Court Rules Reassessment Under Sections 148A and 148 of Income Tax Act Violates Moratorium under Section 14 and Approved Resolution Plan under Section 31 of IBC
In a landmark judgment delivered on August 21, 2026, the Calcutta High Court, presided over by Justice Smita Das De, ruled in favor of McNally Bharat Engineering Co. Ltd, quashing the reassessment proceedings initiated against the company by the Income Tax Department for the assessment year 2017-18. The court held that initiating reassessment proceedings under Sections 148A(b), 148A(d), and 148 of the Income Tax Act, 1961, against a corporate debtor undergoing Corporate Insolvency Resolution Process (CIRP) violates the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code (IBC), 2016, and runs afoul of the binding effect of the approved resolution plan under Section 31 of the IBC.
The petitioner, McNally Bharat Engineering, had been undergoing CIRP following an order by the National Company Law Tribunal (NCLT), Kolkata Bench, initiated by Bank of India. The NCLT admitted the insolvency petition on April 29, 2022, and approved a resolution plan submitted by BTL EPC Limited on December 19, 2023, which clearly stipulated that no proceedings or inquiries could be initiated or continued against the petitioner for transactions prior to the effective date of February 17, 2024.
Despite this, the Income Tax Department issued notices and orders between March and April 2024, alleging suspicious transactions involving shell companies and initiating reassessment proceedings under the Income Tax Act. The petitioner challenged these actions, contending that the reassessment was barred by the moratorium under Section 14 of the IBC and the terms of the resolution plan approved by the NCLT.
The court meticulously analyzed the submissions and documents, noting that the tax authorities failed to conduct the mandatory preliminary inquiry under Section 148A(a) of the Income Tax Act before proceeding with reassessment. The authorities relied solely on external reports without applying independent mind, rendering the proceedings arbitrary and illegal.
Furthermore, the court emphasized the overriding effect of the IBC over the Income Tax Act as provided under Section 238 of the IBC. The moratorium under Section 14 and the approved resolution plan under Section 31 effectively prohibit any proceedings against the corporate debtor relating to the period prior to the effective date in the resolution plan. The court relied on the Supreme Court's ruling in Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. (2021) which confirmed that claims not part of the approved resolution plan stand extinguished and cannot be pursued.
The judgment also pointed out procedural violations by the tax authorities, including failure to provide the petitioner access to third-party statements and materials, thereby breaching principles of natural justice. Additionally, the reassessment proceedings were initiated beyond the statutory limitation period, further invalidating the proceedings.
Consequently, the court quashed the notices and orders issued under Sections 148A(b), 148A(d), and 148 of the Income Tax Act, and all consequential proceedings. The Income Tax Department was directed not to initiate or continue any proceedings against the petitioner in contravention of the moratorium and the resolution plan.
This decision is expected to provide significant clarity on the interaction between the Insolvency and Bankruptcy Code and the Income Tax Act, reinforcing the sanctity of the moratorium under the IBC and providing protections to corporate debtors undergoing CIRP from tax reassessment proceedings that violate the moratorium or approved resolution plans.
Bottom Line:
Reassessment proceedings under Sections 148A(b), 148A(d), and 148 of the Income Tax Act, 1961, initiated against a corporate debtor undergoing Corporate Insolvency Resolution Process (CIRP) are illegal if they contravene the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016, and the approved resolution plan under Section 31.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Sections 14, 31, 238; Income Tax Act, 1961 Sections 148A(b), 148A(d), 148, 143(1)
McNally Bharat Engineering Co. Ltd v. Union of India, (Calcutta) : Law Finder Doc Id # 2980742
