Understanding Section 156A of the Income Tax : How to Modify Demand in Insolvency Resolution Process

I. Introduction

A. Explanation of Section 156A of the Income Tax Act:

Section 156A of the Income Tax Act was inserted to address the lack of a procedure or mechanism in the Act for reducing demands from the outstanding demand register in the event of a business reorganization or insolvency resolution process. This new section allows for the modification of demand orders in accordance with the directions of the Court, Tribunal, or Adjudicating Authority, in order to ensure the future viability of sick entities that have been acquired in business reorganization.

B. Purpose of the amendment:

The amendment aims to ensure the future viability of sick entities that have been acquired in business reorganization by allowing the Court, Tribunal, or Adjudicating Authority to recast the entire liability and modify the demand created via various proceedings in the past, including those by the Income Tax department.

C. Summary of key points:

In summary, Section 156A allows for the modification of demand orders in accordance with the directions of the Court, Tribunal, or Adjudicating Authority, in order to ensure the future viability of sick entities that have been acquired in business reorganization. The Assessing Officer (AO) is required to modify the demand payable in conformity with the order of the Adjudicating Authority and serve the assessee with a notice of demand specifying the sum payable, if any.

II. Modifying Demand Orders in Insolvency Resolution Processes

A. Role of the Assessing Officer:

The Assessing Officer (AO) is required to modify the demand payable in conformity with the order of the Adjudicating Authority as defined in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016, and shall thereafter serve the assessee with a notice of demand specifying the sum payable, if any.

B. Conformity with the order of the Adjudicating Authority:

The AO is required to modify the demand payable in conformity with the order of the Adjudicating Authority, which is defined in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016

C. Revised demand notice:

If the order referred to in sub-section (1) is modified by the National Company Law Appellate Tribunal or the Supreme Court, the modified notice of demand issued by the AO shall be revised accordingly.

D. Implications for the assessee:

With this amendment, assessee will have the opportunity to get the demand reduced in case of disputes about the insolvency of a company are resolved by NCLAT or by the Supreme Court, and the demand raised by the Income Tax Department through the notice under Section 156 is modified.

III. The Amount by which the Demand Order can be Reduced

A. Definition of 'reduced':

Section 156A authorizes the AO to modify the demand order issued under Section 156 in conformity with the order of the adjudicating authority, reducing the demand of tax, interest, penalty, fine, or any other sum.

B. Supreme Court ruling in Mohan Wahi v. CIT:

The Supreme Court in the case of Mohan Wahi v. CIT held that the term 'reduced' would include a case where the demand consequent upon an appeal or any proceedings under the Act has been reduced to nil.

C. Reduction to nil:

Thus, where the adjudicating authority reduces the demand to nil, the AO shall be bound to modify the demand order accordingly.

IV. Which Component to be Included in the Modified Demand Order

A. Following the demand order issued under Section 156: The AO shall follow the demand order issued under Section 156 when modifying the demand order.

B. Types of sums payable: The AO can raise the demand for any tax, interest, penalty, fine or any other sum payable in consequence of any order passed under this Act.

C. Ejusdem generis rule: Applying the rule of ejusdem generis, the words 'any other sum' should include fees payable by the assessee under any provision of the Act, such as, fees under Section 234F, etc.

D. Cess and surcharge: Although 'cess' and 'surcharge' have not been stated explicitly, they should be covered in the term 'tax' as supported by the order of the Kolkata Tribunal in the case of Kanoria Chemicals & Industries Ltd. v. ACIT

VI. Conclusion

A. Summary of key points: In conclusion, Section 156A of the Income Tax Act allows for the modification of demand orders in accordance with the directions of the Court, Tribunal, or Adjudicating Authority, in order to ensure the future viability of sick entities that have been acquired in business reorganization. The Assessing Officer (AO) is required to modify the demand payable in conformity with the order of the Adjudicating Authority and serve the assessee with a notice of demand specifying the sum payable, if any. The amount by which the demand order can be reduced is determined by the order of the Adjudicating Authority.

B. Importance of Section 156A: This amendment is important as it addresses the lack of a mechanism for reducing demands in the event of a business reorganization or insolvency resolution process, and it ensures the future viability of sick entities that have been acquired in business reorganization by allowing the Court, Tribunal, or Adjudicating Authority to recast the entire liability and modify the demand created via various proceedings in the past.

C. Future implications for insolvency resolution and business reorganization: This amendment will have positive implications for insolvency resolution and business reorganization in the future, as it ensures the survival of acquired entities by reducing the demand and recasting the entire liability. Overall, Section 156A is a step forward to make the Insolvency Resolution process more effective and efficient.