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The present write-up deals with continuation of assessment in specific cases of voluntary liquidation, where the company ceases to exist and not with cases of succession of business.

Voluntary liquidation, in common parlance, can be defined as a process whereby the members of a solvent company decide to put an end to the business carried on by them by liquidating the assets owned by the company.

Section 59 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) read with the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017, deals with voluntary liquidation of companies. On the other hand, under the Income Tax Act, 1961 (‘Act’), voluntary liquidation has been dealt with under Section 178 of the Act. In terms of this Section, the provisions of IBC will supersede the provisions of the Act. Further, under the proviso to Section 178(3) of the Act, it has been stated that the claims made by secured creditors would assume priority over the claims made by the Income-tax Department, which has been classified as an operational creditor[1].

In terms of available judicial precedents, the statutory dues which come within meaning of ‘operational debt’ can be claimed against corporate debtor in liquidation only under the provisions of IBC. Like other operational debts, the statutory claims are necessarily to be lodged with the liquidator and will be dealt in terms of Section 59 of IBC. Once the Adjudicating Authority has approved the liquidation, any further claim will stand frozen and will be binding on everyone including the Central Government, any State Government or local authority[2].

In this background, subject to the exceptions of material irregularity or fraud in IBC proceedings, post voluntary liquidation of the company, continuation of assessment or reassessment proceedings or raising consequential tax demand by the Assessing Officer (on a standalone basis without any challenge qua the IBC proceedings) may be argued to be only an academic exercise and could be subject to challenge before the Constitutional Court(s)[3].

However, the taxpayers should ensure strict compliance of the procedure prescribed under the provisions of the Act as well as IBC. Timely notification / intimation regarding liquidation of the company should also be made to their jurisdictional Assessing Officer to avoid any possible fallouts with the Revenue.

[1] Principal Director General of Income-tax (Admn. & TPS) v. Synergies Dooray Automotive Ltd., [2019] 103 taxmann.com 361 (NCL-AT) /[2019] 153 SCL 77 (NCL-AT), dated March 20, 2019; Seth Thakurdas Khinvraj Rathi v. Cai Refineries Ltd., [2019] 108 taxmann.com 409 (NCL-AT), dated May 14, 2019.

[2]Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd., [2021] 126 taxmann.com 132 (SC); Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, [2019] 111 taxmann.com 234 (SC); Murli Industries Limited v. Asstt CIT (Bom), in Writ Petition Nos. 2948 & 2965 of 2021, dated December 23, 2021; Raman Roadways (P) Ltd. v. State of Maharashtra, (2021) 229 Comp Case 286 (Bom).

[3] Ultra Tech Nathdwara Cement Ltd. v. Union of India, [2020] 116 taxmann.com 152 (Rajasthan).

WRITTEN BY

For further information, please contact:

India – Ajay Bahl, Co Founder & Managing Partner, AZB & Partners,
ajay.bahl@azbpartners.com

Ajay Bahl is a Co-Founder and Managing Partner of AZB & Partners, with over 30 years of M&A experience and a range of clients including leading Indian business houses, multinational corporations and international organizations. He has been described in Chambers Asia Guide Asia’s Leading Lawyers for Business as “a figure who inspires the greatest confidence in his clients”. He has advised on varied M&A related issues including transaction structuring, tax, operational efficiencies and regulatory issues for several major corporate acquisitions, private equity investments and takeovers.

Mr. Bahl’s M&A expertise is strengthened by his background in tax accountancy and litigation. He qualified as a chartered accountant in 1978 from the Institute of Chartered Accountants of India, prior to obtaining his law degree in 1985 from the University of Delhi. He has served as an independent expert on behalf of the Government of India on accounting and tax matters before the International Court of Justice at The Hague. He is also known his for successful representation as co-counsel with a leading US law firm in litigations for multinational defendants in the State Supreme Court and the District Courts of New York.  Mr. Bahl has conducted a significant arbitration as co-counsel between large US companies.

Mr. Bahl has gained recognition for his ability to lead complex M&A transactions with strong commercial insight and a specialist tax law perspective. The Asia Pacific Legal 500 named Mr. Bahl a leading attorney in the field of M&A and he is recognized by Chambers & Partners for being extremely well respected in India and overseas as an acknowledged point of reference for complex points of law. The Tax Directors Handbook has listed him as one of the “world’s leading tax advisors”, while Chambers Global as well as Chambers Asia Pacific have named him a Star Individual for M&A. He was also named a leading tax attorney by IFLR1000, and recognized as a Leading Lawyer for M&A in 2013 and 2014 by International Who’s Who Legal.

Mr. Bahl’s experience in M&A encompasses various industries and sectors including telecommunications, broadcasting and print media, financial services and information technology. He is respected by, and has established relationships with various industry associations in India. He is a member of the Confederation of Indian Industry (CII) Economic Growth and Investments Council since 2012-13. He has also made a number of presentations and communications to the government of India and its regulatory bodies to clarify and streamline various issues of law and policy affecting mergers and acquisitions in India.

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