High Court Hyderabad (26.07.2018) in Leo Edibles & Fats Limited vs. The Tax Recovery Officer & Ors. [Writ Petition No. 8560 of 2018] held that; this Court holds that the first respondent cannot claim any priority merely because of the fact that the order of attachment dated 27.10.2016 issued by him was long prior to the initiation of liquidation proceedings under the Code
Excerpts of the order;
(Page-3) The petitioner company’s grievance is with regard to the action of the Sub-Registrar, Erragadda, Hyderabad, in refusing to register its purchase of immovable property in the liquidation proceedings relating to VNR Infrastructures Limited, Banjara Hills, Hyderabad, under the Insolvency and Bankruptcy Code, 2016 (for brevity, ‘the Code’). Refusal in this regard by the registration authorities was at the behest of the Income-tax Department, which claimed a charge over the immovable property sold, pursuant to the attachment proceedings of the Tax Recovery Officer (Central), Income-tax Department, Hyderabad, the first respondent herein.
(Page-7) In his letter dated 08.01.2018, the fifth respondent pointed out to the first respondent that as per Section 33 of the Code, the order of the NCLT would result in a moratorium on the initiation or continuation of legal proceedings by or against the corporate debtor and as per Section 53 of the Code, the Government’s dues would be at the fifth position in terms of priority of repayment. The fifth respondent accordingly called upon the first respondent to submit its claim and to immediately cancel the attachment order issued earlier.
The first respondent filed a counter-affidavit pointing out that the attachment of the subject property belonging to VNR Infrastructures Limited, Hyderabad, for recovery of Income-tax arrears was made on 28.10.2016, long before commencement of proceedings under the Code before the NCLT. He further stated that a tax recovery certificate was received from the Deputy Commissioner of Income-tax, Central Circle-I(3), Hyderabad, on 07.09.2016 in relation to recovery of the tax arrears from VNR Infrastructures Limited to the tune of Rs.101,60,55,000/-. Upon receipt of the said certificate, the first respondent served notice in Form No.ITCP-1 under Rule 2 of the Second Schedule to the Act of 1961 on 30.09.2016, which was duly served on the assessee company on 05.10.2016. Thereunder, it was directed to pay the demanded amount within fifteen days. As the assessee company failed to do so, the order of attachment under Rule 48 of the Rules in the Second Schedule to the Act of 1961 in Form No.ITCP-16, attaching the subject property, along with other properties of the assessee company, was issued on 28.10.2016. The receipt of a copy of the same was acknowledged by the District Registrar, Hyderabad (South), on 28.10.2016. The first respondent admitted receipt of the letter dated 08.01.2018 from the fifth respondent informing him of his appointment as the liquidator for VNR Infrastructures Limited, vide order dated 21.09.2017 of the NCLT in C.A.No.142 of 2017 in C.P.(IB) No.12/10/Hdb/2017. The first respondent claimed that as the tax recovery proceedings were prior in point of time to the proceedings initiated under the Code, the moratorium under Section 33 of the Code would not have any effect. He concluded by stating that the recovery proceedings initiated by the Income-tax Department were in accordance with law and that the provisions of the Code would have no application thereto. He asserted that the petitioner company had not made out any case for interference in so far as he was concerned and prayed for dismissal of the writ petition.
(Page-15) Part V of the Code deals with ‘Miscellaneous’ provisions under Sections 224 to 255. Section 238 stipulates that the provisions of the Code shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Section 247 deals with ‘Amendments to the Income-tax Act, 1961’ and provides that the said Act shall be amended in the manner specified in the Third Schedule. The Third Schedule to the Code provides that in sub-section (6) of Section 178 of the Act of 1961, after the words ‘for the time being in force’, the words and figures ‘except the provisions of the Insolvency and Bankruptcy Code, 2016’ shall be inserted.
(Page-18) However, after its amendment in terms of Section 247 of the Code read with the Third Schedule thereto, it now reads to the effect that the provisions of Section 178 shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force, except the provisions of the Insolvency and Bankruptcy Code, 2016.
(Page-19) In the light of the aforestated statutory schemes obtaining under the Code and the Act of 1961 respectively, it is clear that the Income-tax Department does not enjoy the status of a secured creditor, on par with a secured creditor covered by a mortgage or other security interest, who can avail the provisions of Section 52 of the Code. At best, it can only claim a charge under the attachment order, in terms of Section 281 of the Act of 1961.
(Page-20) Reference, in this regard, may be made to ANANTA MILLS LTD. (IN LIQUIDATION) V/s. CITY DEPUTY COLLECTOR, AHMEDABAD1, wherein the Gujarat High Court observed that the purpose of attachment appeared to be to prevent private alienations of the property but the attaching-creditor does not acquire, by merely levying attachment, any interest in the property. The Court referred to PREM LAL DHAR V/s. OFFICIAL ASSIGNEE2, wherein the Privy Council had reserved its opinion on the question whether attachment created a lien or charge or conferred a title, but opined that since then, the crystallized position was that attachment in this country merely prohibits private alienation by the person(s) whose property is attached but creates no interest in the property in favour of the attaching-creditor. The Court also considered the effect of attachment prior to the commencement of winding-up proceedings and whether such attachment could continue on the property even in the hands of the purchaser, who bought the property through the official liquidator free of all encumbrances. The Court considered the question whether attachment levied on properties of a company, without any further action being taken, would survive, after the Court makes a winding-up order and the liquidator proceeds to act under Sections 466(1) and 467(1) of the Act of 1956. The final conclusion of the Court was that attachment simpliciter of the properties of a company, which was subsequently ordered to be wound up, without any further action being taken would be of no consequence or effect against the official liquidator and the property could be disposed of by the official liquidator, wholly ignoring the attachment.
(Page-21) It may be noticed that in so far as an assessee company in liquidation is concerned, Section 178 of the Act of 1961 provides for a priority in appropriation of the amounts set aside by the liquidator for clearance of the tax dues. However, it may be noted that liquidation of a company could be under the provisions of different enactments. In so far as liquidation of a company under the Code is concerned, Section 178 of the Act of 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 Code read with the Third Schedule appended thereto. Therefore, in the event an assessee company is in liquidation under the Code, 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 Act of 1961. In the context of liquidation of an assessee company under the provisions of the Code, 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 Code. Section 53(1) provides the order of priority for such distribution and any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State in respect of the whole or any part of the period of two years preceding the liquidation commencement date comes fifth in the order of priority under Clause (e) thereof.
(Page-24) As rightly pointed out by Mr.Vadeendra Joshi, learned counsel, Section 178(6) of the Act of 1961 starts with a non-obstante clause but by virtue of the amendment made thereto, vide Section 247 of the Code, exclusion of the said provision in so far as liquidation proceedings under the Code are concerned forms an exception to Section 178(6) of the Act of 1961. Learned counsel would also point out that the provisions of Sections 220 and 222 of the Act of 1961 do not start with any non-obstante clause and therefore, they would necessarily be subject to the overriding effect of the Code, by virtue of Section 238 thereof. We find merit in this submission.
On the above analysis, this Court holds that the first respondent cannot claim any priority merely because of the fact that the order of attachment dated 27.10.2016 issued by him was long prior to the initiation of liquidation proceedings under the Code against VNR Infrastructures Limited, Hyderabad. It may be noted that Section 36(3)(b) of the Code indicates in no uncertain terms that the liquidation estate assets may or may not be in possession of the corporate debtor, including but not limited to encumbered assets. Therefore, even if the order of attachment constitutes an encumbrance on the property, it still does not have the effect of taking it out of the purview of Section 36(3)(b) of the Code. The said order of attachment therefore cannot be taken to be a bar for completion of the sale effected by the fifth respondent under the provisions of the Code. The first respondent necessarily has to submit the claim of the Income-tax Department to the fifth respondent for consideration as and when the distribution of the assets, in terms of Section 53(1) of the Code, is taken up.
(Page-25) The writ petition is accordingly allowed declaring the legal position as aforestated. The fourth respondent shall entertain and register the sale transaction effected by the fifth respondent in favour of the petitioner company, if not already done. The first respondent is at liberty to submit its claim before the fifth respondent, who shall duly consider the same in accordance with the priorities stipulated under Section 53(1) of the Code.
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