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

Tribunal: Insolvency Code Prevails over Income Tax Act, Directs Refund

The Tribunal held that Section 53(1)(e) of the Insolvency and Bankruptcy Code overrides Section 194-IA of the Income Tax Act. The Income Tax Authority was ... Priority of distribution under Section 53(1)(e) of the Insolvency and Bankruptcy Code - Tax deduction at source under Section 194-IA of the Income-tax Act - Overriding effect of the Insolvency and Bankruptcy Code under Section 238 - TDS as advance payment of capital-gains treated as tax paid under Section 199 and charging under Section 45 - Liquidator's obligation to file income-tax return and attendant refund mechanism - Non-obstante clause and legislative priority in insolvency distributionTax deduction at source under Section 194-IA of the Income-tax Act - Priority of distribution under Section 53(1)(e) of the Insolvency and Bankruptcy Code - Overriding effect of the Insolvency and Bankruptcy Code under Section 238 - TDS as advance payment of capital-gains treated as tax paid under Section 199 and charging under Section 45 - Non-obstante clause and legislative priority in insolvency distribution - Whether provisions of Section 194-IA of the Income-tax Act are inconsistent with the priority of distribution under Section 53(1)(e) of the Insolvency and Bankruptcy Code and, if so, which provision prevails. - HELD THAT: - The Tribunal held that TDS under Section 194-IA is advance capital-gains tax recovered by the transferee on behalf of the transferor and, by operation of Section 199 read with Section 45, constitutes a payment of tax. Section 53(1)(e) of the Code prescribes the statutory waterfall and ranks government dues (including income-tax) at the fifth position. Both Section 178(6) of the IT Act (as amended) and Section 53 of the Code employ non obstante language; having enacted the Code the legislature modified the applicability of Section 178 to liquidation under the Code. Because Section 194-IA operates to effect an immediate deduction in priority to other creditors it is inconsistent with the distribution regime envisaged by Section 53(1)(e). By virtue of the Code's overriding provision the Code's priority governed distribution in liquidation and Section 53(1)(e) prevails over Section 194-IA to the extent of inconsistency. [Paras 16, 18, 20, 21]Section 194-IA is inconsistent with the waterfall under Section 53(1)(e) of the Code; Section 53(1)(e), by virtue of the Code's overriding effect, governs priority in liquidation.Liquidator's obligation to file income-tax return and attendant refund mechanism - Refund procedure under the Income-tax Act - Non-obstante clause and legislative priority in insolvency distribution - Whether the liquidator of a company in liquidation under the Code is required to file an income-tax return so as to seek refund of TDS deducted under Section 194-IA, and the consequential remedy. - HELD THAT: - The Tribunal observed that neither the Code nor the IBBI Liquidation Process Regulations cast a duty on the liquidator to prepare statutory financial statements or to file income-tax returns for the liquidation estate; Regulation obligations relate to limited reporting and maintenance of certain books and records. Though certain provisions of the IT Act address verification of returns by a liquidator or insolvency professional in specified situations, there is no statutory duty under the Code regime for the liquidator to file returns to obtain refund of TDS. The statutory refund machinery under the IT Act is lengthy and may be impracticable within the time-bound liquidation process. Given the court's finding that TDS could not be allowed to operate contrary to the Code's priority, the adjudicatory outcome obliges the tax authority to refund the TDS amount deposited by the transferee. [Paras 23, 24, 25, 26, 27]The liquidator is not required by the Code or the Liquidation Regulations to file income-tax returns for the purpose of claiming TDS refunds in liquidation; accordingly the Income-tax authority is directed to refund the TDS deposited by the transferee.Final Conclusion: The appeal is allowed. The order of the Adjudicating Authority is set aside: the Tribunal held Section 194-IA to be inconsistent with the priority prescribed by Section 53(1)(e) of the Insolvency and Bankruptcy Code and that the Code's priority prevails; the Income-tax authority is directed to refund the TDS deposited by the transferee. No order as to costs. 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.