TDS Payments Do Not Amount To An Acknowledgement Of Debt: NCLT

The Mumbai Bench of the National Company Law Tribunal (NCLT) has ruled that TDS (tax deducted at source) payments do not amount to an acknowledgment of debt.

The two-member bench of Justice P.N. Deshmukh (Judicial Member) and Shyam Babu Gautam (Technical Member) has relied on the decision of NCLAT in the case of P.M. Cold Store Pvt. Ltd. v. Goouksheer Farm Fresh Pvt. Ltd. & Anr., in which it was held that the fact that the corporate debtor has paid TDS on interest payable cannot be considered as an acknowledgment in writing of the liability by the corporate debtor, and therefore, such a TDS payment will not have any effect as an acknowledgment of the debt.

The petitioner submitted that the dues in default were admitted or acknowledged on 11.12.2015 and 27.02.2018 by the corporate debtor while making partial payments of TDS reflected in Form 26AS and on 28.12.2018 by its representative or director through a telephonic call assuring that the operational debt will be paid very soon.

The operational creditor has relied on Form 26AS, i.e., payment of tax deducted at source (TDS) on unpaid salaries, and claimed that the petition is within limitation from the date of default. The payment of TDS cannot provide an extension of the period of limitation. The operational creditor filed the company petition in the year 2019, whereas, the salary last claimed by him appears to be as of 05.04.2014, the day on which the operational creditor was relieved from services, as per Article 137 of the Limitation Act, 1963, the period of limitation for filing a company petition under Section 9 of the IBC, 2016. The payment of TDS by the employer does not constitute an acknowledgment of debt for the purpose of claiming limitation under the IBC, 2016.

The operational creditor has filed the petition based on pay slips of unpaid salaries for the months of August 2013 to March 2014.

The corporate debtor submitted that the operational creditor has claimed salary for the month of April 2014; however, no pay slip has been annexed to the petition. The operational creditor has relied upon the TDS paid by the corporate debtor to the tax authorities under the Income-tax Act of 1961 on 11.12.2015, 12.01.2018, and 27.02.2018 to establish that the company petition is filed within limitation. The payment of TDS does not constitute an admission of liability inasmuch as TDS can be deducted even on the expectation of an estimated liability.

According to the operational creditor, TDS was paid by the corporate debtor on unpaid salaries on various dates; therefore, such payments of TDS revived the period of limitation under Section 19 of the Limitation Act, which had already expired.

The corporate debtor stated that the default in the alleged non-payment of salaries does not give rise to a continuous cause of action as the same is a recurring cause of action and is distinct for each salary. Therefore, the assumption of the operational creditor that the payment of TDS for different salaries on 11.12.2015, 12.01.2018, and 27.02.2018 extends limitation is misconceived and not tenable in law; therefore, the company petition is required to be dismissed as time-barred.

The NCLT noted that the debt was time-barred.

The NCLT rejected the petition filed by the operational creditor under Section 9 of the IBC read with Rule 6(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiating the Corporate Insolvency Resolution Process (CIRP).

Case Title: Kalpesh Jaysukh Shah versus M/s Arch Pharmalabs Limited

Citation: CP (IB) 3460/MB/2019

Date: 08.02.2023

Counsel For Petitioner: Advocate Sumit Khanna

Counsel For Respondent: Advocate Nausher Kohli

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