Whether the capital gain tax is to be paid on the proceeds received from sale of assets of the corporate debtor and is to be included in the liquidation cost or to be distributed a per waterfall mechanism under Section 53 of IBC – LML Limited Vs. Office of Commissioner of Income Tax, Mumbai -NCLT Allahabad Bench
September 12, 2020
NCLT held that:
1. the applicability of Sec 45 and 46 of The Income Tax Act will not have an overriding effect on the water fall mechanism provided under See 53 of the IBC, 2016
2. as the corporate debtor is in liquidation under the Code, the Income Tax Department can no longer claim a priority in respect of clearance of tax dues as provided Under Sec 178(2) and (3) of the Income Tax Act,1961 as also held in case of Leo Edibles & Fats Ltd v. Income Tax Department.
3. as per Sec 238 of the Code, the provision of the Code shall have an overriding effect on any other enactment and Sec 53 of the Code provides the waterfall mechanism for distribution of assets in which Sec 53(b) i.e the debt owed to the secured creditors has been given priority over government dues as reflected under Sec 53(1) and has to be dealt accordingly.
4. the tax liability arising out of the sale of assets by the liquidator shall be distributed in accordance with the provisions of Section 53 of the Insolvency and Bankruptcy Code, 2016 and the capital gain tax shall not be treated as the liquidation cost.