2020 (7) TMI 145 - AT - Insolvency and Bankruptcy

CIRP - Reimbursement of Compounding fees - Who is responsible for offence or compounding of offence under the Income Tax Act which was committed much before the initiation of CIRP proceedings - HELD THAT - Admittedly the CIRP commenced vide order dated 7-8-2017 by the Adjudicating Authority under section 7 of the I B Code and Mr. Savan Godiawala was appointed as Interim Resolution Professional and subsequently confirmed as Resolution Professional of the Corporate Debtor thereafter, vide order dated 27-8-2018 passed by the Adjudicating Authority, the Appellant Mr. Savan Godiawala was appointed as the Official liquidator of the Corporate Debtor i.e., Respondent No. 2. It is also admitted fact that on 31-3-2016 Income-tax Office, Shri Mandip ACIT, Income-tax Department filed complaint under section 276-B read with Section 278-B of the Income-tax Act against the Respondent No. 1 being Managing Director and person responsible and in charge of day to day affairs of the Company and Respondent No. 2 i.e., Corporate Debtor with the allegation that the Tax deducted at source under various sections of TDS amounting to ₹ 37,90,87,796/- during the financial year 2012-2013 but has not deposited the said tax to the Government account within the stipulated period i.e. on or before 7 days from the end of the month in which the deduction is made as per the provisions of Income-tax Act read with Rule 30 of the Income Tax Rules. Thus, the Respondent No. 1 and 2 have committed offence punishable under section 276-B read with Section 278-B of the Income-tax Act for the offence the punishment is prescribed a minimum imprisonment of 3 months which can be extended up to an imprisonment of 7 years. Thus, it is clear that much before CIRP Process the alleged offence has been committed by the Respondent Nos. 1 and 2. The question involved in this Appeal is that actually who has committed the default by non-depositing the TDS in time certainly the alleged offence is committed during the financial year 2012-13. Therefore, the person responsible and in charge of the day to day affairs to the Company at relevant time has committed the default. Therefore, he only can be punished. As per the allegation, the Respondent No. 1 G Venketesh Babu was a person responsible and in charge of day to day affairs of the Company being Managing Director. It is true that as per Section 35(1)(k) of the I B Code, it is duty of the liquidator to institute or defend any suit, prosecution or other legal proceedings, civil or criminal in the name of on behalf of Corporate Debtor. Compounding of offence is a process whereby the person/entity committing default will file an Application to the compounding authority accepting that it has committed an offence and so that same should be condoned - In the instant case as per the prosecution Respondent No. 1 has committed the offence under section 276 -B read with Section 278-B of the Income-tax Act, therefore, he has filed the Application before the compounding authority. Liquidator has not committed the alleged offence therefore; he is not required to file Application before compounding authority accepting that he has committed an alleged offence. The Ld. Adjudicating Authority has misconstrued the provisions of Section 35(1) (k) of I B Code, and directed the liquidator to reimburse the compounding fees to Respondent No. 1 - appeal allowed.

Summary

Issues:
- Application filed by the Respondent No. 1 seeking reimbursement of compounding fees.
- Maintainability of the Application under section 33, 35, and 60 of the I&B Code.
- Liability of the liquidator to reimburse compounding fees.
- Interpretation of Section 53 of the I&B Code.
- Applicability of the judgment in the case of ITO v. Joseph (1972) 83 ITR 362.
- Responsibility of the Respondent No. 1 as the Managing Director.
- Decision on the reimbursement of compounding fees.

The Appellant, the liquidator of a Corporate Debtor, filed an Appeal against the order passed by the Adjudicating Authority in an Interlocutory Application. The Corporate Debtor faced financial difficulties and insolvency proceedings were initiated. The erstwhile Managing Director filed an Application seeking priority for compounding fees related to a criminal case. The Respondent No. 1 was accused of not depositing TDS to the Government account, leading to a criminal complaint. The Appellant opposed the Application, citing that it was not maintainable under the I&B Code and was in contravention of Section 53. The Adjudicating Authority allowed the Application, directing the liquidator to reimburse the compounding fees.

The key contention was whether the Respondent No. 1, as the Managing Director, should be liable for the offence or if the Corporate Debtor should bear the responsibility. The Appellant argued that the Respondent No. 1 should defend himself, while the Respondent's counsel claimed that the Corporate Debtor was at fault and the fees were part of liquidation costs. The Adjudicating Authority found the Application maintainable under the I&B Code, leading to the appeal.

The Tribunal analyzed the timeline of events and the nature of the alleged offence. It concluded that the Respondent No. 1, being responsible for the day-to-day affairs, was the one who committed the default. The liquidator's duty to defend the Corporate Debtor did not extend to admitting guilt for the offence. The Tribunal disagreed with the Adjudicating Authority's decision and set it aside, stating that the liquidator was not obligated to reimburse the compounding fees to the Respondent No. 1.

In summary, the Tribunal's judgment clarified the liability for the offence, emphasizing the personal responsibility of the Managing Director. It highlighted the distinction between the Corporate Debtor and individual liability, ultimately ruling in favor of the liquidator and setting aside the order to reimburse the compounding fees.