Can Indian Tax Authorities Recover Dues After a Company Completes Corporate Insolvency Resolution Process
Analyses whether statutory pre-deposits made by a corporate debtor during CIRP, being procedural security rather than admission of liability, should be refunded to the successful resolution applicant upon approval of a resolution plan and extinguishment of unclaimed dues.
INSOLVENCY AND BANKRUPTCY CODELAW OF TAXATION
When posed with such a question the answer usually has been “no, because Section 31 extinguishes claims not part of the resolution plan.” But to understand how this area of law actually works we need to look into legal precedents nevertheless, tax authorities try to recover dues despite the presence of a settled position of law.
The insolvency and Bankruptcy Code, 2016 (“IBC”) in India is a transformative legal framework designed to address financial distress by prioritising resolution, asset value maximization and credit availability. Thereby, disposing of a corporate debtor’s assets during the Insolvency Resolution process which follows a statutory mechanism under Section 53 of the IBC also known as “Waterfall Mechanism”. This method prioritises various claims, including insolvency resolution costs depending upon secured, unsecured, operational or financial debtors. In this mechanism, government claims, including tax dues have now been categorised as operational debts and therefore given a lower priority in the repayment hierarchy. It is also interesting that the IBC has an overriding effect on tax laws under Section 238 of the IBC wherein the legislatures have emphasised the IBC would prevail over any other inconsistent provisions in other law following the principle of “Generalia specialibus non derogant”.
The relationship between tax and IBC is governed through various complex legal judgements, One of the such cases is Om Prakash Agarwal v. Chief Commissioner of Income Tax Company Appeal (Insolvency) No. 624 of 2020, where 1% tax deductions disrupted the IBC’s waterfall mechanism, thereby affecting government dues priority. Further, this decisions aligns with the Leo Edibles & Fats Ltd. v. The Tax Recovery Officer, IT Dept (2018) 407 ITR 369, wherein it was held that the Tax Recovery Officers cannot claim priority based solely on the pre-liquidation orders. Through various cases, The National Company Law Tribunal (“NCLT”) have clarified that entities owed dues are “operational creditors”, but their claims does not prevail secured creditors. As for 2026, there is still need for Tax laws such as GST and other state laws to come up with provisions and reforms addressing the need of business transfers during resolution.
Clean Slate Doctrine: The General Rule
Under the Section 15(1) of IBC, when the Corporate Insolvency Resolution Process (CIRP) initiated the Interim Resolution Professional (IRP) is obligated to issue an immediate public announcement within three days of their appointment. This announcement must contain all the details about the Corporate Debtor, the deadline for claim submissions etc... Considering the challenges which might arise during this process government introduced the concept of a ‘moratorium period’ under Section 14 of the IBC wherein any judicial proceedings either for recovery or transfer of assets are prohibited against the corporate debtor. Thereafter, once a resolution plan is approved by the NCLT under Section 31(1) of IBC, all the claims that are not part of the plan stands extinguished also known as ‘Clean Slate Doctrine’. The section includes statutory dues owed to Central Government, State Governments, or any local authorities.
Persistent efforts of Tax Authorities
Even after declaring the moratorium period, the taxpayers continue to receive notices from tax departments, including reassessment notices under various tax laws such as state VAT, CGST laws. In response to these issues, The Hon’ble Supreme Court has settled this comprehensively in Ghanashyam Mishra and Sons v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 65 that the legislative intent and objective behind the IBC Code, 2016 is to extinguish past liabilities so that the Successful Resolution Applicant is not burdened with the past of the Corporate Debtor. There are ninety days window for the creditors to submit their claims of the resolution plan. In omission of which no person should be entitled to initiate or continue any proceedings with respect to the claims thereby extinguishing such a right. The economic objective of corporate insolvency resolution mechanism is that once the resolution applicant successfully takes over the business of the corporate debtor, bringing in undecided claims which are not even part of the approved resolution would amount to hydra headed claims. Similar was laid down in the case of Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 657, preventing the above situation, the court stated that it would be unfair for the resolution applicant to suddenly face undecided claims after the approval of the plan, thereby obstructing their ability to run the corporate debtor’s business.
While the above precedents are in favour of the companies by discharging them with tax liabilities. The Hon’ble Supreme Court has also held in State Tax Officer v. Rainbow Papers Ltd, 2022 SCC OnLine SC 1162 that prioritising tax or statutory dues depends on the specific language of each statute upholding the priority of the state under the Gujarat VAT Act.
Are Pre-deposits refundable?
Voluntary Pre-Deposits
A pre-deposit is technically a payment under protest towards an unconfirmed liability. It can be both voluntary as well as mandatory statutory pre-deposits. A voluntary pre-deposit usually happens during the “investigation or assessment” stage to either avoid immediate harsh measures like a freezing of accounts or for saving massive amounts in cumulative interest. It can also be deposited as a partial amount to show good faith and attempt to reduce potential penalties. Hence there is no specific provisions to deposit an amount mandatorily to start an appeal as it was laid down by the Hon’ble High Court of Calcutta in Tata Steel limited v. State of U.P & Ors .2025:CHC-AS:2066, Wherein the court examined Section 35F of the Central Excise Act, 1944 (both pre and post 6.08.2014 amended versions).Since CESTAT had waived the requirement of pre-deposit for BSL's appeals and merely stayed recovery of penalty, the Court held there was no mandatory pre-deposit required to maintain these appeals. Therefore, the reversal of CENVAT credit made by BSL under protest was voluntary and not a mandatory statutory pre-deposit within the meaning of pre-amended Section 35F since waiver of pre-deposit was sought for and granted.
Involuntary Statutory Pre-deposits
A involuntary mandatory statutory pre-deposits are paid strictly under protest purely as a conditional security threshold to satisfy a procedural maintainability bar. In simple words, it is to say the authorities that “we are paying this not because we are guilty but because it is mandatory statutory requirement and the amount will be in protest until the final judgement”. The Hon’ble Supreme Court while interpreting section 31 of Insolvency and Bankruptcy Code, 2016 in the case of Ruchi Soya Industries Limited and ors. v. Union of India and ors. (2022) 6 SCC 343 relying on Ghanashyam Mishra & Sons, observed that if the tax authorities does not lodge the claim after the public announcements were issued under section 13 and 15 of IBC, then as on the date on which the resolution plan was approved by the National Company Law Tribunal, all claims thereafter will be frozen and no claims which are not part of the resolution plan will survive. Therefore, the mandatory pre-deposit amount deposited by the corporate debtor at the time of admission of the appeal shall be refunded to the company itself.
Conclusion and Recommendations
To wrap things up, where Tax laws want the old dues to be cleared first, IBC pays the creditors in a fixed order therefore implying both laws affect the business differently. The answer to the above question would be “it depends and not a straight away no” at least until the stakeholders take protective measures to harmonise the tax laws with IBC and clarify under what circumstances the dues are recovered explicitly in the legal framework.
JiyaGoyal©2025
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