NCLAT’s Verdict Tax Refund Dispute: A Simple Guide for Businesses and Professionals
This story is about money, timing and rules. It shows how a tax refund can turn into a major fight when a company is already in the insolvency process. The dispute involves CLC & Sons, the corporate debtor group, the Income Tax Department, the NCLT and the NCLAT. The decisions made in NCLAT’s Verdict Tax Refund Dispute teach clear lessons about the Insolvency and Bankruptcy Code, the moratorium under Section 14 and how refunds paid during insolvency are handled.
What Triggered NCLAT’s Verdict Tax Refund Dispute
The dispute began when a tax refund meant for CLC & Sons was mistakenly paid into the bank account of a company already under the insolvency process. The company was in CIRP, so the Resolution Professional took control of the account. CLC & Sons claimed the refund belonged to them, while the money sat with the corporate debtor. This mix-up over ownership, timing and CIRP rules triggered the legal fight that led to NCLAT’s Verdict Tax Refund Dispute.
A tax refund for the year 2001–02 created a fight between two sides. The tax tribunal said the refund should go to the original taxpayer. But the Income Tax Department sent the money to the bank account of another company that was already under the insolvency process. This mistake started a long legal battle. The courts had to decide who the refund truly belonged to and whether it should stay with the company in insolvency under the rules of the IBC.
How the dispute began simple timeline
- A partnership (Chiranjee Lal & Sons CLCS) had a tax matter for AY 2001–02. The ITAT allowed a refund in favour of the taxpayer on 28 May 2019.
- CLCS joined a scheme of arrangement and its business moved through a series of transfers and name changes to an entity often referred to as CLC Industries Ltd. (CLCI).
- CLC Industries (the corporate debtor) entered CIRP on 3 January 2020. A Resolution Professional (RP) took control of the corporate debtor’s assets and affairs.
- The Income Tax Department issued the refund and the bank credited the amount to an account held in the name of the corporate debtor on 15 September 2020.
- CLCS claimed the refund still belonged to it and asked the tax department to route the payment to CLCS. That triggered writ petitions, applications before the Adjudicating Authority and further legal moves.
Key legal questions
- Who was the rightful owner of the refund the original transferor (CLCS) or the corporate debtor (CLCI) whose bank account received the money?
- Does a refund that lands in a corporate debtor’s account after start of CIRP form part of the insolvency estate and belong to the RP?
- Can the Income Tax Department adjust or divert refunds once CIRP has begun, or must it follow IBC procedures?
- Which forum should decide competing private claims to funds credited to a corporate debtor the tax authorities, civil courts, or the insolvency forum (Adjudicating Authority/NCLT)?
What the tribunals and courts decided
Different bodies heard different parts of this dispute. Here is a plain rundown of the outcomes and why they matter:
- ITAT (Income‑tax Appellate Tribunal) The tribunal allowed the refund in favour of the taxpayer for AY 2001–02. That was a tax outcome on merits of assessment.
- Income Tax Department payment Despite the tribunal outcome and communications from CLCS, the department remitted the refund to the corporate debtor’s bank account. That payment became the pivot of the dispute.
- Delhi High Court CLCS filed writ proceedings claiming the refund belonged to it. The High Court dismissed the petition on 10 May 2021 but gave liberty to approach the Adjudicating Authority, signalling that the insolvency forum should handle the competing claim while CIRP runs.
- Adjudicating Authority (NCLT) An application by CLCS to direct the tax department to pay CLCS was dismissed on 3 February 2023. The Adjudicating Authority found there was no clear wrongful refund and treated the credited amount as part of the corporate debtor’s estate for CIRP purposes. The NCLT stressed that when money is credited to the corporate debtor during CIRP, the RP must manage it unless a clear enforceable third‑party right exists.
- NCLAT: looked at the case again in an appeal decided on 18 March 2024. It agreed with the NCLT’s view. It said that once the insolvency process starts, no one can take money on their own or adjust refunds without permission, not even government departments. The Income Tax Department must file a claim with the Resolution Professional like any other creditor. It cannot decide things on its own. NCLAT also reminded everyone that the IBC rules are stronger than other laws when there is a clash.
Why timing and bank credit matter
The main lesson is easy to understand. When money enters a company’s bank account after the insolvency process starts, the law treats that money as part of the company’s assets. This stays true unless someone can prove, with strong documents, that the money actually belongs to them. The Resolution Professional controls all assets during the process and must take the dispute to the NCLT. Mistakes, like sending the refund to the wrong account, make things confusing. But the courts look at who really owns the money, when it was paid, and whether the other party can show a clear legal right.
What the rulings teach stakeholders
- Corporate debtors and Resolution Professionals: You must list, disclose and protect any incoming tax refunds. Don’t spend disputed amounts until the Adjudicating Authority directs otherwise. Document everything and file claims or objections early.
- Taxpayers / transferors: Act fast if a refund goes to the wrong account. Send written notices to the Income Tax Department and the bank, keep tribunal orders ready, and apply to the Adjudicating Authority without delay if CIRP exists. Evidence matters have the ITAT order, challans and transfer documents ready.
- Income Tax Department and other creditors: Treat IBC timelines and procedures with respect. If you have dues, file claims with the RP within the provided window instead of adjusting refunds on your own once CIRP begins.
Practical steps you can take now
If you face a situation like the CLC & Sons tax refund dispute, follow this checklist:
- Gather tribunal orders, assessment records, challans and transfer documents that prove entitlement.
- Write to the Income Tax Department and the bank immediately and keep delivery records.
- If CIRP is on, file an urgent application before the Adjudicating Authority (NCLT) asking for directions and interim relief.
- Ask the RP to preserve the funds and seek the NCLT’s guidance rather than the RP unilaterally releasing or using disputed amounts.
- Keep a clear timeline of events dates of transfer, remittance, communications and filings as courts rely on precise chronology.
- If you suspect fraud, seek criminal advice: new criminal law provisions such as the Bharatiya Nyaya Sanhita (BNS) may apply to dishonest diversion, though BNS does not change tax refund rules.
FAQs
1. Who owns the refund?
Ans: The insolvency forum will decide. In this dispute, the Adjudicating Authority and later NCLAT treated the refund as belonging to the corporate debtor for CIRP purposes unless a clear superior right is shown by a third party.
2. Can a third party get back a refund credited to the corporate debtor?
Ans: Yes, but they must move fast and present strong, documentary proof before the Adjudicating Authority.
3. Should the Income Tax Department adjust refunds against dues during CIRP?
Ans: No. The IBC moratorium and Section 238 mean tax authorities should file claims and not detain or adjust refunds outside CIRP procedures.
4. Can the department change its mind after remitting money?
Ans: It can try administrative corrections, but once money sits with a corporate debtor in CIRP, the dispute becomes legally complex and may require Adjudicating Authority directions.
5. Does criminal law apply if money was diverted?
Ans: If misconduct or dishonesty occurred, criminal provisions under BNS may apply. That is a separate path from insolvency claims.
6. Should an RP spend disputed funds?
Ans: No. The RP should seek NCLT directions before using disputed amounts.
7. Where should I go for help?
Get an insolvency tax lawyer quickly. Time and evidence are crucial.
Outlook
This dispute highlights friction between tax administration and insolvency law. It pushes three clear improvements:
- Tax authorities and banks must improve checks so refunds don’t land in the wrong accounts during corporate reorganisations.
- Parties involved in transfers and schemes should keep clear, signed documents showing who owns what after restructuring.
- Insolvency forums will remain the right place to settle competing claims to funds credited to a corporate debtor during CIRP.
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