2021 (2) TMI 364 - AT - Insolvency and Bankruptcy

TDS liability during the pendency of CIRP proceedings - Interpretation of statute - Whether the provisions of u/s 194-IA of the Income Tax Act 1961 are inconsistent with Section 53 (1) (e) of the Insolvency and Bankruptcy Code 2016? - HELD THAT - Hon ble Supreme Court in the case of Imperial Chit funds (P) Ltd. Vs. Income Tax Officer 1996 (3) TMI 397 - SUPREME COURT considered Section 178 of the IT Act in relation to the preferential payments covered by Section 530 of the Companies Act 1956. The Supreme Court took the view that the Income Tax Department is to be treated as a secured creditor in the light of the words occurring in Sections 178 (3) and (4) of the IT Act to the effect that the liquidator shall set aside the amount notified by the Income Tax Officer and if it is not so done the liquidator is personally liable to pay the amount of Tax. With this proposition the Income Tax Department is to be treated as a secured creditor and in liquidation proceedings such dues shall get priority. Whereas as per Section 53 (1) (e) of the Code the legislature assigned the 5th position in the order of priority to government dues (including Income Tax Dues). 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 - Section 194 IA of the IT Act provides that where the consideration for transfer of the immovable property is more than 50 Lakhs then the transferee is responsible to deduct the amount which is 1% of the consideration as Income Tax. As per Section 194 IA of the IT Act 1% TDS is recovered on priority to other creditors of the transferor which is partial capital gain tax whereas Section 53(1)(e) of the Code in waterfall mechanism provides that the Government dues comes fifth in order of priority. 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. Otherwise also Section 53 starts with a non-obstante clause whereas Section 194 IA of the IT Act does not start with a non-obstante clause and it would necessarily be subject to overriding effect of the Code and therefore there was no requirement to amend the Section 194 IA of the IT Act. Thus it is clear that when the Company is wound up under the orders of Court or otherwise the return shall be verified by the Liquidator referred to in Sub-Section 1 of Section 178 of the IT Act during corporate insolvency resolution process under Section 7 9 or 10 of the Code the return shall be verified by the Insolvency Professional appointed by the Adjudicating Authority. However there is no such provision in the IT Act Code or IBBI (Liquidation Process Regulation 2016) that the Liquidator of the Company in Liquidation under the Code is required to file Income Tax Return. For filing of return the financial statements are required to be annexed but the Code/IBBI (Liquidation Process Regulation 2016) does not assign a duty on the Liquidator to prepare financial statements - the Liquidator of a Company in liquidation under the Code is not required to file Income Tax Return then there is no question of claiming refund of TDS deducted under Section 194 IA of the IT Act. 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 - Respondent No.1 is directed to refund the amount of TDS to the Appellant which is deposited by the Respondent No. 2 with the department - Appeal allowed.

Summary

Issues Involved:
1. Deduction of TDS under Section 194-IA of the Income Tax Act, 1961.
2. Inconsistency between Section 194-IA of the Income Tax Act and Section 53 of the Insolvency and Bankruptcy Code, 2016.
3. Liquidator's duty to file Income Tax Returns during liquidation.
4. Priority of government dues in liquidation proceedings.

Detailed Analysis:

Issue 1: Deduction of TDS under Section 194-IA of the Income Tax Act, 1961.
The Liquidator filed an application seeking direction against the successful bidder and the Income Tax Authority to not deduct 1% TDS from the sale consideration of Rs. 43 Crores. The Liquidator argued that the provision of deduction of TDS under Section 194-IA of the IT Act is inconsistent with Section 53(1)(e) of the Insolvency and Bankruptcy Code (IBC), which sets out the waterfall mechanism for asset distribution. The Adjudicating Authority dismissed the application, stating that the deduction of TDS does not amount to a tax demand but is a duty of the purchaser to credit TDS to the Income Tax Department.

Issue 2: Inconsistency between Section 194-IA of the Income Tax Act and Section 53 of the Insolvency and Bankruptcy Code, 2016.
The Appellant argued that Section 53 of the IBC postulates the distribution of assets to creditors without the deduction of TDS, and the deduction of TDS interferes with the waterfall mechanism stipulated under Section 53. The Respondent countered that there is no conflict between Section 194-IA and Section 53 as they operate in different domains. The Tribunal concluded that there is inconsistency between Section 194-IA of the IT Act and Section 53(1)(e) of the IBC. By virtue of Section 238 of the IBC, Section 53(1)(e) shall have an overriding effect on Section 194-IA of the IT Act.

Issue 3: Liquidator's duty to file Income Tax Returns during liquidation.
The Appellant contended that during the liquidation period, there is no requirement to maintain profit and loss accounts or balance sheets of the Corporate Debtor, and hence, no need to file Income Tax Returns. The Respondent argued that the Liquidator, being a principal officer, is required to file returns and can claim refunds for TDS. The Tribunal found that there is no provision in the IT Act, IBC, or IBBI (Liquidation Process Regulation, 2016) requiring the Liquidator to file Income Tax Returns. Therefore, the Liquidator is not obligated to claim refunds for TDS deducted under Section 194-IA.

Issue 4: Priority of government dues in liquidation proceedings.
The Tribunal examined the priority of government dues under Section 53(1)(e) of the IBC, which assigns the fifth position in the order of priority to government dues, including Income Tax dues. The Tribunal noted that Section 178(6) of the IT Act was amended to exclude its application in liquidation proceedings under the IBC, indicating the legislature's intent to prioritize the IBC's provisions. The Tribunal concluded that the deduction of TDS under Section 194-IA is inconsistent with the priority mechanism under Section 53(1)(e) of the IBC.

Conclusion:
The Tribunal set aside the impugned order of the Adjudicating Authority, holding that Section 53(1)(e) of the IBC has an overriding effect over Section 194-IA of the IT Act. The Respondent No. 1 (Income Tax Authority) was directed to refund the amount of TDS deposited by Respondent No. 2 (successful bidder) to the Appellant (Liquidator). The appeal was allowed with no order as to costs.