The Hon’ble National Company Law Appellate Tribunal, New Delhi in the matter of Om Prakash Agrawal v. Chief Commissioner of Income Tax (TDS) and Another, REED 2021 NCLAT Del 02504, held that since the tax deducted at source under section 194-IA of Income Tax Act, 1961 is an advance capital gain tax, recovered through transferee on priority with other creditors of the company, it is inconsistent with the waterfall mechanism enumerated in section 53(1)(e) of the Insolvency and Bankruptcy Code, 2016 (IBC) and resultantly, by virtue of section 238 of the IBC, the provision of section 53(1)(e) shall have overriding effect. Hence, if a buyer purchases an immovable property from a company undergoing liquidation under the IBC, it is not required to deduct tax at source from the sale consideration at the time of making payment for such transaction.
Mr. Om Prakash Agrawal (Appellant), who is Liquidator of S. Kumars Nationwide Ltd. (Corporate Debtor), filed an application before the National Company Law Tribunal (NCLT) for directions to the successful bidder/ Respondent No. 2 in an auction held for sale of assets of the Corporate Debtor and Income Tax Authority/ Respondent No. 1, not to deduct tax at source (TDS) while making payment of consideration of Rs. 43 crore for the purchase of immovable property.
The NCLT held that the deduction of TDS under Section 194-IA of the Income Tax Act, 1961 (IT Act) does not mean assessment and raising demand for the collection of tax by the Department and collection of tax will arise only after passing orders under the IT Act subsequent to the 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 and it is the duty of the buyer to credit TDS to the Income Tax Department against PAN of the Corporate Debtor. Accordingly, the application was dismissed by the NCLT. Aggrieved by the aforesaid order, the Appellant filed this Appeal before the National Company Law Appellate Tribunal (NCLAT).
The Appellant argued that the Income Tax dues could be recovered by the department as per the waterfall mechanism set out under section 53 of IBC. Further, the provision of deduction of TDS under section 194-IA of IT Act is inconsistent with section 53(1)(e) of the IBC and by virtue of section 238 of IBC, section 53 of IBC should have an overriding effect.
Whether the provisions under section 194-IA of the IT Act are inconsistent with section 53(1)(e) of the IBC?
Section 194 IA of the IT Act provides that where the consideration for transfer of the immovable property is more than Rs 50 lakh, then the transferee is responsible to deduct the amount which is 1% of the consideration as Income Tax. Further, section 199 of the IT Act stipulates that any deduction made in accordance with section 194-IA 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 of the owner of the property. Moreover, as per section 45 of the IT Act, any profits or 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. Thus, on a combined reading of the above Sections, the NCLAT noted that TDS under section 194-IA is nothing but advance capital gain tax recovered through transferee on behalf of the transferor.
Thus, 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 IBC in waterfall mechanism provides that the Government dues comes fifth in order of priority. Consequently, in regard to recovery of the Government dues, including Income Tax from the Company in Liquidation under the IBC, there is an inconsistency between section 194-IA of the IT Act and section 53(1)(e) of the IBC. Therefore, the NCLAT concluded that by virtue of section 238 of the IBC, section 53(1)(e) of the IBC shall have an 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 194-IA of the IT Act does not start with a non-obstante clause.
The NCLAT also observed that there is no such provision in the IT Act, IBC or IBBI (Liquidation Process) Regulation, 2016 that the Liquidator of the Company in Liquidation under the IBC is required to file Income Tax Return. For filing of the return, the financial statements are required to be annexed but the IBC and IBBI (Liquidation Process) Regulation, 2016 does not assign a duty on the Liquidator to prepare financial statements. Hence, then there is no question of claiming a refund of TDS deducted under section 194-IA of the IT Act.
In light of the foregoing, the NCLAT concluded that NCLT has erroneously held that the deduction of TDS does not mean raising demand for the collection of tax by the Tax Department and accordingly, set aside the impugned order of NCLT.