Despite ‘Clean Slate’ Rule, Taxmen Pursue New Claims Against Insolvent Companies

Tax officers are sending new tax notices to companies that have already been taken over after going through the insolvency process. This goes against the “clean slate” rule in the Insolvency and Bankruptcy Code (IBC), which says that once a company is rescued, all its old debts and taxes should be cleared.

Even though courts have clearly said that no more old claims should be made, tax officers are still doing it. As a result, the new owners of these companies are getting stuck in legal trouble and having to go to court again, even though the law is supposed to protect them from this.

Numerous firms have suffered from new tax bills over pre-takeover liabilities. These companies have also moved to the courts, legal advisors and industry insiders.

A recent example is Tata Steel, which received a tax notice for Rs. 25,185 crore. The tax department said this amount was related to a debt waiver (cancellation) that Bhushan Steel got before Tata Steel bought it through the IBC process in 2018.

The Tata Steel company has challenged the tax notice before the Bombay High Court and said, “Waiver of debt cannot be treated as taxable income in the hands of TSBSL at the relevant point in time, more so when such waiver was a sequel to an acquisition under the IBC proceedings.”

As per the rules of the Corporate Insolvency Resolution Process (CIRP), all claims, including legal claims or unpaid liabilities up until the start of the insolvency process, are considered resolved or erased. This rule is binding on everyone involved, meaning all parties must follow it, as explained by an expert.

Many tax officers who are responsible for reviewing and deciding on tax matters seem to lack knowledge of the latest laws and recent legal clarification. Instead, it seems like they are making their own decisions based on their personal understanding, which can lead to inconsistent tax demands.

Experts say that the tax department should give clear guidelines to these officers to make sure there’s a consistent approach in handling tax matters. This would help provide certainty for companies that are buying and taking over businesses through the Insolvency and Bankruptcy Code (IBC) so they know exactly what to expect regarding tax issues.

Recent Judgments

Over the past years, several court rulings have reconfirmed the clean slate principle. In one case involving Surya Exim, a company from Surat that deals with garments and knitted fabrics, the Gujarat High Court ruled in January 2024 that a tax demand issued after the NCLT approved the resolution plan should be canceled. The court said that any claims not included in the approved resolution plan are no longer valid and should be considered extinguished.

The judgment referred to the Supreme Court’s decision in the Ghanshyam Mishra & Sons case, which stated that “On the date of approval of the resolution plan by the adjudicating authority all such claims which are not part of the resolution plan shall stand extinguished and no person is entitled to initiate or continue any proceeding in respect to a claim which is not part of the resolution plan.”