Not without following the liquidation claims process. In Avil Menezes, Liquidator of Sunil Hitech and Engineers Ltd. v. Principal Chief Commissioner of Income Tax, Mumbai, the NCLAT held on 12 July 2024 that the Department could not unilaterally use later tax refunds to recover pre-CIRP dues without filing its claim with the liquidator. The ruling does not ban set-off during liquidation: it recognizes that set-off may be available, but not as a way to bypass the claims process or improve a creditor’s place in the distribution.
What the NCLAT decided
The National Company Law Appellate Tribunal (NCLAT), Principal Bench at New Delhi, decided Company Appeal (AT) (Insolvency) No. 258 of 2024 on 12 July 2024. The appeal arose from an order of the National Company Law Tribunal (NCLT), Mumbai Bench-I, dated 22 November 2023. The case concerned tax refunds adjusted against older demands while Sunil Hitech and Engineers Ltd. was in liquidation. Read the NCLAT judgment.
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The NCLAT distinguished between determining tax dues and recovering them. It accepted that the Income Tax authority could continue assessment proceedings and determine the amount due, subject to the insolvency framework. But it held that the authority could not recover by unilaterally appropriating a refund without submitting its claim through the liquidation process. The tribunal stated: “Filing of claims for set-off is also mandated by Liquidation Regulations and cannot be bypassed.”
Does the ruling prohibit set-off during liquidation?
No. The NCLAT said the Insolvency and Bankruptcy Code (IBC) does not generally prohibit set-off during liquidation and referred to Regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, which addresses mutual dealings and netting. The ruling is about the procedure and effect of set-off in this dispute: a creditor cannot use unilateral adjustment to avoid the claims process or gain an advantage in the liquidation distribution.
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The decision also rejected the NCLT’s conclusion that section 245 of the Income-tax Act itself gave the Department a security interest. The NCLAT found that the statutory language at issue did not create a charge or security interest. That conclusion concerns section 245 and the record before the tribunal; it should not be read as a ruling that every tax authority is unsecured in every insolvency.
What happened in the Sunil Hitech case
Sunil Hitech entered the corporate insolvency resolution process (CIRP) on 10 September 2018 and went into liquidation on 25 July 2019. The NCLT Mumbai order records that the Department made two adjustments on 12 November 2021: Rs. 2,98,97,590 and Rs. 2,85,49,460. The adjustments were against demands associated with assessment years 2010–11 and 2011–12. The liquidator argued that the Department had not filed a claim for those dues. These are amounts specific to this case, not typical refund values or general limits. See the NCLT order.
Why the matter was sent back to the NCLT
The NCLAT did not determine the final amount the Department could retain. It remanded the dispute to the NCLT to compare the sums already adjusted with the Department’s entitlement in liquidation. The possible outcomes depend on that calculation:
- If the adjustments exceed the Department’s entitlement, the NCLT may direct repayment of the excess to the liquidation estate.
- If the adjustments are below its entitlement, the adjustment may remain undisturbed; any remaining balance may be extinguished because the Department did not file a claim.
The appeal was disposed of by remand. The post-remand calculation and any later change to the disposition are not established by the cited decisions, so the final quantum cannot be stated here. The NCLAT judgment sets out the remand; a later NCLT order citing Avil Menezes discusses set-off in a separate proceeding.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What the ruling means for tax authorities and liquidators
The practical point is to keep three issues separate: assessment, set-off, and recovery. The authority may determine tax dues; set-off may be possible under the liquidation rules; but a refund adjustment does not, by itself, replace filing and having a claim considered under the liquidation process. A creditor should not assume that a statutory power to adjust a refund automatically creates a security interest under the IBC.
When applying the decision to another insolvency, relevant questions include whether the company is in CIRP or liquidation, whether the debts are mutual and when they arose, whether the creditor filed a claim with the liquidator, whether the governing statute expressly creates a charge or security, and whether the dispute concerns assessment, adjustment, or enforcement. The answer turns on those circumstances; Avil Menezes does not make every set-off invalid.
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