(First published on Linkedin)
In a recent ruling, the Income Tax Appellate Tribunal (ITAT) reinforced the overriding effect of the Insolvency and Bankruptcy Code, 2016 (IBC) over the Income Tax Act in matters concerning tax recovery during insolvency proceedings. The question before the ITAT whether tax recovery sought to be made by the revenue authorities against a corporate debtor undergoing liquidation was valid. Despite ongoing liquidation proceedings under the IBC, the tax authorities sought to enforce recovery actions. The ITAT held that once the liquidation process under the IBC is initiated, the recovery of tax dues must align with the IBC’s waterfall mechanism, effectively nullifying the revenue’s direct recovery efforts.
Key Takeaways:
1. Clarity on IBC Proceedings: The IBC has been clear from the start: its provisions override any other law that conflicts with its objectives. Yet, multiple tax authorities continue to pursue recovery actions independently, often overlooking the IBC’s mandate. The IBC has been clear from the start: its provisions override any other law that conflicts with its objectives. This ensures a uniform and predictable process, which is critical for maintaining the integrity and continuity of the debtor as a going concern, thereby maximizing value for all stakeholders.
2. Regulatory Override: In addition to tax, various judicial precedents have repeatedly emphasized that the IBC’s non-obstante clause in Section 238 overrides other legal provisions. Regulatory authorities cannot independently enforce claims outside the resolution framework approved by the NCLT. Failure to adhere could lead to void orders, confusion due to multiple proceedings, and elongated timelines.
3. Tax Recovery: It has been firmly established that tax dues, like any other unsecured debt, must follow the waterfall mechanism outlined in Section 53 of the IBC. This means tax departments must file their claims timely and await their turn in the distribution queue, and not assumed a privileged stance.