In the event an assessee company is in liquidation under the IBC, the Income-tax Department can no longer claim a priority in respect of clearance of tax dues of the said company, as provided u/s 178(2) & (3) of the Income Tax Act, 1961- Leo Edibles & Fats Ltd Vs. The Tax Recovery Officer (Central), Income Tax Department, Hyderabad, & others- High Court of Judicature at Hyderabad for the State of Telangana and Andhra Pradesh
1. The Court held that the Income-tax Department cannot claim any priority merely because of the fact that the order of attachment issued by him was long prior to the initiation of liquidation proceedings under the IBC against the Corporate Debtor.
2. In so far as liquidation of a company under the IBC is concerned, Section 178 of Income Tax Act, 1961 stands excluded by virtue of the amendment of Section 178(6) with effect from 01.11.2016, in accordance with the provisions of Section 247 of the IBC read with the Third Schedule appended thereto. Therefore, in the event an assessee company is in liquidation under the IBC, the Income-tax Department can no longer claim a priority in respect of clearance of tax dues of the said company, as provided under Sections 178(2) and (3) of the Income Tax Act, 1961.
3. In the context of liquidation of an assessee company under the provisions of the IBC, the Income-tax Department, not being a secured creditor, must necessarily take recourse to distribution of the liquidation assets as per Section 53 of the IBC. Section 53(1) provides the order of priority for such distribution and any amount due to the Central Government and the State Government comes fifth in the order of priority under Clause (e) thereof.
4. It is therefore clear that tax dues, being an input to the Consolidated Fund of India and of the States, clearly come within the ambit of Section 53(1)(e) of the IBC. If the Legislature, in its wisdom, assigned the fifth position in the order of priority to such dues, it is not for this Court to delve into or belittle the rationale underlying the same.
5. It may however be noticed that by virtue of the amendment of Section 178(6) of the Income Tax Act, 1961 by Section 247 of the IBC read with the Third Schedule appended thereto, the whole of Section 178 has no application to liquidation proceedings initiated under the IBC. Therefore, if the only source for treating the Income-tax Department as a secured creditor is the language used in Sections 178(3) and (4) of the Income Tax Act, 1961, the said provisions stand excluded when it comes to the liquidation proceedings under the IBC.
