“CIRP should not be permitted to be used as a mechanism to overcome any misdeeds, misappropriations or illegalities deliberately done with an intention to evade tax.”
— Telangana High Court, VRDV Traders (P.) Ltd. v. Union of India, [2025] 176 taxmann.com 80
Introduction: Insolvency Resolution or Escape Mechanism?
India’s corporate insolvency framework under the Insolvency and Bankruptcy Code, 2016 (IBC) is designed to facilitate time-bound revival of distressed enterprises. However, a significant legal concern arises when the Corporate Insolvency Resolution Process (CIRP) is invoked not for restructuring, but as a strategic device to escape scrutiny for past misconduct—particularly in cases involving deliberate tax evasion or fraudulent transactions.
This issue came to the forefront in the recent judgment of the Telangana High Court in VRDV Traders (P.) Ltd. v. Union of India, where it was held that CIRP cannot override the Department’s jurisdiction to reopen assessments under the Income-tax Act, 1961, especially where prima facie indicators of tax evasion are present. The ruling marks a vital reaffirmation that statutory finality cannot defeat substantive justice.
Case Overview: Suspected Reversal Trades and Reassessment Notices
VRDV Traders (P.) Ltd. was engaged in currency derivatives trading and had undergone CIRP. A resolution plan had been approved by the National Company Law Tribunal (NCLT) under Section 31 of the IBC. Meanwhile, based on intelligence from Project Falcon, the Income Tax Department flagged a series of reversal trades executed by the assessee that exhibited characteristics of being non-genuine and manipulative:
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Identical buy-sell quantities;
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Same counter-parties across contracts;
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Abnormal price variances;
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Trades executed within seconds;
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Use of shell entities.
The Department formed the belief that these trades were structured to suppress taxable income and generate fictitious losses. Reassessment notices under Sections 148A(b) and 148 were issued for AYs 2014–15 to 2016–17.
The company contended that the reassessment was barred as all liabilities stood extinguished by virtue of the approved resolution plan.
High Court’s Findings: CIRP Does Not Extinguish Fraud Scrutiny
The Telangana High Court dismissed the writ petition and delivered several important rulings that underscore the continuing jurisdiction of the Income Tax Department post-CIRP, particularly where fraud or illegality is alleged.
1. Reassessment Proceedings Are Legally Valid Post-CIRP
The Court clarified that Section 31 of the IBC does not prohibit the reopening of concluded assessments where prima facie evidence of evasion exists. While approved resolution plans may extinguish debt recovery claims, they do not nullify the statutory right to reassess under the Income-tax Act.
“If the Department wants to have reassessment of the assessment order, the same is not barred under law even after CIRP having been finalized and the resolution plan having been given effect to.”
(Para 21)
2. CIRP Cannot Serve as a Shield for Deliberate Misconduct
The Court strongly rejected the notion that CIRP could be used to erase past fraudulent conduct or suppress scrutiny:
“CIRP should not be permitted to be used as a mechanism to overcome any misdeeds, misappropriations or illegalities deliberately done with an intention to evade tax.”
(Para 24)
Such misuse not only defeats the object of the IBC but also compromises the integrity of the tax system and the rule of law.
3. Directors and Key Officers Remain Liable
The judgment affirmed that even if the company is resolved under CIRP, directors or promoters who orchestrated the evasion remain subject to legal consequences:
“At least appropriate proceedings can be initiated against the director/directors who were then responsible in managing the affairs of the business.”
(Para 22)
This ensures that corporate resolution does not become a tool for individual impunity.
Alignment with Judicial Precedents
The ruling in VRDV Traders is consistent with prior authoritative decisions:
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Ghanshyam Mishra and Sons v. Edelweiss ARC (2021 SCC OnLine SC 313) clarified that resolution plans do not bar liability for fraud unless explicitly dealt with.
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Dishnet Wireless Ltd. v. ACIT [2022] 139 taxmann.com 493 (Madras HC) held that reassessment proceedings are valid despite resolution, where tax evasion is suspected.
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UOI v. Ashish Agarwal [2022] 138 taxmann.com 64 (SC) upheld the procedural legitimacy of reopening assessments under the amended regime where fresh material exists.
These judgments collectively support the conclusion that tax scrutiny survives CIRP where material irregularities are later unearthed.
Restoring Balance: Justice to the Aggrieved
The Court’s reasoning highlights a fundamental point—resolution cannot override restitution. Where shell companies, circular trades, and fabricated transactions are employed to evade tax, the real aggrieved party is not just the Revenue, but:
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The honest taxpayer, whose burden increases;
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The public exchequer, deprived of lawful dues;
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The system of commercial justice, which risks distortion.
Allowing CIRP to erase these violations strips justice of its substance. The integrity of the insolvency process depends on ensuring that it does not operate as a mechanism of immunity for past illegality. Resolution must never come at the cost of truth, transparency, or tax accountability.
Conclusion: Resolution Must Not Mean Exoneration
The Telangana High Court’s decision in VRDV Traders (P.) Ltd. sends a powerful signal: CIRP is not a route to evade scrutiny for deliberate misconduct. Tax evasion, when proven or reasonably suspected, must be met with full statutory rigour—regardless of the resolution status of the corporate debtor.
Legal finality under the IBC cannot become an instrument to defeat the legitimate claims of the state or insulate wrongdoing. In such cases, justice to the aggrieved must prevail over procedural closure.
The principle is clear: where fraud exists, CIRP cannot cure—it must yield. Resolution, in its truest form, is not about burying the past, but about cleansing it through accountability. And justice—especially tax justice—can never be compromised in the name of commercial certainty.
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