NCLT Ahmedabad Directs Income Tax Department To Refund Tax To Corporate Debtor; Section 53 Of IBC Overrides Sec. 194-IA Of Income Tax Act
Pallavi Mishra
20 Dec 2023 11:00 AM IST
The National Company Law Tribunal (“NCLT”), Ahmedabad Bench, comprising of Mrs. Chitra Hankare (Judicial Member) and Dr. Velamur G Venkata Chalapathy (Technical Member), has held that Income Tax deducted and paid by the auction purchaser amounts to recovery of tax from Corporate Debtor (which is under liquidation), on priority with other creditors as mentioned in Section 53 of IBC,...
The National Company Law Tribunal (“NCLT”), Ahmedabad Bench, comprising of Mrs. Chitra Hankare (Judicial Member) and Dr. Velamur G Venkata Chalapathy (Technical Member), has held that Income Tax deducted and paid by the auction purchaser amounts to recovery of tax from Corporate Debtor (which is under liquidation), on priority with other creditors as mentioned in Section 53 of IBC, which is against the object and provisions of IBC.
The Liquidator sold the assets of the Corporate Debtor in e-auction to successful purchasers, who deducted Rs. 28,92,101/- towards 1% TDS payable in view of Section 194-IA of the Income Tax Act, 1963. The Bench has directed the Income Tax Department to refund the amount of Rs. 28,92,101/- to the Corporate Debtor.
Background Facts
On 21.12.2017, Varia Engineering Works Private Limited (“Corporate Debtor”) was admitted into Corporate Insolvency Resolution Process (“CIRP”) by the NCLT. Subsequently, the NCLT ordered liquidation of the Corporate Debtor on 22.07.2019.
The Liquidator sold the assets of Corporate Debtor in e-auction, against which Rs.28,92,101/- was deducted by the successful purchasers towards Tax Deduction at Source (“TDS”), a capital gain of Corporate Debtor.
Section 194-IA of Income Tax Act, 1963 (“IT Act”) provides that where the consideration for transfer of immovable property is more than Rs. 50 Lakhs, 1% of the sale consideration is to be deducted towards Income Tax by the transferee.
While Section 199 of IT Act provides that any deduction made in accordance with Section 194-IA of 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 properties.
During liquidation, the Liquidator is only bound to prepare receipts of payments and cannot file a return of Corporate Debtor. In such a case, TDS would remain unclaimed in the account of Corporate Debtor. Thus, the Liquidator filed an application before NCLT to direct the Income Tax Department to credit the amount of Rs.28,92,101/- deducted as TDS into the account of Corporate Debtor.
The Liquidator submitted that Section 53(1)(e) of IBC assigns 5th position in the order of priority to government dues and these dues cannot not be paid in violation to such hierarchy.
NCLT Verdict
The Bench observed that the provision under Section 53(1)(e) of IBC and Section 178 of IT Act for government dues priority is different.
Further, Section 45 of IT Act provides that any profits or gains arising from the transfer of capital asset effected in the previous years, 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 Income Tax of the previous years in which the transfer took place. Thus, the TDS under Section 194-IA of the Income Tax is nothing but advanced capital gain tax recovered through the purchaser.
The Bench opined that in respect to recovery of government dues from a company under liquidation, there is inconsistency between Section 194-IA of IT Act and Section 53 of IBC. By virtue of Section 238 of IBC, Section 53(1)(e) of IBC shall have overriding effect on Section 194-IA of IT Act.
Further, since IBC does not provide for filing of any Income Tax Return by the Liquidator, therefore, the liquidator cannot claim refund of TDS deposited by the purchaser.
The Bench held that the Income Tax deducted and paid by the auction purchaser amounts to recovery of tax from Corporate Debtor on priority with other creditors as mentioned in Section 53 of IBC, which is against the object and provisions of IBC.
Reliance was placed on the NCLAT judgment in Om Prakash Agarwal, Liquidator of S. Kumars Natinowide Limited vs. Chief Commissioner of Income Tax (TDS), CA (AT) (Ins) No.624 of 2020, wherein it was 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.”
The Bench held that the ratio in Om Prakash Agarwal, Liquidator of S. Kumars Natinowide Limited vs. Chief Commissioner of Income Tax (TDS) is squarely applicable to the case.
The Bench has directed the Income Tax department to return the amount of Rs.28,92,101/- deducted as TDS into the account of Corporate Debtor.
Case Title: Sunil Kumar Agarwal v Chief Commissioner of Income Tax (TDS), Ahmedabad
Case No.: CP(IB) 149 of 2017
Counsel for Applicant: Mr. Vishal Dave a.w. Mr. Nipun Singhvi, Ms. Pragati Tiwari, Mr. Nandish Chudgar, and Mr. Aravindakshan V. Nair.
Counsel for Respondents: Mr. Maithili Mehta.
