FACTS OF THE CASE: the petitioner purchased an immovable property in the liquidation proceedings of VNR Infrastructures Limited. The Sub-Registrar refused to register the property in the name of the petitioner on behest of Income Tax Department. , which claimed a charged on 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, 2016 in juxtaposition to the Income Tax Act,1961.
It was observed that “It is clear that the Income Tax -Department does not enjoy the status of a secured creditor, on par with 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 the provisions of Section 281 of the Act,1961.”
As regards the purpose of attachment, it referred to the judgement 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 provide for a priority in appropriation of the amounts set aside by the liquidator for clearance of tax dues. However, liquidation of a company will be held under different provisions of different act.
PLEASE NOTE THAT: In liquidation of a company under IBC,2016, provisions of Section 178 of the Income Tax Act, 1961 stands excluded by virtue of amendment in Section 178(6) of the Act, 1961 with effect from 1st November ,2016, in accordance of the provisions of Section 247 read with Third Schedule of the Code,2016. Therefore, from above amendment it was cleared that Income Tax Department can no longer claim a priority in respect of clearance of tax due of the said company, in case said company is undergoing liquidation under provisions of Code,2016.
THE HIGH COURT -held that the tax dues, being an input to the Consolidated Fund of India and of the States, clearly come within 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 attachment dated 27th October,2016 was long prior to the initiation of liquidation proceedings under the Code,2016 against VNR Infrastructure Limited. Further Section 36(3)(b) of the Code indicate in no uncertain terms that the liquidation estate assets may or may not be in possession of the Corporate Debtor, 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 effect of taking it out of preview of Section 36(3)(b) of the Code ,2016.
The said order of attachment, therefore cannot be taken as bar for completion of sale under a liquidation proceeding under the Code,2016. The Income Tax Department necessarily submit its claim to the liquidator for consideration as and when the distribution of assets, in terms of Section 53(1) of the IBC,2016 is taken up.
CONCLUSION: the above judgement clarified that Income Tax Department cannot be same as a Secured Creditor in case of tax dues of a company liquidation under provisions of IBC,2016. An Attachment order of Income Department on any asset of Corporate Debtor not conferred any interest in favour of department ,therefore attachment order only acts as a prohibition on private alienation of concerned property and it does not affect consideration of property by the liquidator for the purpose of liquidation. The provisions of IBC, 2016 will overriders provisions of Income Tax Act,1961 in this respect. The Income Tax Department has to submit its claim for tax dues with the liquidator same as other creditors in the process of liquidation according to the provisions of Section 53(1) of IBC, 2016.
SECTION 36 OF IBC,2016 DEALS WITH: LIQUIDATION ESTATE.
(1) For the purposes of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3), which will be called the liquidation estate in relation to the corporate debtor.
(2) The liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors.
(3) Subject to sub-section (4), the liquidation estate shall comprise all liquidation estate assets which shall include the following: —
(a) any assets over which the corporate debtor has ownership rights, including all rights and interests therein as evidenced in the balance sheet of the corporate debtor or an information utility or records in the registry or any depository recording securities of the corporate debtor or by any other means as may be specified by the Board, including shares held in any subsidiary of the corporate debtor;
(b) assets that may or may not be in possession of the corporate debtor including but not limited to encumbered assets;
(c) tangible assets, whether movable or immovable;
(d) intangible assets including but not limited to intellectual property, securities (including shares held in a subsidiary of the corporate debtor) and financial instruments, insurance policies, contractual rights;
(e) assets subject to the determination of ownership by the court or authority;
(f) any assets or their value recovered through proceedings for avoidance of transactions in accordance with this Chapter;
(g) any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest;
(h) any other property belonging to or vested in the corporate debtor at the insolvency commencement date; and
(i) all proceeds of liquidation as and when they are realised.
(4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation: —
(a) assets owned by a third party which are in possession of the corporate debtor, including—
(i) assets held in trust for any third party;
(ii) bailment contracts;
(iii) all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund;
(iv) other contractual arrangements which do not stipulate transfer of title but only use of the assets; and
(v) such other assets as may be notified by the Central Government in consultation with any financial sector regulator;
(b) assets in security collateral held by financial services providers and are subject to netting and set-off in multi-lateral trading or clearing transactions;
(c) personal assets of any shareholder or partner of a corporate debtor as the case may be provided such assets are not held on account of avoidance transactions that may be avoided under this Chapter;
(d) assets of any Indian or foreign subsidiary of the corporate debtor; or
(e) any other assets as may be specified by the Board, including assets which could be subject to set-off on account of mutual dealings between the corporate debtor and any creditor.
SECTION 52: SECURED CREDITOR IN LIQUIDATION PROCEEDINGS.
52. (1) A secured creditor in the liquidation proceedings may—
(a) relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified in section 53; or
(b) realise its security interest in the manner specified in this section.
(2) Where the secured creditor realises security interest under clause (b) of sub-section (1), he shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realised.
(3) Before any security interest is realised by the secured creditor under this section, the liquidator shall verify such security interest and permit the secured creditor to realise only such security interest, the existence of which may be proved either—
(a) by the records of such security interest maintained by an information utility; or
(b) by such other means as may be specified by the Board.
(4) A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it.
(5) If in the course of realising a secured asset, any secured creditor faces resistance from the corporate debtor or any person connected therewith in taking possession of, selling or otherwise disposing off the security, the secured creditor may make an application to the Adjudicating Authority to facilitate the secured creditor to realise such security interest in accordance with law for the time being in force.
(6) The Adjudicating Authority, on the receipt of an application from a secured creditor under sub-section (5) may pass such order as may be necessary to permit a secured creditor to realise security interest in accordance with law for the time being in force.
(7) Where the enforcement of the security interest under sub-section (4) yields an amount by way of proceeds which is in excess of the debts due to the secured creditor, the secured creditor shall—
(a) account to the liquidator for such surplus; and
(b) tender to the liquidator any surplus funds received from the enforcement of such secured assets.
(8) The amount of insolvency resolution process costs, due from secured creditors who realise their security interests in the manner provided in this section, shall be deducted from the proceeds of any realisation by such secured creditors, and they shall transfer such amounts to the liquidator to be included in the liquidation estate.
(9) Where the proceeds of the realisation of the secured assets are not adequate to repay debts owed to the secured creditor, the unpaid debts of such secured creditor shall be paid by the liquidator in the manner specified in clause (e) of sub-section (1) of section 53.
SECTION 53 OF IBC,2016. (1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely:
e) the following dues shall rank equally between and among the following: —
(i) any amount due to the Central Government and the 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;
(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest.
SECTION 178 OF INCOME TAX ACT “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 Assessing Officer who is entitled to assess the income of the company.
(2) The Assessing Officer shall, after making such inquiries or calling for such information as he may deem fit, notify to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the Assessing Officer, would be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company.
3) The liquidator-
(a) shall not, without the leave of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, part with any of the assets of the company or the properties in his hands until he has been notified by the Assessing Officer under sub-section (2) ; and
(b) on being so notified, shall set aside an amount, equal to the amount notified and, until he so sets aside such amount, shall not part with any of the assets of the company or the properties in his hands :
Provided that nothing contained in this sub-section shall debar the liquidator from parting with such assets or properties for the purpose of the payment of the tax payable by the company or for making any payment to secured creditors whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation or for meeting such costs and expenses of the winding up of the company as are in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner reasonable.
(4) If the liquidator fails to give the notice in accordance with sub-section (1) or fails to set aside the amount as required by sub-section (3) or parts with any of the assets of the company or the properties in his hands in contravention of the provisions of that sub-section, he shall be personally liable for the payment of the tax which the company would be liable to pay :
Provided that if the amount of any tax payable by the company is notified under sub-section (2), the personal liability of the liquidator under this sub-section shall be to the extent of such amount.
(5) Where there are more liquidators than one, the obligations and liabilities attached to the liquidator under this section shall attach to all the liquidators jointly and severally.
(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.
DISCLAIMER: the case law produced above is only for information and knowledge of readers. the views expressed here are personal views of author and same should not considered as professional advice. In case of necessity do consult with professionals.