ACIT, CIRCLE - 1(1), KOLKATA, KOLKATA vs. M/S. MCNALLY SAYAJI ENGINEERING LIMITED, KOLKATA

Present for: Appellant by : Shri Abhijit Kundu, CIT, DR Respondent by : Shri Sushil Kumar Pransukhka, FCA Date of Hearing : 08.06.2023 Date of Pronouncement : 21.06.2023 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: These captioned two appeals filed by the revenue are against the separate orders of Ld. CIT(A)-14, Kolkata vide Appeal No. CIT(A), Kolkata- 14/10119/2016-17 and CIT(A),Kolkata-14/10118/2016-17 dated 22.07.2019 against assessment order of Ld. DCIT, Circle-1/JCIT, Range-1, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 25.03.2013 and 30.03.2014 for AYs 2010-11 and 2011-12 respectively.

“1. That on the facts and circumstances of the case and on Law, Ld CIT(A) has erred in granting relief to the assessee on account of retention money of Rs.7,61,23,067/-, ignoring the fact that retention money which forming part of sale is always an income accrued and arose in the hands of the assessee under mercantile system of accounting cannot be kept aside till realization in full.

2. That on the facts and circumstances of the case and on law Ld. CIT(A) has erred in granting relief to the assessee on account of Retention money of Rs.7,61,23,067/- under normal provision as well as in computing Book Prof it u/s 115JB of the IT Act.

2.1. Grounds of appeal for AY 2011-12: “1. That on the facts and circumstances of the case and on Law, Ld CIT(A) has erred in granting relief to the assessee on account of retention money of Rs. 4,61,54,532/- ignoring the fact that retention money which forming part of sale is always an income accrued and arose in the hands of the assessee under mercantile system of accounting cannot be kept aside till realization in full.

2. That on the facts and circumstances of the case and on Law, Ld CIT(A) has erred in granting relief to the assessee on account of professional services of Rs.60,12,000/-.

3. That on the facts and circumstances of the case and on Law, Ld CIIT(A) has erred in granting relief to the assessee on account of corporate service charges of Rs. 41,00,000/-.

4. Where in the facts and circumstances, the Ld CIT(A) has erred in deleting the addition of Rs.1,99,350/- u/s 36(1)(vs) rws 2(24)((x) of the I T Act, 1961, as employees' contribution to PF and ESI respectively deposited by the assessee company after the due date despite the fact that such employees' contribution to PF and ESI should have been deposited within due date as Sec 43B permits delayed payments as regards employer's contribution and not the employee's contribution.

5. The appellant carves the leave to make any addition, alternation, modification etc. of the grounds either before the appellate proceedings, or in the course of appellate proceedings.”

3. At the outset, Ld. Counsel for the assessee submitted that assessee had gone into insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) for which the Ld. National Company Law Tribunal (NCLT), Kolkata Bench has approved the Resolution Plan by passing an order dated 24.02.2023 in IA(IB) No. 1214/KB/2022 in CP (IB) No. 131/KB/2020. According to the Ld. Counsel, once the Resolution Plan has been approved by the adjudicating authority i.e. NCLT, all the litigations/proceedings/claims against the assessee in respect of income-tax matters for the period covered under the Resolution Plan shall get extinguished. Ld. Counsel has placed on record a copy of the order of Ld. NCLT which was referred in the course of hearing and stated that Resolution Plan submitted by Tega Industries Ltd. was approved with 99.787% voting share. Thereafter, reliefs, exemptions and waivers sought by the Resolution Applicant from the adjudicating authority were set out for the successful implementation of the approved Resolution Plan. 3.1. The relevant relief, exemptions and waivers for which approval has been granted by the Ld. NCLT are extracted below for ease of ready reference: (a) Claims by Statutory Authorities: “55. All statutory Liabilities pertaining to the period prior to the Transfer Date or pertaining to or arising out of implementation of this Resolution Plan shall not be required to be paid and the same shall be binding on all such statutory authorities.” (b) non-compliances, breaches and defaults “40.Upon approval of the Resolution Plan by the Adjudicating Authority, all non-compliances, breaches and defaults of the Corporate Debtor for the period prior to the Transfer Date (including but not limited to those relating to tax), shall be deemed to be waived by the concerned Governmental Authorities. Immunity shall be deemed to have been granted to the Corporate Debtor from all proceedings and penalties under all Applicable Laws for any non-compliance for the period prior to the Transfer Date and no interest/penal implications shall arise due to such noncompliance/ default/breach prior to the Transfer Date. Notwithstanding the generality of the foregoing, breaches, contraventions or non-compliances of the Applicable Laws shall be deemed to be permanently extinguished by virtue of the order of the Adjudicating Authority approving this Resolution Plan, and the Corporate Debtor or the Resolution Applicant shall at no point of time, directly or indirectly, have any obligation, Liability or duty in relation thereto.” (c) Relief, concessions and approvals sought” “4. all the non-compliances (including but not limited to violations of Applicable Law) by the Corporate Debtor shall stand regularised and all penalties payable in relation to the non- compliances shall stand waived off and the reconstituted Board of the Corporate Debtor, the Corporate Debtor and the Resolution Applicant shall not be liable for any non-compliances occurring prior to the Transfer Date. Without any liability for the aforesaid noncompliance for the past period before the Transfer Date, the Resolution Applicant shall endeavor to cause the Corporate Debtor to identify such non-compliances, evaluate the steps required to address such non-compliances and take steps to remedy such non-compliances to the extent practically possible. The Resolution Applicant and the Corporate Debtor shall be entitled to apply to and approach the Adjudicating Authority for relief for continued implementation of the approved Resolution Plan before or after any coercive action is taken against the Corporate Debtor or the Resolution Applicant, especially in view of the limited due diligence offered to the Resolution Applicant;” (d) Use of copy of the order of the Adjudicating Authority : “16. A certified copy of the approved Resolution Plan and the order of the Adjudicating Authority approving this Resolution Plan shall constitute conclusive evidence of the rights and entitlements of the Resolution Applicant and the Corporate Debtor as provided in the Resolution Plan and the settlement of claims with the Financial Creditors and discharge and extinguishment of all other claims and obligations, rights and entitlements of Financial Creditors, Operational Creditors and Other Creditors in accordance with the Resolution Plan by deemed satisfaction, discharge or extinguishment. A certified copy of the approved Resolution Plan and the order of the Adjudicating Authority approving this Resolution Plan shall, where applicable, constitute conclusive evidence of any modifications or cancellation or abandonment of contractual arrangements or agreements or leases or licenses as recorded in the Resolution Plan. The mere production and delivery of a certified copy of the approved Resolution Plan and the order of the Adjudicating Authority approving this Resolution Plan shall constitute proof of amendment of any constitutional documents of the Corporate Debtor, the authority to create security over the assets of the Corporate Debtor in favour of any refinancing creditor, change in the shareholding of the Corporate Debtor or its loan capita1, change in the management of the Corporate Debtor,”

4. On the above relevant extracts, Ld. NCLT passed its order and gave the following findings, relevant to the case in hand before us. The same are extracted as under: “34. The reliefs sought with respect to subsisting contracts/agreements can be granted, and no blanket orders can be granted in the absence of the parties to the contracts and agreements. With respect to the waivers with regard to extinguishment of claims which arose Pre-CIRP and which have not been claimed are granted in terms of Ghanashyam Mishra and Sons Pvt. Ltd vs. Edelweiss Asset Reconstruction Company Ltd. wherein the Hon'ble Supreme Court has held that once a resolution plan is duly approved by the Adjudicating Authority under sub-section (1) of section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Govt, any State Govt or any local authority, guarantors and other stakeholders. We place reliance on the recent judgement of Hon'ble High Court of Rajasthan in the matter of EMC v. State of Rajasthan wherein it has been inter-alia held that: "Law is well-settled that with the finalization of insolvency resolution plan and the approval thereof by the NCLT, all dues of creditors, Corporate, Statutory and others stand extinguished and no demand can he raised for the period prior to the specified date.” On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan. The Hon'ble Supreme Court also held that all the dues including the statutory dues owed to the Central Govt, any State Govt or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under section 31 could be continued. 36. With respect to the reliefs and waivers sought for all inquiries, litigations, investigations and proceedings shall be granted strictly as per the section 32SA of the Code. 38. Subject to the observations made in this Order, the Resolution Plan dated 22 April 2022, is hereby APPROVED by this Bench. The Resolution Plan shall form part of this Order. The Resolution Plan thus approved shall be binding on the Corporate Debtor and other stakeholders involved in terms of section 31 of the Code, so that revival of the Debtor Company shall come into force with immediate effect.”

5. In the course of hearing, Ld. Counsel also referred to the decision of Hon’ble jurisdictional High Court of Calcutta in the case of PCIT Vs. Macnally Bharat Engineering Ltd. in ITAT/Gau/109/2021 in IA No. GA/2/2021 dated 07.07.2022 wherein similar issue was dealt with. In this respect, Ld. Counsel submitted that Macnally Bharat Engineering Ltd. is one of the group companies of the assessee which had also gone into IBC process whose Resolution Plan was approved by the NCLT in CP(IB) No. 891/KB/2020 dated 29.04.2022. In this case, consequent to the approval of Resolution Plan by Ld.NCLT, Hon’ble jurisdictional High Court of Calcutta held that revenue cannot proceed with the appeal filed before it and the same was disposed of accordingly. 5.1. The relevant extracts of the said judgment is reproduced as under: “Learned counsel appearing for the respondent submitted that the respondent/company has gone into liquidation and the National Company Law Tribunal, Kolkata Bench-I, Kolkata by its order passed in CP.(IB)No.891/KB/2020 dated 29th April, 2022 has admitted the petition filed under Section 7 of the Insolvency and Bankruptcy Code read with 2016 Rules for initiating CIRP against the respondent/assessee. The operative portion of the order passed by the NCLT is contained in paragraph 13 therein. In the light of the subsequent development, the appellant/revenue cannot proceed with the present appeal. Accordingly, the present appeal (ITAT/109/2021) stands disposed of for the aforementioned reasons and the substantial questions of law which have been raised by the revenue are left open. Consequently, the connected application for stay (IA No.GA/2/2021) also stands closed.”

6. Ld. Counsel thus, asserted that the present case is squarely covered by the judgment of Hon’ble jurisdictional High Court of Calcutta in the case of Macnally Bharat Engineering Ltd. (supra) and thus, the two appeals filed by the revenue ought to be disposed off as infructuous. On confrontation to these facts before the Ld. CIT, DR, it was argued that clauses referred by the Ld. Counsel from the Resolution Plan applied to the pending appeals before the Hon’ble Tribunal. Ld. CIT, DR also referred to section 32A of the IBC and submitted that it relates to offences committed prior to the commencement of corporate insolvency resolution process (CIRP) which is not a case in the present appeals.

6.1. On the merits of the case, Ld. CIT, DR fairly conceded that case of the assessee is squarely covered by the decision of Hon’ble jurisdictional High Court of Calcutta in assessee’s own case for AY 2013-14 decided in ITAT/44/2021 in IA No. GA/2/2021 dated 24.02.2022, on the issue relating to disallowance of retention money which has been offered to tax by the assessee in the year of its actual receipt.