Overview of the ‘Clean Slate’ Principle

The ongoing issue of tax demands levied against companies emerging from corporate insolvency poses serious challenges. Despite the ‘clean slate’ provision embedded in the Insolvency and Bankruptcy Code (IBC), regulators continue to issue fresh tax liabilities, casting doubt on the security of resolution plans for successful applicants.

Recent Legal Challenges

Numerous companies have found themselves contending with unexpected tax obligations arising from pre-acquisition liabilities. This has led to an influx of court cases aimed at challenging these demands. A recent significant instance is Tata Steel, which faced an income addition of ₹25,185 crore linked to a debt waiver from Bhushan Steel, prior to its acquisition in 2018.

Tata Steel has countered this addition in the Bombay High Court, asserting, “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.”

Legal Framework and Current Practices

According to legal experts, the corporate insolvency resolution process (CIRP) mandates that all claims, including statutory ones, prior to the insolvency commencement date, are to be resolved, rendering them null for subsequent stakeholders. Jyoti Singh, founder of AJA Legal, emphasized that the ‘clean slate’ principle, as affirmed by the Supreme Court in the Ghanshyam Mishra case, must be observed to prevent imposing unapproved claims or liabilities on successful resolution applicants.

However, issues arise from assessing officers who, as noted by observers, often disregard recent legal interpretations. This inconsistency underlines the necessity for clear directives from tax authorities to promote uniformity and certainty in tax assessments for companies revitalizing businesses under the IBC.

Case Study: B&B Global Enterprises

B&B Global Enterprises serves as another illustration of this dilemma. Despite winning the bid for NSL Mining Resources India in February of the previous year, the company was subsequently issued a tax liability of ₹143 crore for the fiscal year 2019-20, based on claims of unresolved obligations and unexplained transactions exceeding ₹80.1 crore, which B&B Global refutes.

Promoter Monish Bhalla expressed challenges in navigating these demands, stating, “If I have to appeal to the tribunal, they say pay up 20%, which comes to over ₹29 crore. Where do I come up with that kind of money from?”

Judicial Endorsements of the ‘Clean Slate’ Principle

Multiple judicial decisions have reiterated the relevance of the clean slate principle. For instance, a January 2024 judgment from the Gujarat High Court regarding Surya Exim invalidated demand notices based on claims not included in an approved resolution plan, in alignment with the Supreme Court’s decision in Ghanshyam Mishra & Sons.

Further, a ruling concerning Tehri Iron and Steel Casting reaffirmed that tax demands following the approval of resolution plans by the NCLT are impermissible, reinforcing the legal precedence established on this matter.

Conclusion

The ongoing challenges post-acquisition illustrate a significant gap between judicial clarity and regulatory practice. As companies navigate these turbulent waters, the call for comprehensive guidance from tax authorities emphasizes the need for reform to protect businesses engaging in the insolvency resolution process.