IBC

Case Analysis

Hon’ble National Company Law Appellate Tribunal (NCLAT) in its recent judgment has held that if a buyer purchases an immoveable property through e-auction from a company undergoing liquidation under the Insolvency and Bankruptcy Code, 2016 (IBC), it is not required to deduct tax at source from the sale consideration at the time of making payment for such transaction. The judgment was delivered by a Division Bench comprising of Justice Jarat Kumar Jain, Member (J) and Dr. Ashok Kumar Mishra, Member (T.) on representation and arguments forwarded by CA. Anil Goel, Founder Chairman of AAA Insolvency Professionals LLP and Adv. Kanishk Khetan, referring to provisions of the Income Tax Act, 1961 (IT Act) and the Insolvency and Bankruptcy Code, 2016 & regulations made thereunder.

The Appellant in the present case was Mr. Om Prakash Agrawal, Liquidator of S. Kumars Nationwide Limited, who filed an application before the Ld. Adjudicating Authority for directions upon the successful bidder in auction held for sale of assets of the Corporate Debtor not to deduct tax at source (TDS) while making payment of consideration of Rs. 43 crore for purchase of immoveable property.  The Ld. Adjudicating Authority held that the deduction of tax at source under Section 194-IA of the IT Act does not mean assessment and raising demand for collection of tax by the Department. Collection of tax will arise only after passing orders under the IT Act subsequent to filing of Income Tax Return by the assesse. Thus, the deduction of tax at source does not tantamount to payment of Government dues in priority to other creditors because it is not a Tax demand for realization of Tax dues. It is the duty of the purchaser to credit TDS to the Income Tax Department against PAN of the Corporate Debtor. Accordingly, the application was dismissed by the Ld. Adjudicating Authority on 11.06.2020.

Aggrieved by the aforesaid order, the Appellant filed this Appeal before the Hon’ble NCLAT.

On behalf of the Appellant, the following contentions were raised:

• Section 53 of the IBC postulates the distribution of assets to the Creditors without deduction of tax at source. TDS differs from the scheme and mandate under section 53(1) of the IBC. Disbursement of Government dues falls under Section 53(1)(e) of the IBC and prior deduction of tax at source disrupts the waterfall mechanism stipulated under Section 53(1) of the IBC.
• A Liquidator is duty bound to maintain/update the Books of Accounts only upto the Liquidation Commencement Date. During the liquidation period, there is no requirement of maintaining profit & loss account and balance sheet of the Corporate Debtor and neither to get them audited. Filing of Income Tax Return and getting refund of TDS, which can only be initiated upon preparation of financial statements, is a long drawn process that goes against the object of the IBC. Thus, the provisions under Section 194 IA of the Income Tax Act are inconsistent with Section 53 of the Code
• Section 178 of the IT Act, which requires the liquidator to keep aside the Income tax dues on sale of property and to notify the Income tax officer, is applicable on a company in winding up under the Companies Act, 2013. An amendment to sub-section 6 was enacted on 01.11.2016 clarifying that the provisions of this section would have effect notwithstanding anything to the contrary contained in any other law, except on the provisions of the Insolvency and Bankruptcy Code, 2016. Accordingly, by virtue of the amendment, this provision would neither be applicable to a company undergoing liquidation under IBC nor the Liquidator appointed thereto.

Issue before the NCLAT was:

Whether the provisions of section 194-IA of the Income Tax Act, 1961 are inconsistent with Section 53 (1) (e) of the Insolvency and Bankruptcy Code, 2016?

Hon’ble NCLAT held that:

By virtue of the amendment in sub-section 6 of Section 178 of the IT Act, the whole of section 178 has no application to liquidation proceedings initiated under IBC. It was also held that the priority of Government dues is different in Section 53(1) (e) of the Code and in Section 178 of the IT Act. Income Tax Department is to be treated as a secured creditor in accordance to Sections 178 (3) and (4) of the IT Act. Whereas, as per Section 53 (1) (e) of the IBC, the legislature assigned 5^th position in the order of priority to government dues.

Section 194 IA of the IT Act provides that where the consideration for transfer of the immoveable property is more than Rs. 50 Lakh, then the transferee is responsible to deduct the amount which is 1% (now 0.75% w.e.f. 14^th May 2020) of the consideration as Income Tax.

Section 199 of the IT Act, provides that any deduction made in accordance with the Section 194 IA of the IT Act and paid to the Central Government shall be treated as payment of tax on behalf of the person from whose Income deduction was made.

As per Section 194 IA of the IT Act, 1% TDS is recovered in priority to other creditors of the transferor, which is partial capital gain tax, whereas, Section 53(1)(e) of the Code in waterfall mechanism provides that the Government dues comes fifth in order of priority. Thus, in regard to recovery of the Government dues (including Income Tax) from the Company in Liquidation under the Code, there is inconsistency between Section 194IA of the IT Act and Section 53(1) (e) of the Code. As a result, by virtue of Section 238 of the Code, Section 53 (1) (e) of the Code shall have overriding effect on the provisions of the Section 194 IA of the IT Act.

It was further held that the Liquidator of a Company in liquidation under the Code is not required to file Income Tax Return, and therefore there is no question of claiming refund of TDS deducted under Section 194 IA of the IT Act.

Clearly, it is a cumbersome process to take refund from Income Tax Department and hence IBC and IBBI (Liquidator Process) Regulation 2016 is silent on the subject as the objective of the Code is to provide for a time bound period for completion and maximization of value of assets and cease of doing business.

Hon’ble NCLAT held that the deduction of tax at source means raising demand for collection of tax by the Department. TDS under Section 194 IA is an advance capital gain tax, recovered through transferee on priority with other creditors of the company. Hence, it is inconsistent with the provision of Section 53 (1) (e) of the Code and by virtue of Section 238 of the Code, the provision of Section 53(1)(e)shall have overriding effect. Accordingly, the impugned order by the Ld. NCLT was set aside and the appeal was allowed. The respondent- Income Tax Department was directed to refund the amount of TDS to the Appellant which was deposited by the buyer.