Shree Ram Lime Products Pvt. Ltd. Vs Gee Ispat Pvt. Ltd. (NCLT Delhi)
NCLT HELD THAT: We therefore hold that the tax liability arising out of the sale shall be distributed in accordance with the provisions of Section 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. The Capital Gain will be treated as Operational Debts along with other dues of the government and will be paid according to water fall mechanism as referred above.
BRIEF FACTS:
1. The learned Liquidator under Section 60(5) of the Insolvency & Bankruptcy Code, 2016, praying for directions/clarifications in respect of certain steps required to be taken after liquidating the assets of the Corporate Debtor.
2. Vide order dated 05.10.2018, liquidation of the assets of the Corporate Debtor had been directed as no resolution of the business of the Corporate Debtor was proposed.
3. Vide the present application, the learned Liquidator, Ms. Pooja Bahry, submits that the secured creditors had relinquished their charge over all properties of the Corporate Debtor which were mortgaged with them, upon which steps were taken by her to sell the same.
4. As per averments, auctions were held and a sum of Rs. 16,31,20,000/- has been realised so far. The liquidator proposes to proceed with distribution of the amounts in accordance with the waterfall mechanism prescribed in Section 53 of the Code.
5. However, she is faced with the issue as to whether capital gains tax would be attracted on sales of such secured assets to be included as liquidation cost. If so, she would be required to first make provision for the capital gains and accordingly after deduction of the amount, the balance shall be distributed amongst the claimants. The short point for clarification required by the Learned Liquidator therefore is whether in the present case she is required to deposit the capital gains and include it as liquidation costs to be defrayed in the first instance.
6. On notice being issued to the Income Tax Department, Ms. Lakshmi Gurung, Ld. Counsel appearing for them has of course claimed that the capital gain has to be deposited first as per the Income Tax Act. She submits that all dues towards realisable taxes have to be remitted in the first instance in the Liquidation process as per the provision of Section 178 of the IT Act and no exception can be carved out in cases under the Insolvency & Bankruptcy Code. Reliance has been placed on various judgments which have clearly ordained that capital gain tax is payable on sales whether the liquidation is voluntary or involuntary. Reliance is also placed on specific provisions for deduction of tax under Section 194 IA, mandating the purchaser of the property to deduct an amount equal to 1% of the sale consideration at the time of making payment and deposit it with Government as TDS.
7. To adjudicate the point in reference, we note that as per the provisions of Section 52 of the Code, a secured creditor has the option to:
a) Relinquish their security to the liquidation estate of the Corporate Debtor and allowed liquidator to sell the Secured Assets and apply the proceeds as per the liquidation waterfall under Section 53 of the Code.
b) Realise its security interest in the manner specified in this section.
8. In the present case had the secured creditors chosen option (b) they could have applied the entire proceeds received to recover their debts (without deduction on account of any capital gains tax) as tax on capital gains is not liable to be paid by the banks. However, instead of realising the Secured Assets on their own they have opted for proceeding under Section 52(a). The secured creditors of the Corporate Debtor have relinquished their security to the liquidator who proceeded to sell the Secured Assets in terms of the Code and the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”).
