Tribunal holds such adjustment violates the moratorium under Insolvency and Bankruptcy Code, 2016, directing reversal of Rs. 41.64 lakh set-off and release to Corporate Debtor
In a significant judgment dated August 25, 2026, the National Company Law Tribunal (NCLT), Ahmedabad Bench, has ruled that the Income Tax Department's adjustment of income-tax refunds against pre-Corporate Insolvency Resolution Process (CIRP) dues during the moratorium period is impermissible under the Insolvency and Bankruptcy Code (IBC), 2016. The case, titled Varun Anil Chopra, Resolution Professional (RP) of Demac Technologies Private Limited v. Income Tax Department, underscores the sanctity of the moratorium under Section 14 of the IBC and the collective insolvency resolution mechanism.
Background:
Demac Technologies Private Limited was admitted into CIRP on January 20, 2026, triggering the moratorium under Section 14 of the IBC which prohibits recovery actions against the corporate debtor. The Income Tax Department had raised a pre-CIRP tax demand of Rs. 35.11 lakh for the assessment year 2023-24. Meanwhile, after commencement of the CIRP, the corporate debtor's income tax return for the assessment year 2025-26 was processed, resulting in a refund determination of Rs. 56.07 lakh on February 12, 2026.
Issue:
Despite the moratorium, the Income Tax Department adjusted Rs. 41.64 lakh of this refund against the outstanding pre-CIRP tax dues, citing Section 245 of the Income-tax Act, 1961, which permits set-off of refunds against pending tax liabilities after prescribed notice. The Resolution Professional challenged this adjustment, asserting that the refund constituted an asset of the corporate debtor and that any appropriation towards pre-CIRP dues during the moratorium violates the collective insolvency process under the IBC.
Tribunal's Analysis:
The NCLT emphasized that the moratorium under Section 14 of the IBC is a statutory prohibition on any recovery or enforcement proceedings against the corporate debtor's assets and interests. The tribunal clarified that while the Income Tax Department can determine statutory dues under the Income-tax Act, it cannot recover or appropriate assets during the moratorium in a manner inconsistent with the IBC.
The tribunal relied on the overriding effect of Section 238 of the IBC, which invalidates any inconsistent provisions of other laws during the insolvency process. It noted that the refund amount, determined post commencement of CIRP, is an enforceable receivable and forms part of the insolvency estate. Appropriating it towards pre-CIRP dues amounts to recovery outside the collective insolvency process, thereby violating the moratorium.
The tribunal further distinguished between the determination of tax liability and recovery of dues, holding that the former can continue under the Income-tax Act but the latter must conform to the moratorium imposed by the IBC.
The tribunal also referenced precedents, including the Supreme Court's ruling in Principal Commissioner of Income Tax v. Monnet Ispat and Energy Ltd. (2018) and the NCLAT's decision in Mr. Devarajan Raman v. Principal Commissioner of Income Tax (2024), which reinforced that recovery actions during moratorium are impermissible.
Order and Directions:
The NCLT set aside the adjustment of Rs. 41.64 lakh made by the Income Tax Department and directed the refund amount to be released to the corporate debtor's designated bank account under the control of the Resolution Professional within two weeks. The tribunal also clarified that the applicant is entitled to statutory interest on the refund as per Section 244A of the Income-tax Act, subject to computation by the competent authority.
Importantly, the tribunal restrained the Income Tax Department from appropriating any income-tax refunds towards pre-CIRP dues during the moratorium period in a manner inconsistent with the IBC. However, it made clear that the order does not adjudicate on the validity or quantum of the underlying tax demand, which remains open for determination as per law.
Significance:
This ruling strengthens the enforcement of the moratorium under the IBC, ensuring that no creditor enjoys preferential recovery rights outside the insolvency resolution process. By protecting the collective interests of creditors and preserving the insolvency estate, the judgment promotes equitable treatment and value maximization during corporate insolvency.
Bottom Line:
Adjustment of income-tax refunds towards pre-CIRP dues during moratorium under Section 14 of IBC is impermissible as it contravenes the insolvency process and violates the collective mechanism for equitable treatment of stakeholders.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Sections 14, 17, 18, 20, 25, 60, 238; Income Tax Act, 1961 Sections 143(1), 143(1a), 245, 244A
Varun Anil Chopra v. Income Tax Department, (NCLT)(Ahmedabad) : Law Finder Doc Id # 2978373
