Insolvency Approval Defeats Earlier Income Tax Demand: Analysis of Swastik Ceracon Ltd. Vs DCIT (Gujarat High Court)

Introduction

The Gujarat High Court in Swastik Ceracon Ltd. Vs DCIT has once again affirmed the overriding effect of the Insolvency and Bankruptcy Code, 2016 (IBC) over pre-existing income tax claims when a resolution plan is approved under Section 31.

The Court quashed an Assessment Order and corresponding Demand Notice issued for AY 2011-12 under the Income Tax Act 1961, after holding that all such pre-CIRP tax liabilities stood extinguished in view of the approved resolution plan. This decision reinforces the “clean slate” principle laid down by the Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta and Ghanshyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd.

This write-up presents a structured summary and analysis of the judgment, focusing on how income tax demands are treated once a resolution plan is sanctioned under the IBC.

Background Facts

Corporate Structure and Assessment Proceedings

  • Petitioner No. 1, Swastik Ceracon Ltd., is a company incorporated under the Companies Act 1956 on 31.01.2005, with its registered office in Gujarat, engaged in the ceramics and manufacturing sector.
  • Petitioner No. 2 is a director and shareholder of Petitioner No. 1.
  • For AY 2011-12, the assessee filed its return of income under the Income Tax Act 1961.

Initial Reassessment and Appeal

  • On 17.12.2018, while the company was still under the control of its original promoters, an Assessment Order was passed under Section 147 for AY 2011-12.
  • This reassessment resulted in a tax demand of ₹2,01,86,860.
  • The assessee challenged this order before the Commissioner of Income Tax (Appeals), Ahmedabad, by filing a statutory appeal.

Commencement of CIRP Under IBC

  • Subsequently, M/s. True Value Paper Co., an operational creditor, initiated insolvency proceedings by filing Company Petition (IB) No. 175 of 2018 under Section 9 of the Insolvency and Bankruptcy Code, 2016 before the National Company Law Tribunal, Ahmedabad Bench.
  • By order dated 15.01.2019, the NCLT:
    • Admitted the petition;
    • Commenced Corporate Insolvency Resolution Process (CIRP);
    • Declared moratorium under Section 14 of the IBC; and
    • Appointed an Interim Resolution Professional (IRP).

Public Announcement and Claims

  • On 29.01.2019, the IRP issued a public announcement under Section 13 and Section 15 of the IBC, read with Regulation 6 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
  • Through this announcement, all creditors, including:
    • financial creditors,
    • operational creditors, and
    • statutory authorities (such as the Income Tax Department),
      were invited to submit their claims.

Appointment of Resolution Professional and Approval of Resolution Plan

  • On 20.03.2019, the NCLT formally appointed the Resolution Professional to manage the affairs of the corporate debtor and conduct the CIRP.
  • During CIRP, a resolution plan was submitted by the successful resolution applicant, M/s. Ajita Sil Chem Private Limited.
  • This resolution plan was approved by the NCLT on 20.06.2022 in I.A. No. 428 of 2021 under Section 31 of the IBC.

Key Feature of the Approved Resolution Plan

The approved plan clearly stipulated that:

  • All liabilities, claims, and dues relating to periods prior to the “Appointed Date”, including those under the Income Tax Act 1961, would be waived and extinguished.
  • After approval, the plan was fully implemented and attained finality.

Communication to the Income Tax Department

  • On 01.07.2022, the Resolution Professional wrote to the Income Tax Department:
    • Informing them of the NCLT’s order approving the resolution plan; and
    • Specifically stating that under Section 31 of the IBC, all pre-CIRP claims and statutory dues not captured in the resolution plan stood permanently extinguished.

Despite this, income tax proceedings continued for AY 2011-12, ultimately leading to fresh reassessment and demand, which became the subject-matter of the writ petition.

Post-Resolution Income Tax Proceedings

Order of CIT(A) and Remand

  • On 27.11.2024, the Commissioner of Income Tax (Appeals) disposed of the pending appeal relating to the Assessment Order dated 17.12.2018.
  • The CIT(A) set aside the earlier reassessment order and remanded the matter to the Assessing Officer for fresh adjudication.

Fresh Notices Post-IBC Approval