2018 (8) TMI 62 - HC - Income Tax

Attachment orders - priority to dues - initiation of liquidation proceedings - priority in appropriation of the amounts set aside by the liquidator for clearance of the tax dues - Sale transaction effected by the fifth respondent - Held 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 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.

Issues Involved:

1. Refusal of registration of immovable property by the Sub-Registrar.
2. Attachment of property by the Income-tax Department.
3. Legal implications of the Insolvency and Bankruptcy Code, 2016 (the Code) versus the Income-tax Act, 1961 (the Act of 1961).
4. Priority of claims under the Code versus the Act of 1961.
5. Interpretation of the moratorium under Section 33 of the Code.
6. Distribution of liquidation assets under Section 53 of the Code.

Issue-wise Detailed Analysis:

1. Refusal of registration of immovable property by the Sub-Registrar:
The petitioner company's grievance was against the Sub-Registrar, Erragadda, Hyderabad, who refused to register the purchase of immovable property in the liquidation proceedings of VNR Infrastructures Limited under the Code. The refusal was influenced by the Income-tax Department's claim over the property due to attachment proceedings.

2. Attachment of property by the Income-tax Department:
The Income-tax Department had attached the property on 28.10.2016 for recovery of tax arrears. The liquidator appointed by the NCLT for VNR Infrastructures Limited approached the Sub-Registrar and requested that the Income-tax Department's attachment not be given weightage, citing Section 33 of the Code, which imposes a moratorium on legal proceedings against the corporate debtor. However, the Income-tax Department maintained that the moratorium did not apply as the tax proceedings predated the liquidation.

3. Legal implications of the Insolvency and Bankruptcy Code, 2016 (the Code) versus the Income-tax Act, 1961 (the Act of 1961):
The court examined the provisions of the Code and the Act of 1961. The Code aims to consolidate and amend laws related to insolvency and bankruptcy for maximizing asset value and balancing stakeholders' interests. The court noted that the Code provides a specific framework for liquidation and distribution of assets, which overrides other laws, including the Act of 1961, as per Section 238 of the Code.

4. Priority of claims under the Code versus the Act of 1961:
The court observed that under the Code, the Income-tax Department does not hold the status of a secured creditor. Instead, it can only claim a charge under the attachment order, which does not equate to a secured interest. The court referenced the Gujarat High Court's decision in ANANTA MILLS LTD., which held that mere attachment does not create an interest in the property for the attaching creditor.

5. Interpretation of the moratorium under Section 33 of the Code:
The moratorium under Section 33 of the Code halts the initiation or continuation of legal proceedings against the corporate debtor upon the commencement of liquidation. The court held that this moratorium applied to the Income-tax Department's attachment, which could not continue against the liquidated estate.

6. Distribution of liquidation assets under Section 53 of the Code:
The court emphasized that the distribution of assets in liquidation must follow the priority order in Section 53 of the Code. The dues to the Central and State Governments are ranked fifth in priority. The court clarified that the Income-tax Department must submit its claim to the liquidator and would be paid according to this statutory priority.

Conclusion:
The court allowed the writ petition, declaring that the Sub-Registrar must register the sale transaction, and the Income-tax Department must submit its claim to the liquidator for consideration under Section 53 of the Code. The attachment by the Income-tax Department did not bar the completion of the sale by the liquidator. Pending miscellaneous petitions were closed, and no costs were ordered.

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