In a significant judgment with far-reaching implications for the interplay between insolvency law and taxation in India, the Gujarat High Court has ruled that penalty proceedings under Section 270A of the Income Tax Act, 1961, cannot be initiated or continued once a resolution plan under Section 31 of the Insolvency and Bankruptcy Code (IBC), 2016, has been duly approved by the adjudicating authority. The case involved the petitioner, Dishman Carbogen Amcis Limited, which had emerged as a successful resolution applicant in the corporate insolvency resolution process (CIRP) of Viona Pharmaceuticals Private Limited. The resolution plan had already been approved by the National Company Law Tribunal (NCLT) under Section 31 of the IBC. However, despite this, the Income Tax Department sought to initiate penalty proceedings under Section 270A of the Income Tax Act, which deals with penalties for under-reporting and misreporting of income.
The petitioner challenged these penalty proceedings, arguing that once the resolution plan was approved by the adjudicating authority, all claims, including those arising under the Income Tax Act, stood extinguished in terms of the binding effect created under Section 31 of the IBC. The Gujarat High Court, in its detailed analysis, agreed with the petitioner and quashed the penalty orders issued by the Income Tax Department. The court underscored that the IBC is a complete code in itself, and its provisions have an overriding effect over other laws, including the Income Tax Act, by virtue of Section 238 of the IBC. It held that once a resolution plan is approved, it is binding not only on the corporate debtor and its employees but also on the Central and State Governments and any local authority that may have claims against the corporate debtor.
The High Court observed that the objective of the IBC is to ensure the revival and rehabilitation of financially distressed companies by providing a clean slate to the successful resolution applicant. Allowing penalty proceedings to continue after approval of the resolution plan would run contrary to the spirit of the IBC, as it would not only affect the viability of the resolution plan but also disincentivize potential resolution applicants. The Court highlighted that once a claim is not part of the approved resolution plan, it cannot be enforced subsequently, and any such action would be barred under law.
Moreover, the judgment reinforces the supremacy of the IBC over tax statutes in matters concerning insolvent entities and confirms that the doctrine of “clean slate” is essential to the resolution process. The Gujarat High Court’s ruling aligns with previous judgments by the Supreme Court, such as Ghanashyam Mishra and Sons Pvt Ltd v. Edelweiss Asset Reconstruction Co Ltd, where it was categorically held that all claims not included in the approved resolution plan shall stand extinguished.
This decision by the Gujarat High Court provides further legal clarity and protection to resolution applicants, ensuring that they are not burdened with past liabilities which were not disclosed or dealt with during the CIRP. It strengthens the framework of the IBC and enhances the ease of doing business by preventing unforeseen liabilities post-resolution.
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