the nature of these notices, noting that they function as the foundation for punitive legal actions.

The bench relied on the principle that "legal proceedings" under Section 33(6) of the IBC cover any investigative or inquiry process intended to enforce a remedy or impose a financial burden on the debtor's estate. The tribunal observed that because these penalty notices require the liquidator to answer allegations and face potential financial sanctions, they essentially function as the initiation of legal proceedings against the assets of the company in liquidation. The court noted that once a liquidation order is passed, any such action must be conducted with the leave of the adjudicating authority to ensure that the distribution of assets among creditors, as per the waterfall mechanism, remains undisturbed.

"Accordingly, we hold that the show-cause notices dated 19.02.2025 , insofar as they propose the initiation of penalty proceedings against the Corporate Debtor under Sections 270A and 271AAC(1) of the IT Act, are contrary to the Section 33(6) of the Code ," the tribunal recorded in its order. By quashing these specific notices, the bench affirmed that while statutory authorities may quantify debts, they cannot unilaterally initiate punitive processes that might divert funds from the liquidation estate without judicial oversight.

Implications for Future Liquidation Cases

This decision provides clarity on the extent of the tax department’s powers during the winding-up of a company. By permitting the assessment order to stand, the tribunal ensured that the state retains its right to prove its claim against the corporate debtor. Conversely, by setting aside the penalty notices, the bench reinforced the integrity of the liquidation estate, preventing authorities from depleting remaining resources through penalties that would otherwise rank lower in priority during the final distribution process prescribed by Section 53 of the IBC.

The ruling aligns with the broader objective of the insolvency framework, which prioritizes the collective interest of all stakeholders and secured creditors over individual enforcement actions by creditors or tax authorities. The decision clarifies that a liquidator’s role is primarily to protect the assets and complete the distribution process, which is often hindered when individual departments initiate independent punitive actions.

The tribunal ultimately allowed the liquidator’s application in part. While the assessment order for the financial year 2019-20 remains effective for the purpose of debt determination, the tax department is now precluded from pursuing penalty proceedings related to those assessment notices. This approach ensures that the Income Tax Department can submit its claim as a creditor, but it must adhere to the procedural requirements of the IBC rather than engaging in independent litigation that undermines the liquidation process. The registry has been directed to communicate the decision to all involved parties, ensuring the immediate cessation of the challenged penalty proceedings.