Set-off in liquidation prohibited without an adjudicated claim; refund to liquidator upheld, department must file claim in liquidation.

Whether a tax department may unilaterally adjust TDS refunds against pre-existing tax demands was decided by reference to insolvency law: mutual credits and set-off are permitted only where mutual dealings are adjudicated within the liquidation process, and refunds form part of the liquidation estate to be realised and distributed under the Code and Regulations; absent the Department filing a claim and adjudication in liquidation, adjustment against an earlier assessment demand was impermissible, and the adjudicating authority's direction to refund the TDS to the liquidator was upheld and the appeal dismissed.

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Issues: Whether the Income Tax Department could adjust/set-off an outstanding demand for assessment year 2011-12 against tax deducted at source deposited from auction proceeds (claimed as refund by the liquidator) without having filed a claim in the liquidation proceedings.

Analysis: Regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 permits mutual credits and set-off where mutual dealings exist and claims are adjudicated in the liquidation process. Sections 36 and 53 of the Insolvency and Bankruptcy Code, 2016 treat refunds as part of the liquidation estate and prescribe realisation and distribution in accordance with the Code. Section 238 of the Insolvency and Bankruptcy Code, 2016 gives the Code overriding effect over inconsistent provisions of other laws, subject to the limited exception under Section 178(6) of the Income-tax Act, 1961. In the present case the Income Tax Department had not filed any claim in the liquidation proceedings; the amount was deposited by the successful auction purchaser as TDS and the liquidator filed an income-tax return claiming refund. Absent a claim filed by the Department and adjudication in the liquidation process, adjustment of the refund against an earlier demand was not permissible under the Code and Regulations; the proper course for the Department to seek set-off was to present a claim in the liquidation process and seek relief under the insolvency framework.

Conclusion: The Adjudicating Authority correctly directed refund of the TDS amount to the liquidator; adjustment by the Income Tax Department against the outstanding demand for A.Y. 2011-12 without filing a claim in the liquidation proceedings was not permissible. The appeal is dismissed and the order allowing the liquidator's application is upheld.

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