ITAT Hyderabad Ruling: Moratorium Under IBC and Tax Recovery – What Businesses Must Know

 

Introduction: A Landmark Decision in Tax and Insolvency Law

In November 2025, the Income-tax Appellate Tribunal (ITAT) Hyderabad delivered a ruling with far-reaching consequences for businesses, tax authorities, and insolvency professionals alike. In the case of Gayatri Projects Limited vs DCIT (Assessment Year 2016-17), the tribunal clarified that the Income-tax Department cannot pursue recovery of tax dues during the moratorium period declared under the Insolvency and Bankruptcy Code (IBC).

This judgment is not just a legal formality—it’s a practical guidepost for companies navigating corporate insolvency. It balances the need for tax compliance with the IBC’s core objective: enabling corporate restructuring without interference from individual creditors.

You might wonder: what exactly does this mean for businesses and their tax obligations? Why was there uncertainty in the first place? And how should auditors, CAs, and insolvency professionals adapt? Let’s break this down step by step.

 

Understanding the IBC Moratorium: A Shield for Corporate Debtors

What Is a Moratorium Under the IBC?

Section 14(1) of the IBC automatically triggers a moratorium when a company enters a Corporate Insolvency Resolution Process (CIRP). Once the National Company Law Tribunal (NCLT) admits a petition under Sections 7, 9, or 10, the corporate debtor gains temporary protection from creditor actions.

Specifically, the moratorium restricts:

• Legal proceedings: Creditors, including tax authorities, cannot file or continue lawsuits.
• Enforcement of security interests: No seizures or attachment of assets.
• Asset transfers: The sale, transfer, or disposal of company assets is temporarily halted.
• Disruption of essential services: Utilities and key suppliers cannot be interrupted.

Think of it as a “breathing space” designed to stabilize the company, maintain its value, and enable a collective resolution.

The Non-Obstante Clause: Why Section 238 Matters

Section 238 of the IBC is critical—it contains a non-obstante clause, meaning the moratorium overrides conflicting provisions in other laws, including the Income Tax Act, 1961. This ensures that during CIRP, the corporate debtor is shielded from piecemeal recovery actions by individual creditors.

The moratorium remains in effect until:

• A resolution plan is approved under Section 31,
• Liquidation begins under Section 33, or
• Other IBC-defined events occur.

By freezing coercive actions, the law prevents value destruction and encourages fair resolution among all creditors.

 

Why Tax Authorities Were Impacted

The Income-tax Department is often a significant creditor in corporate insolvency cases. Under the IT Act, authorities have powers to:

• Assess taxes (Section 143),
• Conduct best judgment assessments (Section 144),
• Reassess liabilities (Section 147),
• Issue demand notices (Section 156), and
• Recover dues through certificates (Section 226).

Here lies the friction: if a company under CIRP faces simultaneous tax recovery, allowing coercive actions would undermine the IBC’s collective resolution mechanism. Until now, courts and tribunals had debated whether the moratorium blocks only recovery or both assessment and recovery.

The ITAT Hyderabad ruling provides clarity: assessment can continue, but recovery cannot.

 

Historical Context: Legal Ambiguity

Several NCLAT rulings in the past emphasized a subtle distinction:

• Assessment of tax liability may continue during CIRP.
• Enforcement actions (like attaching assets) are prohibited.

This distinction was often misunderstood by practitioners and companies, leading to confusion and procedural delays. The Gayatri Projects case finally aligns income-tax law with insolvency law, reinforcing that even government authorities are bound by IBC moratorium provisions.

 

The Gayatri Projects Case: Facts and Tribunal Findings

Facts:

• Corporate Debtor: Gayatri Projects Ltd., Hyderabad
• CIRP Start Date: 15 November 2022
• Issue: Income-tax Department issued a revised claim on 6 January 2025, including penalties.
• Company’s Position: Recovery barred under Section 14 of IBC during moratorium.

ITAT Hyderabad Ruling:

• Section 14 IBC prevents recovery actions by the tax department during CIRP.
• Tax authorities may assess and quantify liability but cannot enforce collection.
• The matter was remanded to the CIT(A) for consideration in light of the moratorium.

The judgment essentially creates a “limited jurisdiction” window for tax authorities: assess, claim, but do not enforce until CIRP ends.

 

Legal Provisions at Play

Key legal provisions highlighted by the tribunal include:

Law	Relevance
Section 14, IBC	Moratorium clause restricting creditor proceedings
Section 238, IBC	Non-obstante clause; ensures IBC prevails over inconsistent laws
Sections 144, 156, 226 IT Act	Tax assessment, demand notices, and recovery procedures

The ITAT distinguished assessment vs recovery—a crucial concept for compliance professionals.

 

Alignment With Earlier Jurisprudence

In cases like Mohan Lal Jain vs ITO (NCLAT), courts held that:

• Recovery is barred under moratorium.
• Assessment can continue.

The ITAT Hyderabad ruling now explicitly extends this principle to the Income-tax Department, sending a strong message: even sovereign authorities must respect IBC moratoriums.

“Once the moratorium is granted to the corporate debtor, the Income-tax Department cannot recover dues, but there is no bar to determining the tax liability.” — ITAT Hyderabad

 

Practical Implications: What the Tax Department Can and Cannot Do

Cannot do during moratorium:

• Initiate recovery notices (Sections 156/226).
• Attach or seize corporate assets.
• Execute orders affecting operations or property.

Can do:

• Assess and determine tax liability.
• File claims with the Resolution Professional (RP).
• Keep demands in abeyance until the moratorium ends.

This distinction is vital for businesses, auditors, and insolvency professionals. Misunderstanding it can lead to legal disputes, fines, or delays in resolution.

 

Implications for Corporate Debtors

• Breathing Space: Shield from aggressive tax recovery, allowing operational focus.
• Business Continuity: Enables the RP to restructure without fear of coercive action.
• Liability Planning: Tax dues remain; companies must include them in resolution/liquidation plans.
• Claim Monitoring: Ensures accurate integration of tax claims in CIRP waterfall distribution.

 

Implications for the Income-tax Department

• Limited Enforcement: Immediate recovery is prohibited.
• Continued Assessment: Liability quantification ensures claims are recognized post-moratorium.
• Priority Concerns: Filing timely claims avoids losing statutory priority under Section 53 distribution.
• Coordination with RP: Essential to avoid procedural conflicts.

 

Role of Auditors, CAs, and Insolvency Professionals

Professionals must:

• Advise clients on moratorium effects.
• Document assessments and claims properly.
• Include pending tax liabilities in financial reporting.
• Ensure due diligence in deals impacted by unresolved tax assessments.

For example, if a company under CIRP is being considered for M&A, unassessed tax liabilities can affect valuation and deal structure. Proper disclosure and monitoring help prevent disputes later.

 

Broader Economic and Policy Effects

• Strengthening IBC Framework: Confirms collective resolution over piecemeal creditor action.
• Creditor Equality: Promotes fair treatment among all creditors, including government agencies.
• Revenue Strategy: Encourages tax authorities to focus on claim filing and cooperation rather than aggressive enforcement.
• Investor Confidence: Clear rules enhance predictability, supporting investment in turnaround opportunities.

 

Common Misconceptions

Misconception	Reality
Assessment is barred	❌ False — assessment can continue
Moratorium protects directors	❌ False — only the corporate debtor is protected
Tax dues vanish	❌ False — collection is deferred, not extinguished
Sovereign recovery overrides IBC	❌ False — Section 238 ensures IBC prevails

Understanding these nuances prevents procedural errors and ensures compliance with both the IBC and IT Act.

 

Expert Insights

Drawing from over two decades of experience in tax and insolvency advisory, the Gayatri Projects ruling highlights:

• Businesses: Can plan restructuring without unexpected tax enforcement pressures.
• Tax Authorities: Must balance timely assessment with moratorium limitations.
• Advisors: Need to update internal processes, including monitoring CIRP start dates, moratorium notices, and claim timelines.

From our experience at Manika TaxWise, clarity on moratorium effects allows companies to focus on value preservation, while ensuring statutory compliance is not compromised.

 

Actionable Steps for Stakeholders

For Corporate Debtors:

• Track NCLT admission and moratorium notices.
• Notify tax authorities to prevent unauthorized recovery.
• Plan for liability settlement within CIRP or liquidation process.

For Tax Authorities:

• Assess liabilities accurately.
• File claims with the RP timely.
• Avoid sending demand notices until moratorium lifts.

For Auditors and CAs:

• Include moratorium status in financial statements.
• Reflect tax claims and contingent liabilities.
• Ensure transparency under Ind AS and auditing standards.

For Resolution Professionals:

• Coordinate with tax authorities.
• Admit claims properly in CIRP waterfall distribution.
• Integrate tax assessments into resolution or liquidation plans.

 

FAQs: Common Questions

Q1: Is my business exempt from paying tax during CIRP?
No. The moratorium only suspends enforcement; liabilities still exist.

Q2: Can the Income-tax Department issue a demand notice?
No. Section 156 notice counts as recovery and is barred.

Q3: Can tax recovery resume after moratorium ends?
Yes, subject to resolution plan terms and Section 53 distribution.

Q4: Are directors protected under moratorium?
No. Only the corporate debtor enjoys protection.

Q5: How should auditors report tax claims?
Disclose moratorium effects, contingent liabilities, and pending assessments under Ind AS and auditing standards.

 

Conclusion: A Watershed Moment in Indian Tax & Insolvency Law

The ITAT Hyderabad ruling clarifies the delicate interface between tax and insolvency law:

• For businesses: Provides much-needed breathing space and operational stability.
• For tax authorities: Emphasizes structured coordination with RPs and timely claim filing.
• For advisors: Highlights the importance of monitoring, documentation, and compliance.

Ultimately, this ruling reinforces the IBC’s collective resolution framework, ensures equitable treatment of creditors, and strengthens corporate restructuring in India.

At Manika TaxWise, we guide businesses and professionals through these legal intricacies, ensuring compliance with tax law while leveraging insolvency provisions for strategic planning.

 

References

1. “Recovery proceedings by Income Tax Department during moratorium period not sustainable,” Taxguru, 23 Oct 2025.
2. “Insolvency case – Whether IBC is superior over Income Tax? Yes,” MLG Associates, 13 Aug 2024.
3. “The Moratorium under Section 14 of the IBC: A Legal and Empirical Analysis of its Scope and Limitations,” ibclaw.in.
4. “Tax Authorities Left High & Dry in IBC Cases,” Vinod Kothari Consultants (PDF).