Written by Sneha Arora ,
Himachal Pradesh National Law University, Shimla,
January 2026
Introduction
Corporate insolvency is a complex process that involves multiple legal and financial considerations. Among these, the intersection of the Insolvency and Bankruptcy Code (“IBC”) and tax laws plays a crucial yet often contentious role. When a company faces financial distress, not only do creditors seek repayment, but tax authorities also step in to claim their dues. This creates a unique challenge: How should tax obligations be treated in the face of insolvency?
The Insolvency Triangle: cornerstone of revival and resolution
One of the biggest challenges in aligning tax laws with the IBC is their inherently conflicting nature. Tax laws prioritize recovery, ensuring the government collects dues promptly, whereas the IBC focuses on resolution and revival. To bridge this gap, the Code incorporates a three-pillar mechanism to maintain a harmonious balance among the two conflicting laws:
- Moratorium – ‘Moratorium’ refers to a temporary halt on all legal proceedings and recovery actions against the debtor.
- Clean Slate Principle – This principle was given judicial validity by the Apex Court by a series of landmark decisions. According to the clean slate principle, once a resolution plan is approved by the NCLT, all prior claims before such approval shall stand extinguished or settled.
- Overriding Effect – It is now a settled position that the IBC prevails over other laws, ensuring that insolvency resolution is not disrupted by conflicting legal claims.
This triangular approach enables the IBC to function smoothly alongside tax laws.
- The First Pillar: Moratorium
The moratorium under the IBC serves as a period of standstill for the corporate debtor, offering a period during which its assets are safeguarded from erosion.
As per Section 14(1)(a) of the IBC, once insolvency proceedings commence, the Adjudicating Authority declares a moratorium, prohibiting the institution of new suits against the corporate debtor, continuation of pending suits that could impact the debtor’s assets, and execution of judgments, decrees, or orders against the corporate debtor. The use of the word “including” in the provision is clarificatory, indicating that only those proceedings that have a direct impact on the debtor’s assets shall be prohibited. It therefore means that the moratorium does not act as a blanket ban on all tax recovery and enforcement proceedings but merely prevents them from enforcing tax dues until the resolution process concludes.
In the case of Pr. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd.[1], the Supreme Court upheld the application of the moratorium to appeals filed by the Income Tax Department against orders of the Income Tax Appellate Tribunal concerning the tax liabilities of a debtor under CIRP. Furthermore, in Kitply Industries Ltd. v. Assistant Commissioner of Income Tax[2], the NCLT Guwahati Bench held that such actions are quasi-judicial proceedings and that their continuation during the moratorium period is prohibited under Section 14(1)(a) of the IBC and consequently, the freezing of bank accounts by the tax authorities was deemed illegal during the moratorium.
The position was clarified by the Apex Court in Sundaresh Bhatt v. Central Board of Indirect Taxes and Customs[3] wherein the Supreme Court held that once a moratorium is imposed under Section 14 or 33(5) of the IBC, authorities under the Customs Act as well as the Income tax authorities have limited jurisdiction. They can assess or determine the quantum of customs duty and other levies but are restrained from initiating recovery proceedings during the moratorium period.
- The Second Pillar: Clean Slate Principle
The clean slate principle under the IBC is designed to rejuvenate distressed businesses by ensuring they emerge from insolvency free from prior encumbrances. Section 31(1) of the Code enunciates that that once the Adjudicating Authority approves a resolution plan, the plan becomes binding on all stakeholders, including the corporate debtor, its employees, members, creditors, and even governmental authorities. This binding nature of the plan ensures that all previous claims and disputes are settled, providing the debtor with a clean slate.
In the landmark judgment of Essar Steel[4], the Apex Court reinforced this principle. The Court emphasized that a successful resolution applicant should start with a clean slate on the basis of its approved plan. The Court further discussed that this clean slate theory is evident from Section 31, according to which an approved resolution plan is binding on all the stakeholders involved in the resolution plan.
To further strengthen the clean slate approach, Section 32A was introduced through the IBC (Amendment) Act, 2020. This section provides immunity to the corporate debtor from prosecution for offenses committed prior to the commencement of the CIRP, provided there is a change in management or control to a person who is not related to the previous management and has not abetted the offense. However, it’s crucial to note that this immunity does not extend to individuals such as promoters or officers who were directly involved in the misconduct; they remain liable for their actions.
The Apex Court in Ghanashyam Mishra v. Edelweiss Asset Reconstruction Company Ltd.[5] clarified the extent of the clean slate principle. The court held that once a resolution plan is approved, all claims not included in the plan stand extinguished, and the debtor is discharged from any liability concerning such claims.
Furthermore, in RPS Infrastructure Ltd. v. Mukul Kumar & Anr.[6], the Apex Court addressed the issue of admitting claims after the Committee of Creditors (“CoC”) had approved a resolution plan but before its approval by the Adjudicating Authority. The Court emphasized that permitting such claims would indefinitely prolong the resolution process. The court reinforced the principle by emphasizing that once a resolution plan is approved by the CoC, the corporate debtor should not be burdened with additional claims.
- The third pillar: Overriding Effect
IBC stands at a higher pedestral over other laws when it comes to resolving corporate insolvency. Section 238 of the IBC explicitly states that the provisions of the Code will override any conflicting provisions in other laws or legal instruments.
This principle has been consistently upheld by courts. A landmark decision came in Pr. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd.[7], where the Supreme Court affirmed that the IBC prevails over tax laws in case of any inconsistency. This reinforced the notion that the IBC prioritizes resolution over recovery, ensuring distressed companies get a fair chance at revival.
This creates a significant conflict with various tax laws, which grant tax authorities a first charge over the unpaid dues. The question arises: Should tax dues be treated as secured debts or considered operational debts, ranking lower in the repayment hierarchy?
In the case of Sundaresh Bhatt v. Central Board of Indirect Taxes and Customs[8], the Apex Court held that the IBC takes precedence over the Customs Act, despite the latter establishing a statutory charge in favor of customs authorities. Similarly, in Principal Commissioner of Income Tax v. Monnet Ispat and Energy Limited [9], the Supreme Court referred to Dena Bank v. Bhikhabhai Prabhudas Parekh & Co.[10] and decisively stated that income tax liabilities, considered “Crown debts,” do not supersede the claims of secured creditors, who are private entities.
However, a significant turning point came in State Tax Officer v. Rainbow Papers Ltd.[11], where the Supreme Court changed the interpretation of how statutory dues should be treated. In this case, the Court examined Section 48 of the Gujarat Value Added Tax (“GVAT”) Act, which creates a statutory first charge on a debtor’s property in favour of tax authorities. The Court ruled that:
- If a resolution plan does not include government tax dues, it cannot be approved at a later stage.
- Government dues form a legitimate part of a company’s obligations and must be accounted for within a resolution plan.
- The state government can be considered a secured creditor if a statutory law creates a security interest in its favor.
Despite this decision, the broader legal consensus continues to support the IBC’s priority over tax laws. Several statutory provisions explicitly acknowledge this:
- Section 82 of the CGST Act, 2017 states that tax dues will not have first charge in cases where the IBC applies.
- Section 88 of the Finance Act, 1994 (for service tax) also defers to the IBC, ensuring tax recovery does not override insolvency proceedings.
- Government circulars (e.g., the 2022 Master Circular on Recovery of Revenue) recognize that the IBC supersedes tax laws in insolvency cases.
Conclusion
In conclusion, the relationship between IBC and tax laws is both intricate and evolving. Judicial interpretations, particularly post-Rainbow Papers, have highlighted a shift in how statutory tax dues are treated within the IBC framework.
Despite this shift, the general consensus remains that the IBC should take precedence, ensuring that the core objective of reviving businesses is not overshadowed by the collection of government dues.
[1] Pr. Commissioner of Income Tax, New Delhi Vs. Monnet Ispat & Energy Ltd., [2017] ibclaw.in 08 HC.
[2] Kitply Industries Ltd. v. Asstt. CIT (TDS), [2019] 102 taxmann.com 116.
[3] Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs, (2023) 1 SCC 472.
[4] Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, (2020) 8 SCC 531.
[5] Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited, (2021) 9 SCC 657.
[6] RPS Infrastructure Ltd. v. Mukul Kumar & Anr., CA No. 5590 of 2021.
[7] Supra note at 1.
[8] Supra note at 3.
[9] Supra note at 1.
[10] Dena Bank v. Bhikhabhai Prabhudas Parekh & Co., (2000) 5 SCC 694.
[11] State Tax Officer v. Rainbow Papers Ltd., (2023) 9 SCC 545.
