2020 (11) TMI 157 - Tri - Insolvency and Bankruptcy

CIRP Proceedings - Levy and Recovery of Capital Gains Tax - proceeds received from sale of assets of the corporate debtor - the amount to be included in the liquidation cost or to be distributed as per waterfall mechanism under Sec 53 of IBC? - HELD THAT - This Adjudicating Authority is of the view that the applicability of Sec 45 and 46 of The income Tax Act will not have an overriding effect on the water fall mechanism provided under Sec 53 of the IBC, 2016, which is a complete code in itself and thus capital gain shall not be taken into consideration as the liquidation cost. Further, it is observed that Sec 178 of Income Tax Act, 1961 provides for a priority in appropriation of the amount set aside by the liquidator for clearance of tax dues but it is to consider that the liquidation of accompany could be under the provisions of different enactments. And as for liquidation under IBC, Sec 178 of IT Act stands excluded by virtue of amendment of Section 178(6) with effect from 01.11.2016, in accordance with the provision of Sec 247 of the IBC read with Third Schedule appended there to, therefore, as the corporate debtor is in liquidation under the Code, the Income Tax Department can no longer claim a priority in respect of clearance of tax dues as provided Under Sec 178(2) and (3) of the Income Tax Act, 1961. As per Sec 238 of the Code, the provision of the Code shall have an overriding effect on any other enactment and Sec 53 of the Code provides the waterfall mechanism for distribution of assets in which Sec 53(b) i.e. the debt owed to the secured creditors has been given priority over government dues as reflected under Sec 53(i) and has to be dealt accordingly. Thus, the tax liability arising out of the sale of assets by the liquidator shall be distributed in accordance with the provisions of Section 53 of the Insolvency and Bankruptcy Code, 2016 and the capital gain tax shall not be treated as the liquidation cost - application disposed off.

Summary

Issues:
1. Interpretation of Section 60(5) of The Insolvency and Bankruptcy Code, 2016 regarding the treatment of capital gain tax on proceeds from the sale of assets of the corporate debtor.
2. Analysis of Secured Creditor's rights under Sec 52 of the Code and implications of relinquishing security interest.
3. Priority of distribution of proceeds from the sale of liquidation assets under Sec 53 of the IBC.
4. Conflict between provisions of the Income Tax Act, 1961 and the Insolvency and Bankruptcy Code, 2016 regarding tax liabilities in liquidation cases.

Analysis:
1. The application sought directions on whether capital gain tax from asset sales should be included in liquidation costs or distributed according to Sec 53 of the IBC. The liquidator faced the dilemma of provision for capital gains tax affecting distribution among stakeholders.

2. The secured creditors opted for Sec 52(a), relinquishing security to the liquidator for asset sales. The concern was that treating capital gains tax as a liquidation cost might disadvantage secured creditors, affecting their remittance.

3. The hierarchy in Sec 53 of the IBC prioritizes debts owed to secured creditors and workmen over government dues, indicating that capital gains tax should not precede these liabilities in distribution.

4. The Income Tax Act's provisions on capital gains were argued by the Income Tax Department, asserting that Sec 238 of the IBC does not override the Act concerning tax liabilities. However, the Adjudicating Authority held that the IBC prevails over inconsistent provisions of the Income Tax Act.

5. Referring to judicial precedents, the Adjudicating Authority emphasized that the IBC's provisions, including Sec 53, override conflicting enactments like the Income Tax Act. Capital gain tax was ruled not to be considered a liquidation cost, aligning with the IBC's distribution mechanism.

6. The judgment clarified that the Income Tax Department could not claim priority in tax dues clearance during liquidation under the IBC, as per the amended provisions excluding Sec 178 of the IT Act. The overriding effect of the IBC's provisions, especially Sec 53, was highlighted for proper distribution of assets.

7. Ultimately, the judgment concluded that tax liabilities arising from asset sales by the liquidator should be distributed following Sec 53 of the IBC, with capital gain tax not treated as a liquidation cost. The case was disposed of accordingly.