No TDS u/s 194-IA on payment by successful bidder to Liquidator of a Company in liquidation under IBC 2016 as it is not required to file Income Tax Return
ABCAUS Case Law Citation
ABCAUS 3451 (2021) (02) NCLAT
Important case law relied referred:
Imperial Chit funds (P) Ltd. Vs. Income Tax Officer (1996) 219 ITR 498
Leo Edibles &Fats Limited vs Tax Recovery Officer
LML Limited vs. Office of Commercial of Income Tax
In the instant case, the Appellant Liquidator had filed the Appeal against the order passed by the National Company Law Tribunal (NCLT) declining to issue direction to successful bidder and the Income Tax Authority not to deduct 1% TDS u/s 194IA of the Income Tax Act, 1961 (the Act) from the sale consideration.
Pursuance to the proceedings under Insolvency and Bankruptcy Code (IBC) 2016 an auction was held for the sale of assets of the Corporate Debtors.
Under the provisions of section 194IA of the Act, the purchaser of the immovable property is required to deduct tax at source (TDS) @ one per cent of the sale consideration where it is Rs. Fifty lakhs or more.
In view of the above provision of the I T Act, the Liquidator filed an application before the NCLT for direction against the successful bidder and Income Tax Authority not to deduct 1 % TDS from the sale consideration on the premise that Income Tax dues can be recovered by the department as per waterfall mechanism set out Section 53 of IBC which deals with distribution of the proceeds from sale of the liquidation assets. It was stated that the provision of deduction of TDS u/s 194 IA, Income Tax Act is inconsistent with Section 53(1)(e) of the IBC and by virtue of Section 238 of the Code, Section 53 of Code has over-riding effect.
However, the NCLT held that deduction of Tax at source u/s 194-IA does not mean assessment and raising demand for collection of Tax by the Department. Accordingly, the NCLT dismissed the Application.
The NCLAT framed the following question of Law;
“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 NCLAT noted the amendment made to Sub-Section 6 of Section 178 of the IT Act with effect from 01.11.2016 which gives provisions of the Insolvency and Bankruptcy Code, 2016 an overriding effect to the section with respect to the tax liability of the liquidator for company in liquidation.
The NCLAT opined that by virtue of the amendment the whole of Section 178 has no application to the liquidation proceedings initiated under the Code.
The NCLAT noted that as per section 199 of the IT Act, any deduction made in accordance with Section 194 IA of the IT 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.
Further, Section 45 of the IT Act, provides that any profits or gains arising from the transfer of a capital asset are chargeable to Income Tax under the head capital gain. Thus, TDS u/s 194 IA is nothing but advance capital gain tax recovered through transferee (Purchaser) on behalf of the transferor (seller).
The NCLAT pointed out that as per Section 194 IA of the IT Act 1% TDS is recovered on priority to other creditors of the transferor, which is partial capital gain tax, whereas, Section 53(1)(e) of the Code in waterfall mechanism provides that the Government dues comes fifth in order of priority. Thus, in regard to recovery of the Government dues (Including Income Tax) from the Company in Liquidation under the Code, there is inconsistency between Section 194IA of the IT Act and Section 53(1)(e) of the Code.
The NCLAT stated that 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 IT Act. Otherwise also Section 53 starts with a non-obstante clause, whereas Section 194IA of the IT Act, does not start with anon-obstante clause, and it would necessarily be subject to overriding effect of the Code and therefore, there was no requirement to amend the Section 194-IA of the IT Act.
Further the NCLAT observed that there is no provision in the IT 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 (ITR). For filing of return, the financial statements are required to be annexed but the Code/IBBI Regulation does not assign a duty on the Liquidator to prepare financial statements.
The NCLAT opined 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 IT Act.
Further, the NCLAT observed that under the provisions of the I T Act related to refund, it is a cumbersome process to take refund from Income Tax Department and hence Code and IBBI (Liquidator Process) Regulation 2016 is silent on the subject of filing of Income Tax Return as Code provides for a time bound period for completion and maximization of value of assets and cease of doing business.
Answering the question framed in the favour of the appellant, the NCLAT held that Section 194-IA being inconsistent with the provision of Section 53 (1) (e) of the Code and by virtue of Section 238 of the Code, the provision of Section 53(1) (e) shall have overriding effect.
Therefore, the impugned order of NCLT was set aside as not sustainable in law.
The Income tax Department was directed to refund the amount of TDS deposited to the Appellant and the appeal was allowed in the favour of the appellant.
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