AUGUST 02, 2023

By Vijay Kumar

OUR story starts with a moratorium order passed by the NCLT (NATIONAL COMPANY LAW TRIBUNAL), Kochi Bench under the INSOLVENCY AND BANKRUPTCY CODE. What has GST to do with it? Read on.. - 2023-TIOLCORP-123-NCLT

An application is filed under section 60 (5) of IBC, 2016 by the Resolution professional for directing the respondent (GST Department) to release the assets (documents) which were seized by the respondent on 10.03.2023 and to initiate proceedings against the respondent under section 70(2) of IBC, 2016.

A corporate debtor engaged in the business of amusement park was admitted into CIRP (Corporate Insolvency Resolution Process) by NCLT under section 7 of IBC 2016 ( INSOLVENCY AND BANKRUPTCY CODE ) and an IRP (Interim Resolution Professional) was appointed, who made a public announcement on 28.01.2023 inviting claims from the creditors. The GST Department submitted its claim for a sum of Rs.36,56,077.51/- on 06.03.2023. In pursuance of the CIRP order, moratorium under section 14 of IBC 2016 came into operation/effect from 25.01.2023.

The GST department knowing well that the CIRP order was passed against the corporate debtor and after submitting its claim, all of a sudden on 10.03.2023 raided the premises of the corporate debtor, seized some documents and issued summons to the suspended Managing Director of the corporate debtor and obtained his statement. The Respondent also sent a summons dated 13.03.2023 to the applicant to appear for an inquiry on 20.03.2023.

The GST Department submitted before the NCLT that:

1. On receipt of specific intelligence/information of Tax evasion by the corporate debtor, the search was conducted under section 67(2) of the GST Act.

2. On the search, tax evasion was detected and seven registers were seized.

3. Thereafter summons dated 13.03.2023 and 28.03.2023 were issued to the applicant to produce the Books of account and to record statement, but the applicant did not appear and instead he filed this application.

4. The search was conducted to gather evidences for determination of tax under section 74 of GST Act.

5. The tax determination and tax assessment are not covered under moratorium. The recovery of tax alone was prohibited by virtue of moratorium order passed under IBC.

6. The summons were issued to erstwhile directors of corporate debtor to gather documents and to record their statements.

7. There is no bar in the Act to issue summon to erstwhile directors of the corporate debtor.

8. The corporate debtor is presently under the management of applicant, hence summons was issued to him also to gather evidence and to record his statements to determine tax liability of corporate debtor under section 74 of GST Act.

9. To arrest the leakage of revenue to the exchequer the search was conducted under section 67(2), the summons issued under section 70, for determination tax under section 74 of GST Act are unavoidable.

10. The search and seizure of records made by the respondent are not against the moratorium order of section 14 of IBC, 2016.

The NCLT framed the following issue for determination:

Whether the search and seizure of records of the corporate debtor and issuance of summons to applicant/resolution professional are violative of mortarium order passed under section 14 of IBC, 2016?

NCLT noted that:

1. There is no dispute regarding the facts of the case that the respondent conducted raid in the premises of corporate debtor on 10.03.2023 during moratorium period and seized the documents in the presence of suspended Board of directors.

2. The assessment is defined in Section 2(11) of the Kerala State Goods and Services Tax Act 2017, and chapter XII of the said Act from sections 59 to 64 deal with the various kinds and ways of assessment.

3. The respondent under the guise of assessing or determining the dues, transgressed and invoked the coercive provisions of law in Chapter XIV of the Kerala State Goods and Services Tax Act 2017.

4. In pursuance of search the respondent issued a summons to the applicant under section 70 the Kerala State Goods and Services Tax Act 2017, to attend an inquiry to give evidence and to record statements.

NCLT also referred to the CBIC Circular No.134/04/2020-GST explaining that no coercive action to be taken in respect of dues of GST pertaining to corporate debtor, under the CIRP. The Board Circular clarified that:

a. As per IBC, once an entity defaults certain threshold amount, Corporate Insolvency Resolution Process ("CIRP") gets triggered and the management of such entity (Corporate Debtor) and its assets vest with an interim resolution professional ("IRP") or resolution professional ("RP"). It continues to run the business and operations of the said entity as a going concern till the insolvency proceeding is over and an order is passed by the National Company Law Tribunal ("NCLT")

b. Notification No. 11/2020 - Central Tax , dated 21.03.2020 has been issued by the Government prescribing special procedure under section 148 of the Central Goods and Services Tax Act, 2017 for the corporate debtors who are undergoing CIRP under the provisions of IBC and the management of whose affairs are being undertaken by IRP/RP.

c. In accordance with the provisions of the IBC and various legal pronouncements on the issue, no coercive action can be taken against the corporate debtor with respect to the dues for period prior to insolvency commencement date. The dues of the period prior to the commencement of CIRP will be treated as ‘operational debt' and claims may be filed by the proper officer before the NCLT in accordance with the provisions of the IBC. The tax officers shall seek the details of supplies made / received and total tax dues pending from the corporate debtor to file the claim before the NCLT.

d. Moreover, section 14 of the IBC mandates the imposition of a moratorium period, wherein the institution of suits or continuation of pending suits or proceedings against the corporate debtor is prohibited.

NCLT noted that despite the guidance by CBIC, the respondent GST authority took coercive action and observed,

The acts of the respondent undermined the authority of Resolution professional and because of seizure of Books of accounts of the corporate debtor causes much inconvenience and paralyzed the Resolution process.

The NCLT concluded that the search and seizure of records of the corporate debtor and issuance of summons to applicant/resolution profession are violative of mortarium order passed under section 14 of IBC, 2016.

So, the NCLT ordered:

(i) The respondent is hereby directed to return all the documents seized from the premises of the corporate debtor to the applicant within a week from date of this order .

(ii) The summon dated 13.03.2023 issued by the respondent to the corporate debtor is hereby set aside.

(iii) The respondent is hereby directed to pay a compensatory cost of Rs.50,000/- (Rupees fifty thousand only) to the applicant towards the CIRP cost and

(iv) Liberty is granted to the respondent, after paying the compensatory cost to recover it from the erred officials.

This is not the end of the story:

The applicant had also prayed in the application to initiate proceeding against the respondent for violation of moratorium order under section 74(2) of IBC, 2016.

But the NCLT noted,

This section is criminal in nature fall under Chapter VII under the heading Offences and Penalties, hence under section 236 (1) of IBC, 2016 special court alone has jurisdiction. Further under section 236 (2) of IBC, 2016 cognizance of the offence can be taken only on the compliant of IBBI (Insolvency and Bankruptcy Board of India) or Central Government. Hence the applicant is granted liberty to approach the IBBI to proceed against the Respondent's erred officials in this regard.

So, the GST Department is stuck with a cost of Rupees fifty thousand – all because it went ahead with its usual excursion of raids, summons and demands, in spite of an order from the NCLT. It may also get involved in criminal proceedings if the applicant chooses to take that route also. There are thousands of assessees all around you, but why do you choose somebody who is under a moratorium from an equally powerful authority as you are?

It also raises certain important questions:

1. Can the NCLT impose costs on the GST Department? Is it an inherent power?

2. Can the NCLT grant liberty to the GST Department to recover the costs from the erring officials? Is the liberty so granted, binding on the erring officers? Is recovery not possible if no such liberty was given?

3. What are the options for the State GST Department? Will it pay or appeal or go for writ?

Perhaps there are certain premises which even GST officers cannot raid and some persons who cannot be summoned.

Be you ever so high, the law is above your head!

Until Next week