2026 (3) TMI 90 - AT - IBC

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 ... Mutual credits and set-off in liquidation proceedings - Primacy of the Insolvency and Bankruptcy Code over inconsistent laws - Exception in tax law recognising the operation of the IBC regime in liquidationMutual credits and set-off in liquidation proceedings - Regulation 29 of the Liquidation Process Regulations - Whether the Income Tax Department could adjust the TDS refund against an outstanding demand relating to A.Y. 2011-12 when it had not filed a claim in the liquidation proceedings. - HELD THAT: - The Tribunal accepted that set-off by mutual credits is a recognised principle in liquidation (Regulation 29), and that set-off is permissible where there are mutual dealings and a claim has been filed in the liquidation. However, on the facts the Income Tax Department had not filed any claim in the liquidation of the corporate debtor. The amount in question arose from TDS deducted by the auction purchaser and a refund claim filed by the liquidator. In the absence of a departmental claim in the liquidation process, the Department could not appropriate the refund by unilateral adjustment against an earlier demand. The Adjudicating Authority correctly held that set-off could not be effected without complying with the liquidation claims process. [Paras 7, 8, 11, 12]Adjustment of the refund by the Income Tax Department against the outstanding demand was not permissible where the Department had not filed a claim in the liquidation; the refund could not be set off unilaterally.Primacy of the Insolvency and Bankruptcy Code over inconsistent laws - Operation of Sections conferring liquidation estate and distribution under the IBC - Whether the Adjudicating Authority erred in directing the Income Tax Department to refund the TDS amount to the liquidation estate. - HELD THAT: - The Adjudicating Authority noted that refunds form part of the liquidation estate under the IBC and that Section 238 of the IBC gives the Code overriding effect over inconsistent laws; the Income Tax Act itself contains an exception recognising the operation of the IBC. Applying these principles, the Adjudicating Authority found the Department's adjustment to be inconsistent with the IBC scheme and therefore without merit. The Tribunal found no error in that reasoning and observed that the Department could have pursued its claim only by filing it in the liquidation process and seeking set-off in accordance with law. [Paras 8, 9, 11, 12]The Adjudicating Authority did not err in directing refund to the liquidation estate; its order was upheld.Final Conclusion: The appeal is dismissed; the Tribunal affirms the Adjudicating Authority's order directing refund of the TDS amount to the liquidation estate because the Income Tax Department had not filed a claim in the liquidation and could not unilaterally set off the refund against an earlier demand, and the IBC regime governs realization and distribution of liquidation assets. 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.