Court holds that once NCLT approves a corporate debtor's resolution plan, past statutory dues, including tax liabilities, stand extinguished; fresh reassessment for pre-approval period impermissible despite new information
In a significant ruling delivered on October 16, 2026, the Bombay High Court (Division Bench) quashed the Income Tax Department's reassessment proceedings initiated against Swan Defence and Heavy Industries Ltd. (formerly Reliance Naval and Engineering Ltd.) for the assessment year 2020-21. The Court held that once the National Company Law Tribunal (NCLT) approves a resolution plan under the Insolvency and Bankruptcy Code (IBC), all past claims, including statutory dues and tax liabilities prior to approval, stand extinguished and no fresh reassessment can be initiated against the corporate debtor for the pre-approval period, even if the department receives new information alleging fraudulent transactions.
Background and Contentions:
The Income Tax Department issued a show cause notice under Section 148A(1) and subsequent reassessment notices under Sections 148A(3) and 148 of the Income Tax Act, 1961 (IT Act), to Swan Defence for AY 2020-21, based on fresh information received from the Enforcement Directorate alleging fraudulent transactions, reversal trades with shell entities, and tax evasion.
Swan Defence challenged the notices, contending that the reassessment was barred as the NCLT had already approved a resolution plan submitted by Hazel Mercantile Ltd. on December 23, 2022, under Section 31 of the IBC. The resolution plan's approval extinguished all past claims, including statutory dues. The petitioner also pointed out that earlier reassessment proceedings for the same AY had been quashed by the Court in August 2025.
The Income Tax Department argued that the reassessment was necessary to verify the fresh information and that reopening the assessment did not equate to recovery of past claims. The department emphasized that the corporate insolvency resolution process should not shield alleged fraudulent activities and that the proceedings were initiated in good faith to scrutinize suspicious transactions. The department also clarified that it was not seeking to fasten liability on the company at this stage, and action could be taken against former management if wrongdoing was established.
Court's Analysis:
The Court, after hearing both parties and examining the record, reiterated the binding precedent set by the Supreme Court in Ghanshyam Mishra & Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd. & Ors. [(2021) 9 SCC 657], and its own recent decision in Alok Industries Ltd. v. Assistant Commissioner of Income Tax [2024] 161 taxmann.com 285 (Bombay).
It was observed that the prior reassessment proceedings were already quashed by the Court for the same assessment year, and the fresh reassessment notice could not be sustained. Further, the Court held that the Income Tax Department could not proceed against the petitioner-company for the pre-approval period once the NCLT had sanctioned the resolution plan. The approval under Section 31 of the IBC extinguishes all past claims, including statutory dues, and no liability can be fastened on the corporate debtor for actions prior to the plan's approval.
The Court acknowledged the department's right to investigate alleged fraudulent transactions but clarified that such investigations cannot lead to reopening assessments or fasten liabilities on the corporate debtor post-resolution plan approval for the pre-approval period. However, the department remained free to initiate appropriate legal action against the erstwhile management responsible for any alleged irregularities.
Order:
The Bombay High Court quashed and set aside the show cause notice dated March 31, 2026, the order dated June 29, 2026, and the reassessment notice dated June 29, 2026, all issued under Sections 148A and 148 of the Income Tax Act for AY 2020-21. The writ petition filed by Swan Defence was allowed, with no orders as to costs.
Significance:
This judgment reinforces the principle that an approved resolution plan under the IBC provides protection to the corporate debtor against reopening of tax assessments for periods prior to the plan's approval. It also clarifies the scope and limits of Income Tax proceedings post-IBC resolution, balancing the interests of the revenue and the corporate debtor while preserving the rights of the department to pursue action against former management if warranted.
Bottom Line:
Income Tax - Reassessment under Sections 148A and 148 of Income Tax Act for period prior to approval of Resolution Plan under IBC - Once Resolution Plan is approved by NCLT, past claims including statutory dues stand extinguished and no liability can be fastened on corporate debtor for pre-approval period - Fresh information regarding alleged fraudulent transactions does not permit reopening against company for same assessment year - However, Department is free to take action in law against erstwhile management.
Statutory provision(s): Income Tax Act, 1961 Sections 148, 148A; Insolvency and Bankruptcy Code, 2016 Section 31
