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? – NCLAT Landmark Judgment

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? – NCLAT Landmark Judgment

Om Prakash Agrawal Liquidator-S.Kumars Nationwide Limited Vs. Chief Commissioner of Income Tax (TDS)
Date: 08.02.2021
Citation: (2021) ibclaw.in 54 NCLAT
Justice Jarat Kumar Jain (Member (Judicial) & Dr. Ashok Kumar MishraMember (Technical)
For Appellant: Mr. KanishkKhetan, Advocate & Mr. Anil Goel (PCA) 
For Respondent: Mr. Suresh Kumar, Advocate for R-1
(Click here for full Judgment)

Facts of the Case

The Liquidator filed an Application before the Adjudicating Authority for direction against the successful bidder (Respondent No.2) in auction held for sale of assets of the Corporate Debtor and, Income Tax Authority (Respondent No. 1) not to deduct 1 % TDS from the sale consideration Rs. 43 Crores on the premise that Income Tax dues can be recovered by the department as per waterfall mechanism set out under Section 53 of Insolvency and Bankruptcy Code (‘Code’). The provision of deduction of TDS u/s 194-IA, Income Tax Act, 1961 (“IT Act”) is inconsistent with Section 53 (1) (e) of the Code and by virtue of Section 238 of Code, Section 53 of Code has over-riding effect.

Decision of the Adjudicating Authority(NCLT)

Learned 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 assessee. Thus, the deduction of TDS 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. Therefore, dismissed the Application.

Contention of the Parties

Appellant(Liquidator)

Learned PCA representing the Appellant submitted that Section 53 of the Code, postulate the distribution of assets to the Creditors without deduction of the TDS. It is clear that deduction of TDS runs counter to the scheme and mandate of Section 53 of the Code. Disbursement of Government dues is covered under Section 53 (1) (e) of the Code and the deduction of prior TDS most certainly tinkers with waterfall mechanism stipulated under Section 53 of the Code. For this proposition, placed reliance on the Judgment of Hon’ble Andhra Pradesh High Court in the case of Leo Edibles & Fats Limited Vs. Tax Recovery Officer (Central) [2018] ibclaw.in 12 HC wherein it is held that the Tax Recovery Officer 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. It is also submitted that 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 Adjudicating Authority (National Company Law Tribunal) Bench at Allahabad in LML Limited Vs. Office of Commercial of Income Tax, Mumbai [2020] ibclaw.in 86 NCLT.

Learned PCA further submitted that a Liquidator is duty bound to maintain or update the Books of Account till the Liquidation commencement date and however, during the liquidation period there is no requirement of maintaining profit and loss account and balance sheet of the Corporate Debtor and to get the same audited. The Income Tax Return is filed after 6 months’ end of the financial year and filing of Income Tax Return and getting refund of TDS is a long drawn process and goes directly against the scheme and specific regulations provided under the Code. He has also submitted that in such company on an overall basis it is always be a capital loss and hence, there is no such provision inbuilt either in the Code or the Regulation for filing of Income Tax Return and hence mode of distribution is provided based on existence of Liquidation Estate on liquidation commencement date.

Learned PCA representing the Appellant further submitted that when the Company is in liquidation under the provisions of Code then there is no requirement of filing of return of a Company as it is directly in conflict with the whole scheme of the Liquidation stipulated under the Code. It is that for filing of return requires financial statements to be drawn which is not envisaged anywhere in the Code and Regulation thereto. It is notable that the Liquidation Process is required to be completed within a year as per Regulation 44 of the IBBI (Liquidation Process Regulation 2016). It is argued on behalf of the Respondent No. 1 that the Liquidator may seek refund is also misplaced as no refund is possible without due filing of return as explained above. The Code does not stipulate of filing of return by a Company in Liquidation under the Code. Thus, the provisions under Section 194 IA of the IT Act are inconsistent with Section 53 of the Code. Therefore, by virtue of Section 238 of the Code, the provision of Section 53 of the Code shall have overriding effect. Learned Adjudicating Authority has incorrectly interpreted the law. Therefore, the impugned order is liable to be set aside and the Respondent No. 1 be directed to refund the amount of TDS which is deposited by the Respondent No. 2.

Respondent(Chief Commissioner of Income Tax)

Per Contra, Ld. Counsel representing the Respondent No. 1 submitted that the Appellant is drawing inference beyond what is mandated by the code. The Section 247 of the Code r/w the Third Schedule of I&B Code 2016 duly describes the manner in which IT Act was to be amended with regard to companies in liquidation. According to Third Schedule of the Code, only Section 178 of the IT Act was to be amended, there is no amendment in Section 194-IA of the IT Act. Further, nowhere it is mentioned in the code that company under liquidation outside the purview of Section 139 of the IT Act. Therefore, the liquidator is not exempted from filing return of the income. It is also submitted that TDS is required to be deducted as per provisions of Section 194-IA of the IT Act in respect of sale of immovable property under liquidation and exemption from the TDS would actually tantamount to amending the provisions of the IT Act. The liquidator being a principal officer within the meaning of Section 2(35) of the IT Act for the purpose of furnishing return can file and verify the return as held by Hon’ble High Court of Andhra Pradesh in the case of Income Tax Officer vs. Official Liquidator [1977 106 ITR 119(Andhra Pradesh)].

It is also submitted by the Learned Counsel for the Respondent No. 1 that there is no conflict between Section 194-IA of the IT Act and Section 53 of the Code as the intent and purpose of both the sections are different. One is fiscal provision whereby TDS is required to be made in case of sale of immovable property for a consideration more than 50 lacs. The other determines priority amongst different stake holder in case of distribution of sale proceeds of assets of Corporate Debtor under liquidation. Thus, both the provisions operate under entirely different domain having different purposes and there is no conflict between them.

Ld. Counsel for the Respondent No. 1 also submitted that the assessment proceedings were outside pale of jurisdiction of all civil courts including company court. The liquidation court cannot perform the functions of Income Tax officers as held by Hon’ble Supreme Court in the case of 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)]. Ld. Counsel for the Respondent No. 1 further submitted that ld. 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. Thus, the deduction of TDS does not tantamount to recovery of Income Tax in priority to the other creditors. Hence, the Appeal is liable to be dismissed.

Question before the Appellate Tribunal

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

Decision of the Appellate Tribunal(NCLAT)

Decision of the NCLAT is summarised in following points:

1. Amendment in Section 178(6) of the Income Tax Act

First of all, we have considered what was the necessity to amend Sub-Section 6 of Section 178 of the IT Act. Section 247 of the Code deals with the amendment to the IT Act, 1961 and provides that the said IT Act shall be amended in the manner specified in the Third schedule. The amendment brought into effect from 01.11.2016

Hon’ble Supreme Court in the case of Imperial Chit funds (P) Ltd. Vs. Income Tax Officer (1996) 219 ITR 498 considered Section 178 of the IT Act, in relation to the preferential payments covered by Section 530 of the Companies Act, 1956. The Supreme Court took the view that the Income Tax Department is to be treated as a secured creditor in the light of the words occurring in Sections 178 (3) and (4) of the IT Act to the effect that the liquidator shall set aside the amount notified by the Income Tax Officer and if it is not so done, the liquidator is personally liable to pay the amount of Tax. With this proposition, the Income Tax Department is to be treated as a secured creditor and in liquidation proceedings such dues shall get priority. Whereas, as per Section 53 (1) (e) of the Code, the legislature assigned the 5th position in the order of priority to government dues (including Income Tax Dues).

Thus, in Section 53(1) (e) of the Code and in Section 178 of the IT Act for Government dues priority is different. Section 178 (6) of the IT Act and Section 53 of the Code both Sections start with non-obstante clause, therefore, legislature in its wisdom to give effect to the scheme of the Code amended Section 178(6) of the IT Act. 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. (p12-14)

2. Overriding effect of the Code on Section 194-IA of the Income Tax Act

Section 194 IA of the IT Act provides that where the consideration for transfer of the immovable property is more than 50 Lakhs, then the transferee is responsible to deduct the amount which is 1% 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, or the owner of the security or of the depositor or of the owner of the property.

Section 45 of the IT Act, provides that any profits are gains arising from the transfer of a capital asset effected in the previous year shall save as otherwise provided in the Section be chargeable to Income Tax under the head of capital gain and shall be deemed to be the Income of the previous year, in which the transfer took place. Thus, the TDS under Section 194 IA is nothing but advance capital gain tax recovered through transferee (Purchaser) on behalf of the transferor (seller).

As per Section 194 IA of the IT Act 1% TDS is recovered on 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 therefore, 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. Otherwise also Section 53 starts with a non-obstante clause, whereas Section 194 IA of the IT Act, does not start with a non-obstante clause, and it would necessarily be subject to overriding effect of the Code and therefore, there was no requirement to amend the Section 194 IA of the IT Act.(p16-21)

3. Liquidator of a Company in liquidation under the Code is not required to file Income Tax Return

It is suggested on behalf of the Respondent No. 1 that the Appellant, Liquidator being a principal officer can verify the return of the Company and in the return, can claim refund the amount of TDS. The Liquidator being a principal officer can verify the return, as held by Hon’ble High Court in the case of Income Tax Officer (Supra).

Thus, it is clear that when the Company is wound up under the orders of Court or otherwise the return shall be verified by the Liquidator referred to in Sub-Section 1 of Section 178 of the IT Act, during CIRP under Section 7, 9 or 10 of the Code, the return shall be verified by the Insolvency Professional appointed by the Adjudicating Authority. However, there is no such provision in the IT Act, Code or IBBI (Liquidation Process Regulation, 2016) that the Liquidator of the Company in Liquidation under the Code is required to file Income Tax Return. For filing of return, the financial statements are required to be annexed but the Code/IBBI (Liquidation Process Regulation 2016) does not assign a duty on the Liquidator to prepare financial statements.

NCLAT holds that we are of the view that the Liquidator of a Company in liquidation under the Code is not required to file Income Tax Return, then there is no question of claiming refund of TDS deducted under Section 194 IA of the IT Act.(p22-25)

As per chapter XIX of the Act, ‘Refunds’ has been dealt with at length vide Section 237, 239 and 245 of the IT Act.

All these reflect that this is a cumbersome process to take refund from Income Tax Department and hence Code and IBBI (Liquidator Process) Regulation 2016 is silent on the subject of filing of Income Tax Return as Code provides for a time bound period for completion and maximization of value of assets and cease of doing business.

Learned Counsel for the Respondent No. 1 cited the Judgment of S.V. Kondaskar, Official Liquidator (Supra) in that case Hon’ble Supreme court held that the Liquidation court cannot perform functions of ITO while assessing amount of Tax payable by assesse even if, assesse be a company which is being wound up by the Court. We are not assessing amount of Income Tax. Thus, this ruling is not helpful to the Respondents.

The Respondent No. 1 has also filed a General Circular No. 41 of 2011 dated 06th July, 2011 issued by the Government of India, Ministry of Corporate Affairs, this circular was issued for removable of the difficultly in e-filing of Income Tax Return in respect of the companies under liquidation. This circular is prior to coming in force the Code, thus this circular is not relevant for deciding the issue involved in this Appeal.(p26-29)

Finally, NCLAT holds that Ld. Adjudicating Authority has erroneously held that the deduction of Tax at source does not mean raising demand for collection of tax by the Department. Actually TDS under Section 194 IA, is an advance capital gain tax, recovered through transferee on priority with other creditors of the company. Hence, 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. Thus, the impugned order is not sustainable in law. Therefore, it is hereby set aside. The Respondent No.1 is directed to refund the amount of TDS to the Appellant which is deposited by the Respondent No. 2 with the department. Thus, the Appeal is allowed. However, no order as to cost.(p30-31)

Refer full judgment here.