Commissioner Of Income-Tax vs Attili N. Rao - What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefore belonged to the assessee.

Supreme Court (11.10.2001) in Commissioner Of Income-Tax vs Attili N. Rao [AIR 2002 SC 388] held that;.

• What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefore belonged to the assessee. 

• From out of that price, the State deducted its dues towards "kits" and interest due from the assessee and paid over the balance to him. 

• The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it is on the full price realised (less admitted deductions) that the capital gain and the tax thereon has to be computed.

Excerpts of the Order;

# 1. The High Court ([1998] 233 ITR 10) answered against the Revenue all the following questions, except question No. 3 which, in the High Court's view, did not arise for consideration (page 11) :

• "1. Whether on the facts and in the circumstances of the case and in law, the Appellate Tribunal was correct in holding that the amount realised by the sale of the assessee's interest in the property was only Rs. 4,33,960 i.e., Rs. 5,62,980 minus Rs. 1,29,020 ?

• 2. Whether on the facts and in the circumstances of the case and in law, the Appellate Tribunal was correct in holding that the amount realised under the charge or mortgage by the Government by public auction does not partake of the character of 'full value of consideration' envisaged under section 48 of the Income-tax Act ?

• 3. Whether on the facts and in the circumstances of the case and in law, the Appellate Tribunal was justified in holding that the amount payable by the assessee in discharge of the mortgage debt to the Government on the sale of property was an expenditure incurred towards the cost of acquisition of the capital asset and deductible under section 48 of the Income-tax Act ?

• 4. Whether on the facts and in the circumstances of the case and in law, the Appellate Tribunal  as correct in holding that the assessee was not vested with full interest in the property sold and capital gains be computed only with reference to the price realised towards his interest with property ?"

 

# 2. The Revenue is in appeal by certificate.

 

# 3. The assessee has been served but has not chosen to put in an appearance.

 

# 4. The assessment year with which we are concerned is the assessment year 1982-83. The assessee carried on abkari business. In the course of the financial year 1970-71 he mortgaged to the Excise Department of the State of Andhra Pradesh immovable property belonging to him at Waltair. He did so to provide security for the amounts of "kits" which were due by him to the State. The State, in the assessment year with which we are concerned, sold the immovable property by public auction, without the intervention of the court, to realise its dues. A sum of Rs. 5,62,980 was realised at the auction. Thereout, the State deducted the amount of Rs. 1,29,020 due to it towards "kits" and interest and paid over the balance to the assessee.

 

# 5. The Revenue contended that the assessee was liable to capital gains tax on capital gain in the sum of Rs. 3,70,970, having regard to the cost at which the said immovable property had been acquired by the assessee. According to the assessee, the sum of Rs. 1,29,020 due by him to the State on account of "kits" was required to be deducted from the amount of Rs. 5,57,980 realised at the auction before computing the capital gain. According to him, the capital gain was only Rs. 85,130. Neither the Income-tax Officer nor the appellate authority agreed with the assessee and the assessee went up in further appeal to the Income-tax Appellate Tribunal.

 

# 6. The Tribunal upheld the assessee's claim. According to it, the full sale price realised by the sale of the immovable property had two components; the first represented the price which could be ascribed to the interest of the assessee in the immovable property and the rest represented the arrears of debt and interest due to the State. In its opinion, as there was a clear charge or mortgage over the immovable property, the amount realised under the charge or mortgage was an amount which never reached the hands of the assessee but which reached the Government by overriding title.

 

# 7. From out of the judgment and order of the Tribunal, the questions aforestated were placed before the High Court for its consideration. The High Court observed that the undisputed fact was that the immovable property was mortgaged to the State. Thereby, an interest in the property was created in favour of the State. When the immovable property was sold by public auction, its value had to be reduced to the extent of the interest that was created in favour of the State by reason of the mortgage.

 

# 8. We are of the view that the Tribunal and the High Court were in error. What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefore belonged to the assessee. From out of that price, the State deducted its dues towards "kits" and interest due from the assessee and paid over the balance to him. The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it is on the full price realised (less admitted deductions) that the capital gain and the tax thereon has to be computed.

 

# 9. In these premises, the first question is answered in the negative and in favour of the Revenue. The other questions do not arise for consideration.

 

# 10. The civil appeal is allowed. The judgment and order under appeal is set aside.

 

# 11. No order as to costs.

 

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T.S. Hajee Moosa & Co Vs. ACIT (ITAT Chennai) - It is clear that the mortgaged property sold, in discharge of the mortgage created by the assessee itself, belonging to the assessee and the price realized there-form belonged to the assessee and hence the capital gain is very much warranted on the full price [less admissible deduction].

ITAT Chennai-C (06.09.2019) in T.S. Hajee Moosa & Co Vs. ACIT (ITAT Chennai) [Appeal Number : ITA No. 2686/CHNY/2018] held that;.

• Thus, it is clear that the assessee availed loan from the Bank under the banner of group concerns by mortgaging its own property and group concerns failed to repay the loan, the bank sold the property and the entire consideration was recovered by the bank. Thus, it cannot be held that the assessee has not received any consideration directly or indirectly, which were liable to tax

• What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefore belonged to the assessee. From out of that price, the State deducted its dues towards “kist” and interest due from the assessee and paid over the balance to him. 

• The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it is on the full price realised (less admitted deductions) that the capital gain and the tax thereon has to be computed.

• It is clear that the mortgaged property sold, in discharge of the mortgage created by the assessee itself, belonging to the assessee and the price realized there-form belonged to the assessee and hence the capital gain is very much warranted on the full price [less admissible deduction].

• Otherwise also, availing loan itself is consideration and in this case, constructive benefit was very well accrued to the assessee when the loan was availed by its group concerns, which was owned partly by the assessee.

Excerpts of the Order;

The assessee filed this appeal against the order of Commissioner of Income Tax (Appeals)-13, Chennai, in ITA No.98/CIT(A)-13/AY 2015-16 dated 27.07.2018 for the assessment year 2015-16.

 

# 2. The assessee has sold the land at Guindy for a sale consideration of Rs.28,17,03,500/- and the factory building for Rs.1,82,96,500/- for a total of Rs.30,00,00,000/-. The assessee has worked out LTCG for the assessment year 2015-16, adopting guideline value of the property u/s.50C of the Act at Rs.36,83,81,500/- (43,339 sq. ft. x Rs.8500/- per sq. ft.), allowed selling and legal expenses for Rs.28,19,570/- and allowed indexed cost of acquisition of land at Rs.30,35,53,290/- adopting guideline value as on 1988 at Rs.684 per sq. ft. (43,339 sq. ft. x Rs.684 per sq. ft. x 1024/100) based on Registered Valuer’s Report and has worked out LTCG at Rs.6,20,08,639/-.

 

# 2.1 During the assessment proceedings the AO issued notice u/s.133(6) to the SRO, Adyar and asked him to furnish guideline value of the land in question as on 01.04.1981. The SRO furnished the guideline value @ Rs.20,000/- per ground (2400 sq. ft.) which works out to Rs.8.33 per sq. ft. as on 01.04.1981. Based on this, the AO show caused to the assessee saying that why the cost of acquisition should not be arrived at based on the guideline value furnished by the SRO as on 01.02.1989. The assessee clarified before the AO that in 1975-77 there was no immediate public demand for land in Guindy Estate. As such, the Government has allotted the land to the assessee almost free, so that industries can develop and that is why the rate of land was at the rate of Rs.1.26 per sq.ft. During the period 1975-1980, the amenities and infrastructure development took place in the industrial area of Guindy and it is evident from the approved valuer’s report that the rate of land in 1975 was at Rs.1.26 per sq.ft. In 1975-80, development took place and therefore in 2015, the rate of land is at Rs.8,500/- per sq.ft. Increase in rate from 1975 to 2014 it is Rs.8,499/- per sq.ft. Therefore, average for 39 years (8499/39) increase is for Rs.217/- per year and therefore from 1975-1981 increase for 5 years works out to Rs.1085 per sq.ft. (217 x 5) and accordingly the Government approved valuer has adopted the land rate at Fair Market Value at the rate of Rs.684/- per sq.ft. is reasonable. Considering the indexed cost of acquisition of 1981, the value of the land would be at Rs.48,15,13,626/- as on 01.04.1981 (43339 sq. ft. x Rs.1085 x 1024/100). The AO found that the land has been registered in the name of the assessee M/ s. T.S. Hajee& Co. in the year 1989 and the guideline value supplied by the SRO for the period 01.04.1989 to 31.03.1990 was for Rs.2,50,000/- per ground which works out to Rs.104.16 per sq.ft. during the year 1989-90. Based on that the cost of acquisition was worked out for Rs.45,14,190/- (43,339 sq.ft. x Rs.104.16 per sq.ft.) and indexed cost of acquisition in the year 1989-90 worked out to Rs.2,68,75,178/- (Rs.45,14,190 x 1024/172) and accordingly the AO held that if the indexed cost of acquisition itself works out to Rs.2,68,75,178/- in the year 1989-90 then how come the cost of acquisition would be at Rs.30,35,53,290/- (43,339 sq.ft. x Rs.684 per sq.ft. x 1024 /100) during the year 1981-82 and therefore AO held that the assessee adopting the value of land at the rate Rs.684/- per sq. ft. as on 1981 is unreasonable and not justifiable. Thus, based on this finding the AO calculated sale consideration by adopting guideline value of the property u/s.50C of the Act at Rs.36,83,81,500/- (43,339 sq. ft. x Rs.8500/- per sq. ft.) allowed selling and legal expenses for Rs.28,19,570/- and allowed indexed cost of acquisition of land at Rs.36,98,258/- adopting guideline value as on 1981 at Rs.20,000/- per ground, i.e. Rs.8.33 per sq. ft. (43,339 sq. ft. x Rs.8.33 per sq. ft. x 1024/100) and has worked out LTCG for Rs.36,18,63,672/- as against LTCG declared and offered by the assessee for Rs.6,20,08,639/-. The balance of LTCG for Rs.29,98,55,033/- has been brought to tax accordingly. Aggrieved, the assessee filed an appeal before the CIT(A) .The CIT(A) dismissed the appeal . Aggrieved, the assessee filed this appeal with following grounds :

• 1. The Appellant submits that the impugned land was assigned during 1975-77  and major infrastructure developments took place during 1975-1981, transforming the agricultural lands into a neighbourhood township.

• 2.  The Appellant firm engaged Sri. S. Ramamurthy B.E., F.I.V. Retd. Valuation Officer, Income Tax Department (Government of India), LT. Registered Valuer CAT-1/486/2000-2001, Approved Valuer of Institution of Valuers No.F-9, who has inspected the site, made extensive inquiries and valued the same at Rs. 684 per sq ft. in 1981. Even though all infrastructure developments were made by the Government only during 1975-1981, the valuer has adopted only 63% of the average increase method.

• 3. The Assessing Officer called for the 1981 Valuation from the Sub-Registrar who replied that the 1981-1982 records are damaged and are not available. However, he gave a ridiculously low Guideline value of Rs. 8.33 per sq ft. in 1981.

• 3. It is submitted that the Honorable Supreme Court in the case of R. Sai Bharath Vs J. Jayalalithaa and others has held the Guideline value is not the Fair Market Value. It is Trite Law that the Guideline Value published by the Registration Department is not a conclusive evidence to work out the Fair Market Value as on 01.04.1981.

• 4. It is also submitted that the IT Appellate Tribunal B Bench Chennai in ITA 619/MDS/2012 Assessment 2007-2008 held that the Guideline Value of Rs.5/- per sq ft. is abysmally low and directed the Assessing Officer to accept the value of Rs.454 per sq ft. reported by the Registered Valuer.

• 5. The Appellant submits that the Assessing Officer neither rebutted the Registered Valuer’s Report nor referred the matter to the DVO and in the absence of any evidence on record, the report of Registered Valuer should be accepted with regard to the Market Value as on 01.04.1981 for the purpose of computing Capital Gains.

• 6. In view of the above, the Appellant raises the following questions of Law whether the Assessing Officer is legally correct in totally ignoring:

• (a) The Approved Valuer’s Certificate and simply relying and adopting the guideline value when the Hon’ble Supreme Court has held that the Guideline Value is not the Fair Market Value;

• (b)  The case laws of the Jurisdictional ITAT cited by the Appellant in which the 1981 Fair Market Value was fixed at Rs.454/- per sq.ft. against the Guideline Value of Rs.5/- per sq.ft. furnished by the Sub-Registrar.

• In conclusion, the Appellant prays that the Fair Market Value of Rs.684/-per sq.ft. as determined by the Approved Valuer, a technical expert be accepted.

 

# 3. The Ld. AR presented the case on the above lines. Per contra, the Ld.DR supported the orders of the lower authorities.

 

# 4. We heard the rival submissions. In the judgment of the Supreme Court referred to above, while considering the issue as to whether the land purchased has been undervalued or not, the Supreme Court observed that the guideline value has relevance only in the context of section 47A of the Indian Stamp Act (as amended by T.N. Act 24 of 1967) which provides for dealing with instruments of conveyance which are undervalued. Guideline value will only afford a prima facie basis to ascertain the true or correct market value. Guideline value is not sacrosanct, but only a factor to be taken note of if at all available in respect of an area in which the property transferred lies. When the assessee relies on the Registered Valuer’s report and if Assessing Officer is not satisfied about such claim then, the AO should have referred the matter to the DVO to ascertain the fair market value. Therefore, we deem it fit to remit this issue back to the AO who shall refer the matter to DVO and proceed to determine the issue in accordance with law. The assessee’s corresponding grounds of the appeal are treated as allowed for statistical purpose

 

# 5. The next is in connection with the additional ground. It is submitted that the assessee firm had given guarantee / security for the borrowals made by other entities. The assessee did not receive any benefit or accrue any benefits from the transfer and therefore , the levy of Capital Gains Tax is not correct.

• “The assessee contends that since it has not received any benefit from the transfer of its property given as security to bank & others for borrowals made by other entities, no capital gain is leviable.

• The Appellant relies on the case law ITA (2006) 102 ITD 227 (Delhi) – Additional Commissioner of Income-Tax, Special Range-26, New Delhi Vs. Glad Investments (P) Ltd., a copy of which is enclosed.

• The Appellant submitted that the property was sold for Rs.30 crores, the sale proceeds of which were disbursed to Bank and creditors of other entities and the disbursement details are also submitted herewith.

• In view of the above, the legal question now raised is to cancel the levy of Capital Gains Tax.”

 

# 6. We heard the rival submissions and being a legal issue admit the additional ground. The assessee has pledged its property to Canara Bank as a security to the loan availed by its group concerns. No lay man can execute a deed of mortgage of his property against the loan availed by a third party/ parties, until and unless the individual has substantial interest over them. Thus, it is clear that the assessee availed loan from the Bank under the banner of group concerns by mortgaging its own property and group concerns failed to repay the loan, the bank sold the property and the entire consideration was recovered by the bank. Thus, it cannot be held that the assessee has not received any consideration directly or indirectly, which were liable to tax.

 

# 6.1 We have gone through the judgment in the case of CIT v. Attilli N. Rao 252 ITR 880 (SC), wherein, the Hon’ble Supreme Court has observed and held as under:

• “4. The assessment year with which we are concerned is the assessment year 1982-83. The assessee carried on abkari business. In the course of the financial year 1970-71 he mortgaged to the Excise Department of the State of Andhra Pradesh immovable property belonging to him at Waltair. He did so to provide security for the amounts of “kist” which were due by him to the State. The State, in the assessment year with which we are concerned, sold the immovable property by public auction, without the intervention of the court, to realise its dues. A sum of Rs. 5,62,980 was realised at the auction. Thereout, the State deducted the amount of Rs. 1,29,020 due to it towards “kist” and interest and paid over the balance to the assessee.

• 5. The Revenue contended that the assessee was liable to capital gains tax on capital gain in the sum of Rs. 3,70,970, having regard to the cost at which the said immovable property had been acquired by the assessee. According to the assessee, the sum of Rs. 1,29,020 due by him to the State on account of “kist” was required to be deducted from the amount of Rs. 5,57,980 realised at the auction before computing the capital gain. According to him, the capital gain was only Rs. 85,130. Neither the Income-tax Officer nor the appellate authority agreed with the assessee and the assessee went up in further appeal to the Income-tax Appellate Tribunal.

• 6.  The Tribunal upheld the assessee’s claim. According to it, the full sale price realised by the sale of the immovable property had two components; the first represented the price which could be ascribed to the interest of the assessee in the immovable property and the rest represented the arrears of debt and interest due to the State. In its opinion, as there was a clear charge or mortgage over the immovable property, the amount realised under the charge or mortgage was an amount which never reached the hands of the assessee but which reached the Government by overriding title.

• 7. From out of the judgment and order of the Tribunal, the questions aforestated were placed before the High Court for its consideration. The High Court observed that the undisputed fact was that the immovable property was mortgaged to the State. Thereby, an interest in the property was created in favour of the State. When the immovable property was sold by public auction, its value had to be reduced to the extent of the interest that was created in favour of the State by reason of the mortgage.

• 8.  We are of the view that the Tribunal and the High Court were in error. What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefore belonged to the assessee. From out of that price, the State deducted its dues towards “kist” and interest due from the assessee and paid over the balance to him. The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it is on the full price realised (less admitted deductions) that the capital gain and the tax thereon has to be computed.

• 9. In these premises, the first question is answered in the negative and in favour of the Revenue. The other questions do not arise for consideration.”

 

From the above judgment, it is clear that the mortgaged property sold, in discharge of the mortgage created by the assessee itself, belonging to the assessee and the price realized there-form belonged to the assessee and hence the capital gain is very much warranted on the full price [less admissible deduction]. When the law laid down by the Hon’ble Supreme Court is very much available on the identical facts, the cases relied on by the assessee are held as not applicable. Otherwise also, availing loan itself is consideration and in this case, constructive benefit was very well accrued to the assessee when the loan was availed by its group concerns, which was owned partly by the assessee. Accordingly, we dismiss the corresponding grounds of the assessee.

 

# 7. In the result, the assessee’s appeal is treated as partly allowed.

 

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IBBI - Facilitation / 002 / 2020 Dated 05.08.2020 - In aid of Insolvency Professionals conducting Liquidation Process.

Insolvency and Bankruptcy Board of India

7th Floor, Mayur Bhawan, Connaught Place, New Delhi-110001

Facilitation/002/2020                                                                         5th August, 2020

To

All Registered Insolvency Professionals

All Registered Insolvency Professional Agencies

All Recognised Insolvency Professional Entities 

(By mail to registered email addresses)

Other stakeholders (On website of IBBI).

Dear Madam / Sir,

Subject: In aid of Insolvency Professionals conducting Liquidation Process.

An Insolvency Professional (IP) plays a key role in various processes under the Insolvency and Bankruptcy Code, 2016 (Code). He acts as liquidator in liquidation and voluntary liquidation processes and the entire liquidation process revolves around him.

2. The Adjudicating Authority (AA), the National Company Law Appellate Tribunal (NCLAT), and High Courts, through their orders and judgements, have guided liquidators in the conduct of liquidation process. This communication presents a few significant directions and observations from these orders and judgements, which an IP may find useful. These are presented under the following six broad categories:

• A. Taking Charge as Liquidator, etc.

• B.Scope of Liquidation Estate, etc.

• C. Sale of Assets, etc.

• D. Attachments, etc.

• E.Managing the Affairs, etc., and

• F. Powers and Duties, etc.

A. Taking Charge as Liquidator, etc.

(a) S. Muthuraju Vs. Commissioner of Police and Another [MA/504/2019 in CP/288/IB/2018]

A group / mob of unknown persons hurled threats with weapons and did not allow the liquidator to enter the premise of the corporate debtor (CD) and carry out his functions. The AA directed the Superintendent of Police to give adequate police protection to the liquidator to enable him to perform his duties.

(b) Vijisan Exports Pvt. Ltd. Vs. Cimme Jewels Ltd. [C.P. (IB)-297/MB/2018]

The liquidator submitted that the CD neither handed over possession of the assets nor records during the material period and even after passing of liquidation order. It was presumed that the erstwhile directors of the CD had deliberately stolen records with an intention to enrich themselves and also to siphon off all the assets without even bringing to the knowledge of the liquidator and therefore, prima facie, the attitude of directors was malafide. The AA directed the liquidator to file a police complaint for appropriate action for the theft of confidential information / records. It directed the police station officer to register the complaint and take appropriate action against the former directors of the CD.

(c) Alchemist Asset Reconstruction Company Limited Vs. Precision Fasteners Ltd. [MA 1007/2018, MA 751/2019 in CP No. (IB)1339(MB)/2017]

The liquidator filed an application seeking possession of the flats under occupation of respondents. He submitted that refusal to handover the flats owned by the CD is likely to affect the creditors who are entitled to liquidation proceeds. The respondents claimed that they had possession of the flat based on a letter issued by the CD. The AA noted that the said letter cannot be treated as valid document whereby the alleged property has been transferred to the respondents. It ordered the respondents to vacate the flats and handover the same to the liquidator, failing which the liquidator would be entitled to get the possession in accordance with law with the help of police.

(d) Mrs. Dipti Mehta, Resolution Professional, Prag Distillery Private Limited Vs. Shivani Amit Dahanukar and Ors. [MA 267/2018 in CP (I&B) 1067/NCLT/MB/2017]

The RP had filed an application under sections 43, 49, 60(5) and 66 of the Code against five directors of the CD and its holding. The liquidator continued to pursue the said application. The AA held: 

• “…it is clear that the impugned assets were transferred to the holding company with an intent to protect the value of the assets. However, there is no consideration received by the Corporate Debtor against the said transfer, and the assets were not sold but only transferred to the holding company for its utilisation. Had the assets not being transferred, there was a risk of them getting wasted and spoiled. It is not disputed that the ownership of the assets is still with the Corporate Debtor and they are part of the liquidation estate of the Corporate Debtor. The respondents have submitted that the holding company agree to transfer the machinery back to the Corporate Debtor. Given the circumstances above, it is directed that the assets of the Corporate Debtor shall be returned and restored to the Corporate Debtor by the holding company within one month from the date of this order.”

B.Scope of Liquidation Estate, etc.

(a) Precision Fasteners Ltd. Vs. Employees Provident Fund Organisation, Thane and Others [MA 576 & 752/2018 in C.P. (IB) 1339 (MB)/2017]

The liquidator sought a declaration that the attachment of movable and immovable properties of the CD (under liquidation) by the respondents under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 was null and void, to enable him to dispose of these properties alongside other assets of the CD. The AA observed that the creditors have a property right over the assets of the CD, whereas workmen dues are interwoven with the right to life. The former right is subordinate to the latter right and they cannot be treated at par. In recognition of this, section 36(4)(a)(iii) of the Code provides that the dues in respect to Provident Fund/Pension Fund/Gratuity Fund are not part of the liquidation estate. These dues are assets of the workmen lying with the CD. However, the liquidation process should not be obliterated by the attachment of the assets of the CD. Accordingly, the AA vacated the attachment with a direction to the liquidator to sell the assets and pay off the provident fund dues in priority to all claims payable by the CD in liquidation.

(b) State Bank of India Vs. Moser Baer Karamchari Union &Anr. [CA(AT)(Ins)No. 396/2019]

The AA, by the impugned order, held that ‘Provident Fund Dues’, ‘Pension Fund Dues’ and ‘Gratuity Fund Dues’ cannot be part of section 53 of the Code. A financial creditor (FC) filed an appeal on the ground that workmen’s dues have the same meaning as assigned to it in section 326 of the Companies Act, 2013, which includes provident fund, pension, and gratuity fund. Therefore, for the purpose of distribution of assets of the CD under section 53 of the Code, dues of employees as mentioned in sub-clause (c) of sub-section (1) therein  includes provident fund dues. The NCLAT held: 

• “In terms of sub-section (4) (a) (iii) of Section 36, as all sums due to any workman or employees from the provident fund, the pension fund and the gratuity fund, do not form part of the liquidation estate/ liquidation assets of the ‘Corporate Debtor’, the question of distribution of the provident fund or the pension fund or the gratuity fund in order of priority and within such period as prescribed under Section 53(1), does not arise…” 

It further observed that liquidation estate of the CD under section 36(1) read with section 36 (3) does not include all sum due to any workman and employee from the provident fund, the pension fund and the gratuity fund, for the purpose of distribution of assets under section 53.

(c) In the matter of Clutch Auto Ltd. [CA-1432(PB)/2019 & CA-1433(PB)/2019 in (IB)-15(PB)/2017]

The liquidator filed an application seeking directions for relinquishment of security interest by the secured creditor under section 52 of the Code. The AA held that if the liquidator concludes that a creditor has security interest over the assets of the CD, he shall permit the creditor to utilise its right under section 52 of the Code. It concluded that directions to compel a creditor to relinquish its security interest is not supported by the Code.

(d) Edelweiss Asset Reconstruction Co. Ltd. Vs. Reid and Taylor India Limited [MA 1392/2019 in CP No.382/IB/MB/MAH/2018]

An FC of the CD claiming sole first charge over all the fixed assets and first pari-passu charge over the current assets of the CD sought permission of the AA to realise the security interest by selling the secured assets of the CD on “as is where is” basis as a going concern as per section 52 of the Code read with regulation 37 of the IBBI (Liquidation Process) Regulations, 2016. Another FC objected to this stating that section 52 of the Code does not empower a secured creditor to stand outside the liquidation process to enforce its security to the exclusion of other secured creditors having same ranking pari-passu charge over the same security interest, more particularly when the issue of priority of charges had not been adjudicated. The AA held: 

• “only the first charge holder/ the secured creditor with first pari-passu charge can stay outside the liquidation process and realize his security interest. The applicant being the first charge holder is entitled to realise security interest under section 52.”

(e) Mr. Srikanth Dwarkanath, Liquidator of Surana Power Limited Vs. Bharat Heavy Electricals Limited [CA(AT)(Ins)No. 1510 of 2019]

The liquidator faced a deadlock, when secured creditors (ten out of eleven) having 73.76% share in security interest relinquished their security interests to the liquidation estate, but one secured creditor (BHEL) with 26.24% of share did not. Consequently, he could not attempt a slump sale of the CD, as all secured creditors didn’t relinquish their security interests. He filed an application before the AA seeking permission to sell the assets of the CD under liquidation. The AA rejected the application stating that an arbitration award has granted lien over the assets of the CD to BHEL prior to the initiation of CIRP. The liquidator challenged the order of the AA. The NCLAT relied on section 13 of the SARFAESI Act, 2002 which requires confirmation by creditors having at least 60% of the value of total debt for taking any steps about the realisation of assets by secured creditors. It noted that that since BHEL did not have requisite 60% value in security interest, it did not have the right to realise its security interest.It observed that since secured creditors with 73.76% in value have relinquished the security interest into the liquidation estate, it would be prejudicial to stall the process at the instance of a creditor who has share of only 26.24%. While allowing the appeal, the NCLAT further observed that BHEL did not hold a superior charge over the rest  of the secured creditors and the decision of 73.76% of majority creditors would bind the dissenting secured creditor.

C. Sale of Assets, etc.

(a) Mr. S. S. Chockalingam Vs. Mr. CA Mahalingam Suresh Kumar [MA/661/2018 in TCP/431/2017]

In an e-auction of the assets of the CD in liquidation, the applicant was H1 bidder and he was required to deposit 25% of the bid amount within 24 hours and the rest 75% within 15 days. H1 bidder deposited 25% after 3 days and sought time for payment of the rest of the amount. The liquidator granted extension of time twice. Thereafter, the liquidator cancelled the sale, proceeded to negotiate with H2 bidder and sold the asset to it following the bidding process. The applicant filed an application under rule 11 of the NCLT Rules, 2016 to direct the liquidator to extend the last date of payments, as he had already paid 57% of the bid amount and the liquidator has no authority to forfeit the said amount. The AA observed: 

• “… there does not appear any provisions in the I&B Code, 2016 to give extension of time as far as the bidding process is concerned. Moreover, the Liquidator has already negotiated with the 2nd highest bidder who has already made payment which is equivalent to the amount, which was offered by the applicant being the highest bidder. In other words, the 2nd bidder, being in a position to make the payment of the same amount, has become the successful bidder and made the payment well in time. Therefore, in the circumstances, the application has become infructuous and the same stands dismissed.”

(b) Alchemist Asset Reconstruction Co. Ltd. Vs. Moser Baer India Limited [CA-769(PB)/2019 in C.P. No. IB-378(PB)/2017]

An application was filed by the liquidator under regulation 33(2)(d) of the IBBI (Liquidation Process) Regulations, 2016 for seeking prior permission to sell the assets of the CD by means of a private sale. The AA considered the issue whether all the requirements of clauses (a) to (d) of regulation 33(2) are required to be fulfilled to sell the assets by private sale. It held: 

• “To our mind the proper interpretation on clauses (a) & (b) would be that a liquidator is entitled to sell the assets without requirement of prior permission after reaching the conclusion that the assets are perishable and it is likely to deteriorate significantly in value if not sold immediately. Otherwise the purpose of regulation would be defeated if the time is required to be spent in filing an application and taken permission because the assets which are perishable may not remain available for sale and perish or it may deteriorate significantly in value if not sold immediately.” 

However, the assets to be sold at a price higher than the reserve price of a failed auction have to be sold with the prior permission of the AA.

(c) Ms. Pooja Bahry, Liquidator and Anr. Vs. Gee Ispat Pvt. Ltd. [CA666/2019 in (IB)/250(ND)/2017]

The liquidator sold certain properties relinquished by the secured creditors. Before proceeding to distribute the proceeds, she filed an application with the AA seeking guidance whether she is required to deposit capital gains on sale of secured assets and include it in the liquidation cost to be defrayed first and distribute the balance amongst the claimants. The AA opined that upon realisation of the liquidation estate of the CD, it must be distributed in accordance with the waterfall mechanism under section 53. The dues towards Government, be it tax on income or on sale of properties, would qualify as operational debt and must be dealt with accordingly. It noted that a secured creditor is entitled to effect sale under the SARFAESI Act and appropriate the entire amount towards its dues, without any liability to first pay capital gain. If the capital gain is first to be provided for, and then be included as liquidation cost, it would create an anomalous situation in the secured creditor getting a lesser remittance than what it could have realised had it not released the security into the common corpus. It is for this purpose that the provision of section 178 of the Income-tax Act, 1961 has been amended giving priority to the waterfall mechanism over government dues. The AA held: 

• “ We therefore hold that the tax liability arising out of the sale shall be distributed in accordance with the provision of Sec 53 of the Code. The applicability of Section 178 or 194 IA of the IT Act will not have an overriding effect on the water fall mechanism provided under Section 53 of the Code, which is a complete code in itself, and the capital gain shall not be taken into consideration as the liquidation cost.”

(d) Om Prakash Agarwal Vs. Chief Commissioner of Income Tax (TDS) & Anr. [Item No. 203 CP/294/2018]

The liquidator filed an application seeking direction against the successful bidder and the Income Tax Authority not to deduct TDS from the sale of assets made in favour of the bidder on the ground that tax dues cannot be collected by the Government in priority to the waterfall mechanism under section 53 and section 238 has an overriding effect upon other enactments. The AA observed that the overriding effect under section 238 is applicable to the issues between the creditor and the debtor but not to TDS deductions. When the Government comes before the liquidator as creditor, it is bound by sections 53 and 238 of the Code. In this case, the Government is not making any claim as an operational creditor. While directing the purchaser to pay the TDS amount, it held that deduction of TDS does not tantamount to payment of Government dues in priority to other creditors since it is not a tax demand for realisation of tax dues. It observed that the liquidator is not asked to pay TDS; it is the duty of the purchaser to credit TDS to the Income Tax Department.

D. Attachments, etc.

(a) Leo Edibles & Fats Ltd. Vs. The Tax Recovery Officer (Central) Income Tax Department, Hyderabad, and others [WP No. 8560/2018]

The petitioner purchased an immovable property in the liquidation proceeding of VNR Infrastructures Limited. The sub-registrar refused to register the property in the name of petitioner at the behest of the Income Tax Department which claimed a charge over the immovable property pursuant to attachment proceedings against which this writ petition was filed. The High Court noted that it entails construction and interpretation of the provisions of the Code in juxtaposition to the Income-tax Act, 1961. It observed: “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.”

As regards the purpose of attachment, it referred to the judgements in Ananta Mills Ltd. (High Court Gujarat) and Prem Lal Dhar (Privy Council), where it has been held that attachment only prohibits private alienation of the property, but the attaching creditor does not acquire any interest in the property. It noted that section 178 of the Income-tax Act, 1961 provides for a priority in appropriation of the amounts set aside by the liquidator for clearance of the tax dues. However, liquidation of a company could be under different enactments. In case of liquidation of a company under the Code, section 178 of the Income-tax Act, 1961 stands excluded by virtue of the amendment of section 178 (6) with effect from 1st November, 2016, in accordance with section 247 read with the Third Schedule to the Code. 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.

The High Court held that the 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 Code. It further held that the Income Tax Department cannot claim any priority merely because the order of the attachment dated 27th October, 2016 was long prior to the initiation of liquidation proceedings under the Code against VNR Infrastructures Limited. Further, 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 CD, 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 under a liquidation proceeding under the Code. The Income Tax Department necessarily must submit its claim to the liquidator for consideration as and when the distribution of the assets, in terms of section 53(1) of the Code, is taken up.

(b) Mr. Anil Goel, the Liquidator appointed in respect of VarrsanaIspat Limited Vs. Deputy Director, Directorate of Enforcement, Delhi and SBER Bank Vs. VarrsanaIspat Limited [IA (IB) No. /KB/2020 in CP (IB) No. 543/KB/2017]

The Liquidator filed an application under sections 60(5) and 32A of the Code seeking permission to sell the assets of the CD which were attached by the Enforcement Directorate (ED), in view of section 32A. He submitted that he was running the CD as a going concern, but unable to proceed with the sale of the CD or its business as a going concern due to the attachment, even though there is interest from several parties. The ED objected to the application on three grounds: 

• (a) An application under section 32A can be made only after the liquidation process is over or resolution plan is approved; 

• (b) An application under section 32A can be filed only by the successful resolution applicant and not the liquidator; and 

• (c) the rights of the parties had already been crystallized through proceedings before the PMLA Appellate Authority and hence subsequent change in law (insertion of section 32A) would not take away such rights which had attained finality. 

The AA observed that under the object as well as under the said section it is specifically dealt with that it is applicable to prevent insolvency in case a company goes into CIRP or liquidation. It held that section 32A is also applicable to the assets of the CD undergoing liquidation and a liquidator can file an application like the one in hand. It further held that a liquidator can proceed with the sale of the assets even if it is under attachment by the ED, to continue the time bound process of liquidation under the Code and upon completion of the sale proceedings, the buyer can take appropriate steps to release the attachment.

(c) Anil Goel, Liquidator Vs. Dy. Director, Directorate of Enforcement in the matter of REI Agro Limited [CA (IB) No. 453/KB/2018 in CP (IB) No.73/KB/ 2017]

The liquidator filed an application under section 35(1)(n) of the Code seeking orders against the ED to release the attachment of assets of the CD. The AA observed: 

• “In any case, the Court established under PMLA Act being a criminal Court can only decide whether the properties attached during investigation from possession of the Corporate Debtor could be said to be the properties acquired by them using proceeds of the crime. It is for this Tribunal to decide as to how the properties and assets of the Corporate Debtor under liquidation can be appropriated. The Liquidator must get possession of those properties attached by the Enforcement Director, NewDelhi.”

(d) In the matter of Clutch Auto Ltd. [CA-1432(PB)/2019 & CA-1433(PB)/2019 in (IB)-15(PB)/2017]

The liquidator filed an application against the Municipal Corporation, Faridabad (MCF) to de-seal CD's land and hand it over to him. The AA observed that the property was sealed by MCF during moratorium in violation of section 14. It directed MCF to de-seal the property and the liquidator to consider its claim relating to tax on the property sealed.

(e) Om Prakash Agarwal Vs. Tax Recovery Officer 4 & Anr. [Item No. 301, IA-992/2020 in CP/294/2018]

The liquidator filed an application to defreeze the accounts of the CD which was attached by Tax Recovery Officer. The Income Tax Department submitted that the income tax proceedings have an overriding effect against other enactments and money attached by it is no more an asset of the CD. The liquidator submitted that the Income Tax Department has filed its claim against the CD and the same would be considered for distribution under section 53. The AA held that the monies of the CD lying in the bank accounts shall be construed to be an asset of the CD even if an attachment order is passed against the same. It noted that section 178 of the Income-tax Act, 1961 has been amended to allow the Code to have an overriding effect. It directed the Bank to de-freeze the accounts and release the amounts of the CD within 30 days.

E. Managing the Affairs, etc.

(a) In the matter of Hind Motors India Limited [CA 138/2017 in CP (IB) No.06/CHD/2017]

The AA noted that the CD has no liquid assets and hence it is difficult to meet the expenses of liquidation. Accordingly, the AA directed that the expenses of the public announcement and for service of process, etc. incurred by the liquidator shall be borne by Union Bank of India at first instance, which shall form part of liquidation costs. It clarified that the liquidator shall be paid fee in accordance with the Regulations.

(b) Abhay N. Manudhane Vs. Gupta Coal India Pvt. Ltd. [CA(AT) (Insolvency) No. 786/2019]

The liquidator filed an appeal against the impugned order of the AA rejecting an application filed by him under section 60(5) of the Code for institution of a suit or other legal proceedings on behalf of the CD under liquidation in the Courts / Tribunals. He intended to file an application under section 9 of the Code against different companies. While dismissing the appeal, the NCLAT held that in terms of section 11(d) of the Code, a CD under liquidation is not entitled to make an application to initiate CIRP. It observed: 

• “However, in case where matter does not relate to any secured asset and recovery of any money by the ‘Corporate Debtor’, which is not under Liquidation, a suit or other legal proceedings may be instituted by the Liquidator on behalf of the ‘Corporate Debtor’, but not an application under Section 9 of the I&B Code.”

Note: The Insolvency and Bankruptcy Code (Amendment) Act, 2020 has since clarified that section 11 does not prevent a CD from initiating CIRP against another CD.

(c) Reliance India Power Fund Reliance Capital Trustee Company Limited Vs. Mr. Raj Kumar Ralhan, Liquidator of Su Kam Power Systems Limited [CA(AT)(Ins) No. 318/2020]

The appellant had initiated arbitration proceedings against the CD, of which the respondent is the liquidator, before initiation of CIRP. The respondent did not attend the arbitration proceedings. The appellant submitted that in terms of section 35(1)(k), it is the duty of the liquidator to defend any suit, prosecution or other legal proceedings to which the CD is a party. The Respondent submitted that the arbitration proceeding relates to inter-shareholders dispute of the CD and the CD has nothing to do with such inter se dispute. While agreeing with the submission of the appellant, the NCLAT held that the said duty includes any conscious decision that a liquidator may take whether, in the given set of facts, he needs to defend any proceedings. The appellant has no right to force the liquidator to take part in the arbitration proceedings, as such duty would include a conscious decision to not to take part in the proceedings.

(d) Jindal Steel and Power Limited Vs. Arun Kumar Jagatramka & Anr. [CA(AT) No. 221/2018]

An unsecured creditor of the CD preferred an appeal under section 421 of the Companies Act, 2013 against the order of the AA for taking steps for financial scheme of compromise and arrangement between the promoter and the CD through the liquidator. The issue was whether the promoter is eligible to file an application for compromise and arrangement, while he is ineligible under section 29A of the Code to submit a resolution plan. The NCLAT, relying on the judgment of the Supreme Court in Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors., held that the promoter, if ineligible under section 29A, cannot make an application for compromise and arrangement for taking back the immovable and movable property or actionable claims of the CD.

Note: The Liquidation Process (Amendment) Regulations, 2020 now clarifies that a person, who is not eligible under the Code to submit a resolution plan for insolvency resolution of the CD, shall not be a party in any manner to a compromise or arrangement of the CD under section 230 of the Companies Act, 2013.

F. Powers and Duties, etc.

(a) Rajive Kaul Vs. Vinod Kumar Kothari & Ors. [CA(AT)(Ins) No. 44, 224 & 1518/2020]

The liquidator moved the AA to remove the nominee directors of the CD on the Board of its subsidiary, due to non-cooperation, active obstruction, breach of duty and breach of code of conduct. The AA held that the liquidator has the power to remove and also appoint nominee directors of the CD, which the company is bound to follow. On an appeal against the order of the AA, the NCLAT upheld the order of the AA and held that it is an axiomatic principle in law that a company in liquidation acts through the liquidator and the liquidator steps into the shoes of the board of directors of the company under liquidation for the purpose of discharging its statutory duties. It further held that the liquidator is armed with requisite powers to remove the nominee directors and is entitled to nominate the directors, and the company is enjoined to act upon the replacement proposal of the existing nominee directors. He is not required to inform the reasons for replacing nominee directors.

(b) Punjab National Bank Vs. Mr. Kiran Shah, Liquidator of ORG Informatics Ltd. [CA(AT)(Ins) No. 102/2020]

The lead bank in the CoC challenged the appointment of the liquidator after the AA passed the liquidation order. The NCLAT held that after the liquidation order, the CoC has no role to play and that they are simply claimants, whose matters are to be determined by the liquidator and hence cannot move an application for his removal.

(c) D & I Taxcon Services Private Limited Vs. Mr. Vinod Kumar Kothari  [CA(AT)(Ins) No. 1347/2019]

The AA dismissed an application challenging the actions of the liquidator and imposed a cost of Rs.1,00,000 on the appellant for levelling vague and baseless allegations against the respondent with a direction that the cost of Rs.1,00,000 shall form part of liquidation  estate. On an appeal, the NCLAT observed that without having a locus under section 47(1) of the Code, the appellant has been interfering with the process of liquidation and thwarting the liquidation process which ultimately will have deleterious effect on the rights of those who are entitled to the benefit of the distribution of sale proceeds of liquidation proceedings. It dismissed the appeal but dispensed with the cost having regard to the fact that the appellant is a victim of the incident of fire.

(d) Indian Oil Corporation Ltd. Vs. Mr. Ashish Arjun Kumar Rathi, Liquidator of SBQ Steels Pvt. Ltd. [CA(AT)(Ins) No. 1116/2019] The AA upheld the decision of the liquidator to reject the claims of the appellant, while noting that though the liquidator has not clearly mentioned in many words as to why he rejected those two claims, he has mentioned that there is no binding agreement between the parties obligating the CD to pay interest and that reason is more than sufficient for rejecting the claim. While admitting an appeal, the NCLAT observed that ascribing reasons is the ‘heart and soul’ of a reasoned order / judgement. Not assigning reasons and that too in a rejection order relating to a claim is not a ‘prudent and reasonable course of action’. It further observed that as per section 40 of the Code a liquidator being an ‘Authority’ decides the matter in a quasi-judicial manner and his decision is open to challenge under section 42 of the Code. In terms of the ingredients of section 40, reasons are to be spelt out for rejecting the claims, which in the present case was not followed by the liquidator.A liquidator is an officer of the AA and is expected to perform his duties fairly, justly, and honorably in dealing with the claims of persons.

3. This communication is issued for the sole purpose of education and awareness of IPs and other stakeholders of liquidation processes. The directions and observations cited herein above are only indicative. An IP must study the orders for comprehensive understanding of the issues entailed therein and also update himself from subsequent orders, if any, on those issues. He must also refer to the Code and the Rules/Regulations/Circulars and other relevant case laws or may seek professional advice if he intends to take any action or decision, in any matter dealt in this facilitation letter.

Sd/-

(Appala Subramanyam)

Chief General Manager

Email: subrahmanyam.a@ibbi.gov.in

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Blogger’s Comments; Under Om Prakash Agarwal Vs. Chief Commissioner of Income Tax (TDS) & Anr. [Item no. C(d) supra above], Board has quoted from the judgement of NCLT, which stands set aside by NCLAT, as not sustainable in law, vide orders dated 08.02.2021, observing as under;

• # 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.

• # 21. . . . . .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. 

• # 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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