NCLT Ahmedabad: Disputed ₹211.87 Crore VAT & CST Dues Cannot Be Admitted in Liquidation Without Final Tax Determination

NCLT Ahmedabad: Disputed ₹211.87 Crore VAT & CST Dues Cannot Be Admitted in Liquidation Without Final Tax Determination

Introduction

The National Company Law Tribunal (Ahmedabad Bench) has upheld the decision of the liquidator of Gujarat Foils Ltd. to reject a tax claim of approximately ₹211.87 crore filed by the State Tax Department during the company’s liquidation. A Bench comprising Judicial Member Chitra Hankare and Technical Member Dr. V.G. Venkata Chalapathy held that the claim relating to VAT and CST dues could not be admitted as the underlying tax liabilities were still under challenge before appellate authorities and had not attained finality.

Factual Background

The case arose from the liquidation proceedings of Gujarat Foils Ltd. Insolvency proceedings against the company commenced on November 30, 2017. After the corporate insolvency resolution process failed to yield a resolution plan, the Tribunal ordered liquidation of the company on September 16, 2019 and appointed Alok Kailash Saksena as the liquidator.

Following the public announcement inviting claims from creditors, the State Tax Department filed a claim on October 22, 2019 seeking recovery of approximately ₹211.87 crore towards VAT and CST dues along with interest and penalties. The demand related to assessment years from 2006–07 to 2017–18. The tax liabilities arose from disputes relating to classification of aluminium foil for VAT purposes and from disallowances linked to statutory CST forms.

Procedural Background

After examining the claim, the liquidator rejected it through a communication dated March 5, 2020. The rejection was based on the ground that the tax demands stemmed from assessment orders that were under challenge before appellate authorities and therefore had not yet been finally determined. Aggrieved by the rejection of its claim, the State Tax Officer approached the NCLT challenging the liquidator’s decision.

Issues

1. Whether the liquidator was justified in rejecting the State Tax Department’s claim when the underlying tax demands were pending adjudication before appellate authorities.

2. Whether the liquidator was required to assign a notional value to the disputed claim instead of rejecting it entirely.

3. Whether the pendency of tax appeals rendered the tax liability incapable of admission during the liquidation process.

Contentions of the Parties

The State Tax Department argued that the pendency of appellate proceedings did not make the underlying tax liability uncertain. It contended that the liquidator had wrongly rejected the claim merely because appeals against the assessment orders were pending. The department further submitted that under the liquidation regulations, the liquidator ought to have assigned a notional value to the disputed claim based on available records rather than rejecting it outright.

The department also relied on the judgment in State Tax Officer v Rainbow Papers Ltd to argue that statutory tax dues may qualify as secured claims under the Insolvency and Bankruptcy Code. The respondent liquidator and the successful auction purchaser, OFB Tech Private Limited, opposed the application. They contended that the tax demands were still under dispute and had not crystallised into final liabilities. It was further argued that once the corporate debtor had been sold as a going concern during liquidation, prior liabilities could not be enforced against the purchaser.

Reasoning and Analysis

The Tribunal examined the nature of the tax demands and noted that the liabilities arose from disputes over VAT classification of aluminium foil and issues relating to statutory CST forms. These matters were already pending before appellate authorities and had not yet reached final adjudication. The Bench observed that the liquidator had acted within the scope of his statutory duties under Section 35(1)(a) of the Insolvency and Bankruptcy Code, 2016, which requires the liquidator to verify and admit claims only when they are properly established.

Since the assessment orders forming the basis of the claim were under challenge, the Tribunal held that the liability remained uncertain and had not crystallised into a final debt. In such circumstances, admitting the claim would be inconsistent with the framework of the insolvency process. The Tribunal also rejected the department’s argument that the liquidator should have assigned a notional value to the disputed claim. It held that the Insolvency and Bankruptcy Code does not require liquidators to accept claims based on speculative or unresolved liabilities.

The Bench further noted that the department had failed to pursue the adjudication of the tax demands within the relevant time during the liquidation process, which resulted in the claim remaining in an indeterminate state.

Decision

The NCLT Ahmedabad dismissed the application filed by the State Tax Department and upheld the liquidator’s decision to reject the ₹211.87 crore VAT and CST claim. The Tribunal concluded that the tax liabilities remained in a “fluid form” without any crystallised determination and therefore could not be admitted as valid claims during liquidation.

In this case the applicant was represented by Advocate Ritu Guru. Meanwhile the respondent was represented by Advocates Nipun Singhvi and Mayur Jugtawat for R1; Advocates Shreya Kumar and Sarwar Raza for R3.