TMI Blog2018 (8) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... f the sale effected by the fifth respondent under the provisions of the Code. The first respondent necessarily has to submit the claim of the Income-tax Department to the fifth respondent for consideration as and when the distribution of the assets, in terms of Section 53(1) of the Code, is taken up. The writ petition is accordingly allowed declaring the legal position as aforestated. The fourth respondent shall entertain and register the sale transaction effected by the fifth respondent in favour of the petitioner company, if not already done. The first respondent is at liberty to submit its claim before the fifth respondent, who shall duly consider the same in accordance with the priorities stipulated under Section 53(1) of the Code. - WRIT PETITION No. 8560 OF 2018 - - - Dated:- 26-7-2018 - THE HONBLE SRI JUSTICE SANJAY KUMAR AND THE HONBLE SRI JUSTICE T.AMARNATH GOUD For the Petitioner : Mr. S.Niranjan Reddy, Mr. Vadeendra Joshi, and Ms. Raubaina S. Khatoon For the Respondent : Mrs.M.Kiranmayee Counsel Ms. Ch.Vedavani ORDER ( Per Sri Justice Sanjay Kumar ) The petitioner companys grievance is with regard to the action of the Sub-Registrar, Erragadda, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment withdrawn. However, the fifth respondent, vide letter dated 22.02.2018, again called upon the petitioner company to pay the balance sale consideration within the stipulated time. As the petitioner company was under threat of the amount deposited by it towards 25% of the sale consideration being forfeited, it addressed letter dated 23.02.2018 requesting the fifth respondent to extend the due date for depositing the balance sale consideration until 07.03.2018. By letter dated 24.02.2018, the fifth respondent extended time subject to payment of interest at 15% per annum for the delayed period. The petitioner company alleges that it made enquiries and came to know that the Sub-Registrar, Erragadda, Hyderabad, the fourth respondent, would not entertain any request for registration in relation to the subject property until and unless the attachment order of the first respondent was lifted. Hence, the present writ petition. The petitioner company filed I.A.No.1 of 2018 in the writ petition seeking an interim order directing the first respondent to recall the attachment and directing the fourth respondent to register the sale of the property by the fifth respondent in its favour. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... came to know that the Income-tax Department had issued a notice for attachment of the said item of property, under its letter dated 28.10.2016, and had directed the fourth respondent not to register any transactions in relation thereto. He stated that the fifth respondent thereupon approached the fourth respondent and submitted letter dated 12.01.2018 requesting that no weightage should be given to the Income-tax Departments letter as he was appointed as a liquidator on 21.09.2017 and had taken over the companys affairs. Reference was made to Section 33 of the Code to the effect that a liquidation order would result in a moratorium on initiation and continuation of legal proceedings by or against the corporate debtor, i.e., VNR Infrastructures Limited, with effect from the date of appointment of the liquidator. The fifth respondent also addressed letter dated 08.01.2018 to the first respondent requesting him to lift the attachment. However, the first respondent replied on 30.01.2018 that Section 33 of the Code would not be applicable in the instant case, as the tax proceedings had been initiated prior to the liquidation proceedings under the order of the NCLT. This letter was recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e commencement of proceedings under the Code before the NCLT. He further stated that a tax recovery certificate was received from the Deputy Commissioner of Income-tax, Central Circle-I(3), Hyderabad, on 07.09.2016 in relation to recovery of the tax arrears from VNR Infrastructures Limited to the tune of ₹ 101,60,55,000/-. Upon receipt of the said certificate, the first respondent served notice in Form No.ITCP-1 under Rule 2 of the Second Schedule to the Act of 1961 on 30.09.2016, which was duly served on the assessee company on 05.10.2016. Thereunder, it was directed to pay the demanded amount within fifteen days. As the assessee company failed to do so, the order of attachment under Rule 48 of the Rules in the Second Schedule to the Act of 1961 in Form No.ITCP-16, attaching the subject property, along with other properties of the assessee company, was issued on 28.10.2016. The receipt of a copy of the same was acknowledged by the District Registrar, Hyderabad (South), on 28.10.2016. The first respondent admitted receipt of the letter dated 08.01.2018 from the fifth respondent informing him of his appointment as the liquidator for VNR Infrastructures Limited, vide order date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applies to matters relating to insolvency and liquidation of corporate debtors where the minimum amount of default is ₹ 1,00,000/-. The proviso to Section 4(1) in Chapter I of this Part however empowers the Central Government to specify the minimum amount of default, by notification, of a higher value which shall not be more than Rs.One Crore. Section 5 in this Chapter sets out definitions of terms used in Part II. Section 5(1) defines Adjudicating Authority to mean the NCLT constituted under Section 408 of the Companies Act, 2013, for the purposes of Part II. Section 5(11) defines initiation date to mean the date on which a financial creditor, corporate applicant or operational creditor, as the case may be, makes an application to the Adjudicating Authority for initiating the corporate insolvency resolution process. Section 5(12) defines insolvency commencement date to mean the date of admission of an application for initiating corporate insolvency resolution process by the Adjudicating Authority under Sections 7, 9 or 10, as the case may be. Section 5(17) defines liquidation commencement date to mean the date on which proceedings for liquidation commence in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Initiation of liquidation. Section 33(1) reads to the effect that where the Adjudicating Authority does not receive a resolution plan or rejects the resolution plan, it shall pass an order requiring the corporate debtor to be liquidated in the manner laid down in Chapter III; issue a public announcement stating that the corporate debtor is in liquidation; and require such order to be sent to the authority with which the corporate debtor is registered. Section 33(5) provides that, subject to Section 52, when a liquidation order has been passed, no suit or other legal proceedings shall be instituted by or against the corporate debtor, except with the prior approval of the Adjudicating Authority. Section 34 deals with Appointment of a liquidator and provides that where the Adjudicating Authority has passed an order for liquidation of the corporate debtor under Section 33, the resolution professional appointed for the corporate insolvency resolution process under Chapter II shall act as the liquidator for the purposes of liquidation, unless replaced by the Adjudicating Authority. The powers and duties of such liquidator are specified in Section 35 of the Code. One such power under Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets by the liquidator in the manner specified in Section 53 or realize its security interest in the manner specified thereunder. Section 52(9) stipulates that where the proceeds of realization of the secured asset are not adequate to repay the 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 Section 53(1). Section 53 deals with distribution of assets by the liquidator. It is of particular relevance to this case and reads thus: 53. Distribution of assets.(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:-- (a) the insolvency resolution process costs and the liquidation costs paid in full; (b) The following debts which shall rank equally between and among the following:-- (i) workmens dues for the period of twenty-four months preceding the liquidation commencement date; and (ii) debts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the corporate debtor is registered within seven days from the date of the order. Part V of the Code deals with Miscellaneous provisions under Sections 224 to 255. Section 238 stipulates that the provisions of the Code shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Section 247 deals with Amendments to the Income-tax Act, 1961 and provides that the said Act shall be amended in the manner specified in the Third Schedule. The Third Schedule to the Code provides that in sub-section (6) of Section 178 of the Act of 1961, after the words for the time being in force, the words and figures except the provisions of the Insolvency and Bankruptcy Code, 2016 shall be inserted. It may be noted that Section 238 was brought into effect from 01.12.2016, while Section 247 was brought into effect from 01.11.2016. Sections 4 to 32, both inclusive, were brought into effect from 01.12.2016. Sections 33 to 54, both inclusive, were brought into effect on 15.12.2016. Now a look at the Act of 1961 and the Rules framed thereunder. Chapter XVII of the Act of 1961 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a certificate has been drawn up by a Tax Recovery Officer for recovery of arrears under Schedule II, the Tax Recovery Officer shall cause to be served upon the defaulter a notice requiring the defaulter to pay the amount specified in the certificate within fifteen days from the date of service of the notice and intimating that in default, steps would be taken to realize the amount as per the procedure set out in the Second Schedule. Rule 4 provides the mode of recovery and states that if the amount mentioned in the notice is not paid within the time specified therein or within such further time as the Tax Recovery Officer may grant in his discretion, the Tax Recovery Officer shall proceed to realize the amount by one or more modes mentioned, one such being by attachment and sale of the defaulters immovable property. Rule 8 provides for disposal of the proceeds of execution and states that whenever assets are realized by sale or otherwise in execution of a certificate, the proceeds shall be disposed of in the manner stipulated (a) they shall first be adjusted towards the amount due under the certificate in execution of which the assets were realized and the costs incurred in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her giving notice or failing to set aside the amount as required or parting with the assets of the company in contravention of the provisions of sub-section (3), he is made personally liable for payment of the tax which the company would be liable to pay, under sub-section (4). Sub-section (6), as it stood prior to its amendment, read to the effect that the provisions of Section 178 shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force. However, after its amendment in terms of Section 247 of the Code read with the Third Schedule thereto, it now reads to the effect that the provisions of Section 178 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. It may be noted that under Section 281 of the Act of 1961, certain transfers are to be treated as void. Section 281(1) provides that during the pendency of any proceeding under the Act of 1961 or after the completion thereof, but before the service of notice under Rule 2 of the Second Schedule to the Act of 1961, if any assessee creates a charge o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prior to the commencement of winding-up proceedings and whether such attachment could continue on the property even in the hands of the purchaser, who bought the property through the official liquidator free of all encumbrances. The Court considered the question whether attachment levied on properties of a company, without any further action being taken, would survive, after the Court makes a winding-up order and the liquidator proceeds to act under Sections 466(1) and 467(1) of the Act of 1956. The final conclusion of the Court was that attachment simpliciter of the properties of a company, which was subsequently ordered to be wound up, without any further action being taken would be of no consequence or effect against the official liquidator and the property could be disposed of by the official liquidator, wholly ignoring the attachment. It may be noticed that in so far as an assessee company in liquidation is concerned, Section 178 of the Act of 1961 provides for a priority in appropriation of the amounts set aside by the liquidator for clearance of the tax dues. However, it may be noted that liquidation of a company could be under the provisions of different enactments. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Legislature, in its wisdom, assigned the fifth position in the order of priority to such dues, it is not for this Court to delve into or belittle the rationale underlying the same. Mrs.M.Kiranmayee, learned senior standing counsel, would however contend that the arrears of VNR Infrastructures Limited, Hyderabad, amount to over ₹ 100.00 Crore as on date and recovery of such arrears must necessarily be given priority in the context of the statutory scheme obtaining under the Act of 1961. She would point out that the attachment effected by the first respondent was on 27.10.2016, long prior to initiation of the liquidation proceedings under the Code. She would further point out that though Section 178 of the Act of 1961 was amended by Section 247 of the Code, no amendment was effected in Sections 222, 226 or 232 of the Act of 1961, whereunder tax arrears could be recovered. She relied upon IMPERIAL CHIT FUNDS (P.) LTD. V/s. INCOME- TAX OFFICER [1996] 219 ITR 498, wherein the Supreme Court considered Section 178 of the Act of 1961 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the Code are concerned forms an exception to Section 178(6) of the Act of 1961. Learned counsel would also point out that the provisions of Sections 220 and 222 of the Act of 1961 do not start with any non-obstante clause and therefore, they would necessarily be subject to the overriding effect of the Code, by virtue of Section 238 thereof. We find merit in this submission. On the above analysis, this Court holds that the first respondent cannot claim any priority merely because of the fact that the order of attachment dated 27.10.2016 issued by him was long prior to the initiation of liquidation proceedings under the Code against VNR Infrastructures Limited, Hyderabad. It may be noted that Section 36(3)(b) of the Code indicates 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 the effect of taking it out of the purview of Section 36(3)(b) of the Code. The said order of attachment therefore cannot be taken to be a bar for completion of the sale effected by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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