Does the Moratorium Prevent the Assessment of Arrears under Other Statutes? – By Chidambaram Ramesh

Does the Moratorium Prevent the Assessment of Arrears under Other Statutes?

– By Chidambaram Ramesh [Author of The Law of Employees’ Provident Funds – A Case-law Perspective]

The Calcutta High Court recently quashed an assessment order issued under Section 143(3) read with Section 263 of the Income Tax Act, 1961, stating that the assessing officer committed a grave error in proceeding to complete the assessment during the moratorium declared under Section 14(1)(a) of the I & B Code, which expressly prohibits the institution or continuation of pending suits or proceedings against corporate debtors. [SREI Equipment Finance Ltd. vs. Additional/Joint/Deputy/Assistant Commissioner of Income Tax and others.][1]

This decision presents a significant legal issue as to whether the proceedings undertaken under different laws to assess the statutory arrears payable by corporate debtors are within the definition of “suits or proceedings” as defined in Section 14(1)(a) of the I & B Code. In other words, whether the words “suits and proceedings” used in Section 14(1)(a) of the Code should be interpreted to mean “all legal proceedings” or be limited to mean a specific type of legal proceeding, such as “debt recovery action,” that may have an effect of dissipating or diminishing the corporate debtor’s assets during the period of its insolvency resolution.

Meaning of the terms “Suits and Proceedings.”

The issue of interpretation of the words “Suits and Proceedings” appearing in Section 14(1)(a) of the I & B Code came for the judicial scrutiny of the Delhi High Court in the case of Power Grid Corporation of India Ltd. vs. Jyoti Structures Ltd.[2]  The Court observed that the term “proceedings,” as is mentioned in Section 14(1)(a) of the Code, is not preceded by the word “all” to indicate that the moratorium would apply to all the proceedings against the corporate debtor. The term ‘including’ is clarificatory of the scope and ambit of the word ‘proceedings.’ For instance, in the case of Canara Bank vs. Deccan Chronicle Holdings Ltd. [2017] ibclaw.in 25 NCLAT, the NCLAT held that the moratorium does not apply to the Writ Proceedings instituted under Article 32 or 226 of the Constitution of India.

Since the Insolvency & Bankruptcy Code 2016 is new legislation, the judicial pronouncements of the higher judicial forums having precedential value on the moratorium issues are few. However, Section 14 of the I & B Code is analogous (pari materia) to Section 446 of the 1956 Companies Act. We may, therefore, conveniently make use of the relevant judgments under the Companies Act.

Section 446 of the Companies Act, 1956 reads as follows:

“Section 446. —Suits Stayed on Winding-up Order

(1) When a winding-up order has been made, or the Official Liquidator has been appointed as provisional liquidator, no suit or other legal proceedings shall be commenced, or if pending at the date of the winding-up order, shall be proceeded with, against the company, except by leave of the Court and subject to such terms as the Court may impose.

(2) The Court which is winding up the company shall, notwithstanding anything contained in any other law for the time being in force, have jurisdiction to entertain or dispose of

(a) any suit or proceeding by or against the company;

(b) any claim made by or against the company (including claims by or against any of its branches in India);

(c) any application made under section 391 by or in respect of the company;

(d) any question of priorities or any other question whatsoever, whether of law or fact, which may relate to or arise in course of the winding up of the company;”

Whether such suit or proceeding has been instituted or is instituted, or such claim or question has arisen or arises, or such application has been made or is made before or after the order for the winding up of the company, or before or after the commencement of the Companies (Amendment) Act, 1960.] (65 of 1960)

In S.V. Kandeakar vs. V.M. Deshpande and another,[3] the Supreme Court held that the assessment proceedings for computing the amount of tax must be held to be such other legal proceedings as can be started or continued without the leave of the Liquidation Court under Section 446 of the Companies Act.

The Supreme Court endeavoured to explain why the income tax procedure would not fall under Section 446(2) of the Companies Act. According to the Supreme Court, the winding-up court should take all matters that the Company Court can dispose of expeditiously without exposing the company to costly litigation in other courts. In other words, if the Company Court lacks jurisdiction over a particular subject, it cannot be brought within the scope of Section 446(2) of the Companies Act. The Income Tax Act is an independent piece of law. Statutory authorities or assessing officers are vested with the authority to levy the tax. The Company Court has no jurisdiction over assessment matters. In light of this consideration, the Supreme Court ruled that Section 446(2) of the Companies Act could not prevent assessment proceedings under the Income Tax Act.

 The Supreme Court observed:

The Income Tax Act is, in our opinion, a complete court, and it is particularly so with respect to the assessment and re-assessment of income tax, with which alone we are concerned in the present case. The fact that after the amount of tax payable by an assessee has been determined or quantified, its realisation from a company in liquidation is governed by the Act because the income tax payable also being a debt has to rank pari passu with other debts due from the company does not mean that the assessment proceedings for computing the amount of tax must be held to be such other legal proceedings as can only be started or continued with the leave of the liquidation court under Section 446 of the Act. The liquidation court, in our opinion, cannot perform the functions of Income Tax Officers while assessing the amount of tax payable by the assessee even if the assessee be the company which is being wound up by the Court.

“The language of Section 446 must be so construed as to eliminate such startling consequences as investing the winding up Court with the powers of an Income Tax Officer conferred on him by the Income Tax Act, because in our view the legislature could not have intended such a result.

The liquidation court would have full power to scrutinise the claim of the Revenue Department after income tax has been determined and its payment demanded from the Liquidator. It would be open to the liquidation court then to decide how far under the law the amount of income tax be determined by the Department should be accepted as a lawful liability on the funds of the company in liquidation.

The winding-up Court under Section 446(2) is to take up all matters which the company court itself can conveniently dispose of rather than exposing a company which is under winding up to expensive litigation in other courts. This being the object of Section 446(2), the expression “proceeding” was given a limited meaning as it is obvious that a company court cannot dispose of an assessment proceeding in Income Tax or a criminal proceeding.

Again, in Central Bank of India vs. Elmot Engineering Co.,[4] the Supreme Court reiterated the same proposition of law. Section 446(2) aims at safeguarding the assets of a company in winding up against wasteful or expensive litigation as far as matters which could be expeditiously and cheaply decided by the Company Court.

Quasi-Judicial Proceedings are not barred

In M/s Embassy Property Developments Pvt. Ltd. vs. The State of Karnataka and others [2020] ibclaw.in 12 SC, the Supreme Court pointed out that the interim resolution professional or the resolution professional, as the case may be, is obliged to represent and act on behalf of the Corporate Debtor with third parties. He should exercise rights for the benefits of the Corporate Debtor in judicial and quasi-judicial proceedings whenever the need arises at the time of taking control and custody of an asset over which the corporate debtor has ownership rights or after that. This proposition of law shows that the inquiry authority can summon the IRP/RP for the quasi-judicial inquiries under various statutes to represent the employer’s case (corporate debtor). The Supreme Court further clarified that wherever the corporate debtor has to exercise his rights in a judicial or quasi-judicial proceeding, he must do so. He cannot short circuit the same and bring the claim directly before the NCLT taking advantage of Section 60(5) of the I & B Code. Many statutes provide for a detailed mechanism for the assessment of statutory dues; for example, Section 7-A of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, Section 45-A of the Employees’ State Insurance Act, 1948, Sections 144 to 148 of the Income Tax Act, 1961 and so on. It could be interfered from the Supreme Court ruling that the quasi-judicial proceedings are not barred by the moratorium declared under Section 14(1)(a) of the I & B Code.

Conclusion

The ruling of the Calcutta High Court in the SREI Equipment Finance Ltd. (supra) case is in direct violation of the Supreme Court precedent, both in language and spirit. The decision to suspend the assessment proceeding during the moratorium period would effectively postpone the assessment, which may ultimately result in operational creditors being unable to collect their dues. This violates the law and natural justice’s fundamental precepts. The judgment needs a re-look in light of the Supreme Court’s rulings.

Reference:

[1] (2022) ibclaw.in 112 HC

[2] (2017) ibclaw.in 12 HC

[3] (1972) 1 SCC 438

[4] (1994) 4 SCC 159

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