Statutory dues of Income Tax, VAT etc. are Operational Debts under Insolvency and Bankruptcy Code, 2016

The National Company Law Appellate Tribunal has held that statutory dues of income tax, value added taxes etc. are ‘operational debts’ under the Insolvency and Bankruptcy Code 2016.

The said ruling was held in the matter of Pr. Director General of Income Tax (Admn. & TPS) Vs. M/s. Synergies Dooray Automotive Ltd. & Ors. [Company Appeal (AT) (Insolvency) No. 205 of 2017], decided on 20.03.2019.

Challenge

 The judgment was given by the NCLAT dismissing a batch of appeals filed by the IT Department and Sales Tax Departments against orders passed by NCLT benches of Mumbai and Hyderabad approving resolution plans for corporate debtors, which had included tax dues. The departments took the stand that tax dues enjoy the status of ‘first charge’ under law, and therefore cannot be included in resolution plans. The further argument was that ‘operational debts’ under IBC covers only debts in relation to supply of goods and services.

Held

The NCLAT noticed that the definition of ‘operational debt’ under Section 5(21) covered a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority, in addition to claims in respect of supply of goods or services. As the ‘Income Tax’, ‘Value Added Tax’ and other statutory dues arising out of the existing law, arises when the Company is operational, it was held that such statutory dues has direct nexus with operation of the Company. Holding that all statutory dues including ‘Income Tax’, ‘Value Added Tax’ etc. come within the ambit of ‘Operational Debt'”.

Consequently, it held that Income Tax Department, Sales Tax Department of states etc., who are entitled to such dues are ‘operational creditor’.