NCLAT (08.02.2021) in Om Prakash Agrawal Liquidator - S. Kumars Nationwide Limited Vs Chief Commissioner of Income Tax (TDS) [Company Appeal (AT) (Insolvency) No. 624 of 2020] held that;
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.
Excerpts of the order;
The Appellant Liquidator has filed this Appeal against the order dated 11.06.2020 passed by the Adjudicating Authority (National Company Law Tribunal) Principal Bench, New Delhi. Whereby the Adjudicating Authority declined to issue direction to successful bidder (Respondent No. 2 herein) and the Income Tax Authority (Respondent No. 1 herein) not to deduct 1 % TDS from the sale consideration.
# 2. 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 (In Brief ‘Code’). The provision of deduction of TDS u/s 194-IA, Income Tax Act, 1961 (in brief “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.
# 3. 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 assesse. 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.
# 5. 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) (WP No. 8560 of 2018 dated 26.07.2018) 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 (C.A. No. 389 of 2019 in CP(IB)No. 55/ALD/2017.
# 6. 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.
# 11. After hearing Ld. counsel for the parties we have perused the record and gone through the relevant provisions of the Code and the IT Act. The Question for our consideration is:
“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?”
# 12. 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 after the amendment sub-Section 6 of
Section 178 of the IT Act reads as under: -
“Company in liquidation
178. (1) Every person—
(a) who is the liquidator of any company which is being wound up whether under the orders of a court or otherwise; or
(b) who has been appointed the receiver of any assets of a company; (hereinafter referred to as the liquidator) shall, within thirty days after he has become such liquidator, give notice of his appointment as such to the Income-tax Officer who is entitled to assess the income of the company.
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(6) The provisions of this section 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) (Inserted by the Insolvency and Bankruptcy Code, w.e.f 01.11.2016.)”
# 13. 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) Section 53 Distribution of Assets
“Section 53(1)(e) the following dues shall rank equally between and among the following”
(i) any amount due to the Central Government and State Government including the amount to be received on account of the consolidated fund of India and the consolidated fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date”
# 14. 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.
# 18. 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.
# 20. 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).
# 21. 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.
# 24. 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 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. 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. Chapter III of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 provides powers and functions of liquidator, Regulation 5 & 6 of the Regulations is reproduced below:
6. Registers and books of account.
(1) Where the books of account of the corporate debtor are incomplete on the liquidation commencement date, the liquidator shall have them completed and brought up-to-date, with all convenient speed, as soon as the order for liquidation is passed.
(2) The liquidator shall maintain the following registers and books, as may be applicable, in relation to the liquidation of the corporate debtor, and shall preserve them for a period of eight years after the dissolution of the corporate debtor
(a) Cash Book;
(b) Ledger;
(c) Bank Ledger;
(d) Register of Fixed Assets and Inventories;
(e) Securities and Investment Register;
(f) Register of Book Debts and Outstanding Debts;”
# 25. 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.
# 30. 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.
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Blogger’s comments; One important aspect which escaped the attention of the Ld. counsel for the parties & the bench is that there is no provision in the Code for consideration of claim of any party including govt. dues, falling due after the liquidation commencement date. Liquidator can only consider the claims as on the date of commencement of Liquidation.
Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.
# Regulation 12. Public announcement by liquidator.
(1) The liquidator shall make a public announcement in Form B of Schedule II within five days from his appointment.
(2) 11[The public announcement shall-
(a) call upon stakeholders to submit their claims or update their claims submitted during the corporate insolvency resolution process, as on the liquidation commencement date; and
(b) provide the last date for submission or updation of claims, which shall be thirty days from the liquidation commencement date.]
Secondly, the following provisions of the Code provide for the business of the corporate debtor is continued during the liquidation process by the liquidator.
# Section 33. Initiation of liquidation. -
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(7) The order for liquidation under this section shall be deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator.
If the business of CD is maintained as a going concern during liquidation, then there will be two situations;
CD under liquidation, has negative cash flow (Losses) as a going concern, which is chargeable as liquidation cost.
CD under liquidation, has positive cash flows (Profits) as a going concern, the same becomes the part of liquidation estate.
Now the question is whether the liquidator is liable to pay income tax on the profits generated out of economic activity (CD working as a going concern) during liquidation.
Further when liquidator is not required to maintain Profit & Loss accounts, how negative/positive cash flow out of the economic activity of CD as a going concern shall be assessed.
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