NO TDS on Sale of Property by Liquidator under the IBC, 2016?

Case Law: Company Appeal (AT) (Insolvency) No. 624 of 2020

Facts of the Case:

1. Om Prakash Agrawal; Liquidator – S.Kumars Nationwide Limited (“Appellant” or “Liquidator”) who has been appointed as Liquidator of S. Kumars Nationwide Limited a public limited company (“Corporate Debtor”) under the provisions of Company Act 1956/2013 having its registered office at B2, 5^{TH Floor}, Marathon Nextgen, off. G.K.Marg, Worli, Lower Parel (West), Mumbai, Maharashtra, India, 400013.
2. Liquidator had sought Adjudicating Authority’s direction to prevent 1% TDS deduction on Rs. 43 Crores by the successful bidder (Respondent No.2) in auction held for sale of assets of the Corporate Debtor by the Income Tax Authority, arguing inconsistency with Section 53 of the Insolvency and Bankruptcy Code (“IBC”). Contends Section 238 of IBC grants overriding effect to Code’s provisions.
3. Adjudicating Authority dismisses Liquidator’s plea, stating TDS deduction under IT Act Section 194-IA does not signify tax assessment or demand collection by the department. Emphasizes that TDS is the purchaser’s duty, not tantamount to priority payment of government dues.
4. Being aggrieved with this order, the Appellant filed the Appeal against the order of Adjudicating Authority before National Company Law Appellate Tribunal, New Delhi.

The Applicant Company’s submission:

1. TDS deduction contradicts Section 53 of the Code, disrupting the mandated distribution of assets to creditors. Cites Andhra Pradesh High Court judgment to emphasize that Tax Recovery Officer’s claim for priority is unwarranted in liquidation proceedings. Further, the Income Tax liability arising out of sale of assets by the Liquidator shall be distributed in accordance with the provisions of Section 53 of the Code and the capital gain tax shall not be treated as liquidation cost as held by the National Company Law Tribunal) Bench at Allahabad in LML Limited Vs. Office of Commercial of Income Tax, Mumbai. [(C.A. No. 389 of 2019 in CP(IB)No. 55/ALD/2017].
2. The Liquidator’s obligation to maintain or update accounts does not extend to preparing audited financial statements during the liquidation period. Further, filing Income Tax Return and refund processing, extending beyond the Code’s scheme, contradicts its specific regulations. Further it was highlighted before the NCLAT about the absence of provisions for filing Income Tax Return in case of an overall capital loss in the company and hence mode of distribution is provided based on existence of Liquidation Estate on liquidation commencement date.
3. The Code’s liquidation scheme negates the need for a company in liquidation to file returns, as it conflicts with the regulatory process. Also, as per Reg. 44 of IBBI (Liquidation Process Regulation 2016) the Liquidation Process is required to be completed within a year.  Seeking a refund requires filing a return which has not been mandated by the Code. Thus, Section 194 IA of the IT Act contradicts Section 53 of the Code and by virtue of Section 238, section 53 of the Code shall have overridden effect. Appellant therefore sought reversal of the order of Adjudicating Authority and a directive for refunding TDS by IT Department deposited by the Respondent No. 2 i.e. successful bidder.

Department’s view:

1. IT Department argued that Appellant’s interpretation extends beyond the Code’s mandate. As per Section 247 and the Third Schedule of the Code, only Section 178 of the IT Act was amended, with no changes to Section 194-IA. Further it was argued that the Code does not exempt a Company in liquidation from filing an income tax return under Section 139 of the IT Act. It was submitted that TDS deduction under Section 194-IA is necessary for the sale of immovable property in liquidation and any exemption would amount to amending the provisions of the IT Act. Citing the verdict of High Court of Andhra Pradesh’s ruling in case of Income Tax Officer vs. Official Liquidator [1977 106 ITR 119(Andhra Pradesh)] it was further submitted that the liquidator, as a principal officer within the meaning of Section 2(35) of the IT Act, can file and verify the return.
2. There is no conflict between Section 194-IA of the IT Act and Section 53 of the Code, as their intent and purpose are distinct. Section 194-IA serves as a fiscal provision requiring TDS for the sale of immovable property over 50 lakhs, while Section 53 determines priority in the distribution of sale proceeds during the liquidation of a Corporate Debtor. These provisions operate in entirely different domains with distinct purposes, and thus, no conflict exists between Section 194-IA of the IT Act and Section 53 of the Code.
3. Assessment proceedings fall outside the jurisdiction of all civil courts, including the company court, citing the Supreme Court’s ruling in S.V. Kondaskar, Official Liquidator and Liquidator of the Colaba Land & Mills Co. Ltd. Vs. VM Deshpande, Income Tax Officer [1972 83 ITR 685(SC)]. Further it was submitted that Adjudicating Authority has rightly held that the TDS u/s 194-IA of the IT Act does not mean assessment and raising demand for collection of Tax by the Department and therefore the deduction of TDS does not tantamount to recovery of Income Tax in priority to the other creditors.

After hearing counsel for both parties and examining the records along with relevant provisions of the Code and the IT Act, the question before NCLAT was:

Hon’ble NCLAT Decision:

• The necessity to amend Sub-Section 6 of Section 178 of the IT Act was examined by NCLAT, wherein it was noted that Section 247 of the Code, deals with the amendment to the IT Act, and provides that the said IT Act shall be amended in the manner specified in the Third schedule. Referring to the Supreme Court’s decision in Imperial Chit funds (P) Ltd. Vs. Income Tax Officer (1996) 219 ITR 498, it was noted that the Income Tax Department is treated as a secured creditor in liquidation proceedings, giving it priority. However, Section 53(1)(e) of the Code assigns a different priority to government dues, including Income Tax Dues. Both Section 178(6) of the IT Act and Section 53 of the Code begin with a non-obstante clause, indicating the legislative intent to amend Section 178(6) to align with the Code’s scheme. By virtue of the amendment the whole of Section 178 has no application to the liquidation proceedings initiated under the Code. With the aforesaid, it was necessary to amend Section 178(6) of the IT Act.

• Section 194-IA of the IT Act mandates that when the consideration for the transfer of immovable property exceeds 50 Lakhs, the transferee must deduct 1% of the consideration as Income Tax. Section 199 specifies that such deductions, when paid to the Central Government, are considered as payment of tax on behalf of the transferor. Additionally, Section 45 of the IT Act states that profits or gains from the transfer of a capital asset are chargeable to Income Tax under the head of capital gain. Therefore, TDS under Section 194-IA essentially functions as an advance capital gains tax collected by the transferee (Purchaser) on behalf of the transferor (Seller).”

• Section 194-IA of the IT Act mandates the recovery of 1% TDS as partial capital gains tax, taking priority over other creditors of the transferor. However, Section 53(1)(e) of the Code, in its waterfall mechanism, places government dues, including income tax, as fifth in order of priority for recovery from a company in liquidation. This inconsistency between Section 194-IA of the IT Act and Section 53(1)(e) of the Code leads to the conclusion that, by virtue of Section 238 of the Code, the latter shall have overridden effect. Notably, Section 53 of the Code starts with a non-obstante clause, whereas Section 194-IA of the IT Act does not, making it subject to the overriding effect of the Code. Hence, there was no necessity to amend Section 194-IA of the IT Act.

• The Liquidator, acting as a principal officer, can verify the company’s return and claim a refund of the TDS amount, as supported by the Hon’ble High Court’s decision in the mentioned case of Income Tax Officer. The third proviso of Section 140 of the IT Act specifies that when a company is wound up under court orders or otherwise, the return shall be verified by the Liquidator mentioned in Sub-Section 1 of Section 178 of the IT Act. However, during the corporate insolvency resolution process under Section 7, 9, or 10 of the Code, the return shall be verified by the Insolvency Professional appointed by the Adjudicating Authority. Notably, there is no provision in the IT Act, Code, or IBBI (Liquidation Process Regulation, 2016) requiring the Liquidator of a company in liquidation under the Code to file an Income Tax Return. Additionally, the Code and IBBI (Liquidation Process Regulation, 2016) do not impose a duty on the Liquidator to prepare financial statements, a prerequisite for filing a return.

• Since, the Liquidator of a company in liquidation under the Code is not obligated to file an Income Tax Return, there is no basis for claiming a refund of TDS deducted under Section 194-IA of the IT Act.

• General Circular No. 41 of 2011 dated July 6, 2011, issued by the Government of India, Ministry of Corporate Affairs pertains to the e-filing of Income Tax Return for companies under liquidation. Given that the said MCA circular predates the enactment of the Code, it is deemed irrelevant for addressing the issues at hand in this appeal.

• In conclusion the NCLAT, passed a judgment concluding that Adjudicating Authority has erroneously concluded that the deduction of Tax at Source (TDS) does not imply raising a demand for the collection of tax by the Department. TDS under Section 194-IA serves as an advance capital gains tax, prioritized over other creditors of the company which is inconsistent with the provisions of Section 53(1)(e) of the Code, and by virtue of Section 238 of the Code, the Section 58(1)(e) of the Code shall have overriding effect.

• Hon’ble NCLAT further set aside the order passed by National Company Law Tribunal New Delhi Bench and also directed IT Department to refund the amount of TDS to the Appellant which is deposited by Respondent No. 2 with the department.

The decision confirms the position of the law that post commencement of liquidation, income tax provisions are not applicable.