WHEHTER THE LIQUIDATOR IS REQUIRED TO FILE INCOME TAX RETURN?

[Mr. M. GOVINDARAJAN]

Duties of liquidator under Income Tax Act

Section 178 of the Income Tax Act requires a liquidator to give notice of his appointment as such to the Assessing Officer who is entitled to assess the income of the company.  The Assessing Officer shall notify to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the Assessing Officer, would be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company.  The liquidator shall set aside an amount, equal to the amount notified and, until he so sets aside such amount, shall not part with any of the assets of the company or the properties in his hand.  If the liquidator fails to give the notice or fails to set aside the amount or parts with any of the assets of the company or the properties in his hands, he shall be personally liable for the payment of the tax which the company would be liable to pay.

Distribution of assets

Section 53 of Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides the procedure of distribution of assets by the liquidator to the eligible persons in the order of priority.  The Government dues, including taxation departments, come under the fifth rank under section 53 at par with the security creditors.

Filing income tax return by liquidator

Chapter III of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 provides powers and functions of liquidator.  Regulation 5 & 6 of the Regulations requires the liquidator to submit various reports, to complete the books of accounts, to maintain the registers and books for a period of 8 years.  The said regulation does not require the liquidator to prepare profit and loss accounts of the company and to file income tax return.

The Income Tax Department’s view is according to the Income Tax Act the liquidator is liable to file income tax returns and to get refund if any TDS is recovered from the sale proceeds of the assets of the corporate debtor. 

In the following case law the National Company Law Appellate Tribunal held that the liquidator is not required to file income tax return:

In ‘OM PRAKASH AGRAWAL LIQUIDATOR-S. KUMARS NATIONWIDE LIMITED VERSUS CHIEF COMMISSIONER OF INCOME TAX (TDS) , UPL LIMITED [2021 (2) TMI 364 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI], (decided on 08.02.2021) the respondent No. 2 is the successful bidder in auction held for sale of assets of the Corporate Debtor. The liquidator filed an application before the Adjudicating Authority for direction against the respondent No.2 and Income Tax Authority not to deduct 1 % TDS from the sale consideration ₹ 43 Crores.  The prayer is on the premise that Income Tax dues can be recovered by the department as per waterfall mechanism set out under Section 53 of Insolvency and Bankruptcy Code.

The Adjudicating Authority held that the deduction of Tax at source under Section 194-IA of the IT Act does not mean assessment and raising demand for collection of Tax by the Department.  Collection of Tax will arise only after passing orders under the Income Tax Act subsequent to filing of Income Tax Return by the assessee. Thus, the deduction of TDS does not tantamount to payment of Government dues in priority to other creditors because it is not a Tax demand for realization of Tax dues. It is the duty of the purchaser to credit TDS to the Income Tax Department.  The Adjudicating Authority, therefore, dismissed the application filed by the liquidator.

Aggrieved against the order of the Adjudicating Authority the liquidator filed an appeal before the National Company Law Appellate Tribunal (‘Appellate Tribunal’ for short)

The appellant submitted the following before the Appellate Tribunal-

• Section 53 of the Code, postulate the distribution of assets to the Creditors without deduction of the TDS.
• Disbursement of Government dues is covered under Section 53 (1) (e) of the Code.
• Deduction of TDS runs counter to the scheme and mandate of Section 53 of the Code. 
• The Income Tax liability arising out of sale of assets by the Liquidator shall be distributed in accordance with the provisions of Section 53 of the Code and the capital gain tax shall not be treated as liquidation cost.
• A Liquidator is duty bound to maintain or update the Books of Account till the Liquidation commencement date and however, during the liquidation period there is no requirement of maintaining profit and loss account and balance sheet of the Corporate Debtor and to get the same audited.
• Filing income tax returns and getting refund for TDS is a tedious job and goes directly against the scheme and specific regulations provided under the Code.
•  There is no such provision inbuilt either in the Code or the Regulation for filing of Income Tax Return and hence mode of distribution is provided based on existence of Liquidation Estate on liquidation commencement date.
• The Liquidation Process is required to be completed within a year as per Regulation 44 of the IBBI (Liquidation Process Regulation 2016). 
• The provisions under Section 194 IA of the Income Tax Act are inconsistent with Section 53 of the Code. 
• Section 238 of the Code, the provision of Section 53 of the Code shall have overriding effect.
• The impugned order is liable to be set aside and the Respondent No. 1 be directed to refund the amount of TDS which is deposited by the Respondent No. 2.

The respondent No.1 submitted the following before the Appellate Tribunal-

• The Appellant is drawing inference beyond what is mandated by the code.
•  The Section 247 of the Code read with the Third Schedule of I&B Code 2016 duly describes the manner in which Income Tax Act was to be amended with regard to companies in liquidation. According to Third Schedule of the Code, only Section 178 of the Income Tax  Act was to be amended, there is no amendment in Section 194-IA of the Income Tax  Act.
•  Nowhere it is mentioned in the code that company under liquidation outside the purview of Section 139 of the Income Tax Act.
• The liquidator is not exempted from filing return of the income. 
• TDS is required to be deducted as per provisions of Section 194-IA of the Income Tax  Act in respect of sale of immovable property under liquidation and exemption from the TDS would actually tantamount to amending the provisions of the Income Tax  Act.
• The liquidator being a principal officer within the meaning of Section 2(35) of the Income Tax  Act for the purpose of furnishing return can file and verify the return.
• There is no conflict between Section 194-IA of the Income Tax Act and Section 53 of the Code as the intent and purpose of both the sections are different.
• One is fiscal provision whereby TDS is required to be made in case of sale of immovable property for a consideration more than ₹ 50 lakhs. The other determines priority amongst different stake holder in case of distribution of sale proceeds of assets of Corporate Debtor under liquidation. 
• The Adjudicating Authority has rightly held that the TDS under section  194-IA of the Income Tax  Act does not mean assessment and raising demand for collection of Tax by the Department. 
•  The Appeal is liable to be dismissed.

The Appellate Tribunal heard the arguments put forth by both the parties and also the documents produced by them.  The Question for consideration of the Appellate Tribunal is 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.

The Appellate Tribunal analyzed the various provisions of the Income Tax Act and the Code.  The Appellate Tribunal observed that as per the Supreme Court judgment 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 Income Tax  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.  But section 53 (1) (e) of the Code assigned the 5^th position in the order of priority to government dues (including Income Tax Dues).

The Appellate Tribunal further observed that Section 178 (6) of the Income Tax  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 Income Tax Act. By virtue of the amendment the whole of Section 178 has no application to the liquidation proceedings initiated under the Code.  The Appellate Tribunal, therefore, considered for the amendment of section 178(6) of the Income Tax Act.

Then the Appellate Tribunal analyzed sections 45, 194-IA, 199 of Income Tax Act and section 53 of the Code  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.   Section 199 of the Income Tax Act, provides that any deduction made in accordance with the Section 194 IA of the Income Tax Act and paid to the Central Government shall be treated as payment of tax on behalf of the person from whose Income deduction was made, or the owner of the security or of the depositor or of the owner of the property.  Section 45 of the Income Tax Act, provides that any profits are gains arising from the transfer of a capital asset effected in the previous year shall save as otherwise provided in the Section be chargeable to Income Tax under the head of capital gain and shall be deemed to be the Income of the previous year, in which the transfer took place.   Section 53(1)(e) of the Code in waterfall mechanism provides that the Government dues comes fifth in order of priority.

The Appellate Tribunal held that there is inconsistency between Section 194IA of the Income Tax  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 Income Tax Act.

The Appellate Tribunal further observed that there is no such provision in the Income Tax 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.   The Code/IBBI (Liquidation Process Regulation 2016) does not assign a duty on the Liquidator to prepare financial statements.  The Appellate Tribunal was of the view that 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 Income Tax Act.

The Appellate Tribunal held that the 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.   The impugned order is not sustainable in law. Therefore the Appellate Tribunal set aside the order of Adjudicating Authority.  The Appellate Tribunal further directed to refund the amount of TDS to the Appellant which is deposited by the Respondent No. 2 with the department.