Mr. Sanjay Kumar Mishra, Vs. National Highways Authority of India - In conclusion, we are of the view that the Company ordered in Liquidation under IBC, is also required to file its return of income under section 139(1) of the IT Act, which is to be verified by the Liquidator appointed under IBC under section 140 of IT Act read with Rule 12AA of the IT Rules.

 NCLT Hyd. (2023.10.31) in Mr. Sanjay Kumar Mishra, Vs.  National Highways Authority of India (NHAI) & Anr. [IA. No.659/2023 In CP (IB) No. 262/07/HDB/2018] held that;

• As the provisions of section 139(1) in conjunction with section 140(c) of the IT Act, along with the corresponding Rule 12AA of the IT Rules, which became effective on 18.08.2021, were indeed in force at the time when the liquidator was appointed on 08.04.2022, they are directly applicable in the present case.

• The requirements of the IT Act and Rules do not impede the implementation of section 53 of the IBC. Importantly, there is no provision in section 53 of the IBC that exempts a company in liquidation from the obligation to file a tax return, as mandated under section 139(1) of the IT Act, which applies to every person, including a company in liquidation.

• A company in liquidation can file a tax return through the Liquidator and claim a refund for any taxes paid in excess of the due amount. As indicated in the previous paragraph, section 53 of the IBC also does not introduce any conflicting requirements in this regard.

• The requirements outlined in Regulation 5 of the IBC and section 139(1) of the IT Act are distinct and operate in parallel as obligations under two different legal frameworks. The absence of a particular requirement in one law does not automatically place them in conflict with the other. Therefore, section 238 of the IBC is not applicable in this context, as there is no inherent conflict between the two sets of requirements.

• In conclusion, we are of the view that the Company ordered in Liquidation under IBC, is also required to file its return of income under section 139(1) of the IT Act, which is to be verified by the Liquidator appointed under IBC under section 140 of IT Act read with Rule 12AA of the IT Rules.

Excerpts of the Order;

# 1. The present application is filed on behalf of Mr. Sanjay Kumar Mishra, Liquidator for Transstroy- Tirupati- Tiruthani Chennai- Tollways Private Limited, u/s 60(5) of Insolvency and Bankruptcy Code, 2016 (IBC) r/w Rule 11 of NCLT Rules, 2016, praying this Hon’ble Tribunal to direct Respondent No.1 (R-1) to remit the amount of Rs 2,80,44,000 out of Rs 140,22,00,000 which has been deducted on account of tax deducted at source (“TDS”) against the Termination Payment or alternatively direct Respondent No.2 (R-2) to remit the said shortfall amount of Rs 2,80,44,000 if the same has been paid by R-1 to R-2 as TDS.

Submissions of the Applicant

# 2. The applicant was appointed [vide order dated 08.04.2022 (published on 19.04.2022) in IA No. 79 of 2022 in CP (IB) No. 262/7/HDB/2018]   as liquidator for conducting liquidation process in relation to the Corporate Debtor (CD). Consequent thereon Stakeholder Consultation Committee (“SCC”) was constituted wherein it was deliberated and resolved to pursue termination payments from R-1 under the Concession Agreement dated 12.07.2010 (“Concession Agreement”). CD has no assets except for concession rights granted by the R-1 under the Concession Agreement.

# 3. An application [IA No. 893 of 2022] was then filed by the Applicant before this Authority, inter-alia seeking to pursue the termination of Concession Agreement executed by CD with NHAI and initiate recovery vide Termination Payment under the agreement in accordance with the decisions of SCC. This application was allowed by this Hon’ble Tribunal vide order dated 19.10.2022.

# 4. Conciliation Committee of Independent Experts (CCIE) was formed thereafter as per the Modified Standard Operating Procedure dated 9 April 2021 and NHAI policy circular on Establishment of a Conciliation & Settlement Mechanism for Contractual Disputes. Subsequently, based on the proceedings of the CCIE meeting held on 11.10.2022 and 30.11.2022, a Settlement Agreement dated 30.11.2022 (“Settlement Agreement”) was executed between CD represented by Liquidator and R- 1 to terminate the Concession Agreement dated 12.07.2010.

# 5. A letter was then issued by R-1 on 16.07.2022 informing the Applicant of the net due amount of Rs 140,22,00,000. R-1 however paid only Rs 137,41,56,000 into the Escrow Account being maintained by CD on 05.01.2023 towards proceeds of Termination Payment in relation to the Project Agreements.

# 6. Applicant contacted R-1 to bring to their attention about the shortfall in the amount remitted as against the amount agreed to be paid under the Settlement Agreement. R-1 informed that an amount of Rs 2,80,44,000 was deducted towards TDS @ 2 % u/s 194C of the Income Tax Act ,1961 and balance amount of Rs 137,41,56,000 was remitted to Escrow Account of CD.

# 7. Applicant then sent an email on 06.01.2023 and reminder emails [vide order dated 08.04.2022 (published on 19.04.2022) in IA No. 79 of 2022 in CP (IB) No. 262/7/HDB/2018]  on 13.01.2023, 19.01.2023, 30.01.2023, 31.01.2023, 20.02.2023, 10.03.2023 and 21.03.2023 to R-1 informing about the orders passed by Hon’ble NCLAT in the matter of “Om Prakash Agrawal v. Chief Commissioner of Income Tax (TDS)” dated 8th February 2021 where under para 25 it is observed 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.”

and that

• “ .............. The Respondent No.1 is directed to refund the amount of TDS to the Appellant which is deposited by the Respondent No. 2 with the department.”

However, R-1 did not reply to any of the above-mentioned emails..

# 8. On the question of filing of income tax returns and claiming refund of TDS by Liquidator deducted under Income Tax Act the Applicant has relied on the aforesaid decision of Hon’ble NCLAT in the matter of Om Prakash Agrawal (supra) where it was categorically observed that Liquidator of the Company in liquidation under the code is not required to file income tax returns, and therefore there is no question of claiming refund of TDS. Quoting Hon’ble NCLAT, the Applicant has extracted the following from that decision:

• “Ld. Adjudicating Authority has erroneously held that the deduction of Tax at source does not mean raising demand for collection of tax by the Department. Actually, TDS under Section 194 IA, is an advance capital gain tax, recovered through transferee on priority with other creditors of the company. Hence, 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. Thus, the impugned order is not sustainable in law. Therefore, it is hereby set aside.”

Further reliance has been placed by the Applicant on JCIT vs Rohan and Rajdeep Infrastructure [ ITAT (Pune) Order dated 05.01.2021 in ITA no. 53-55]   and Oberoi Hotels Pvt LTD vs CIT [ (1999) 3 SCC 127 dt. 10.03.1999] without specifying what part of those judgments have been referred to.

# 9. It is the position of the Applicant that tax should not have been deducted from the termination payment under the Income Tax Act, as its provisions concerning TDS are inconsistent with the provision of Section 53(1) (e) of IBC 2016, and under Section 238 of that Code the latter shall have overriding effect. Considering that R-1 has deposited the amount of TDS with the R-2 hence the Applicant is pressing upon the alternative prayer

i.e. to direct the R-2 to remit the shortfall amount of Rs 2,80,44,000 being TDS out of Rs 140,22,00,000.

# 10. It is further contended that termination payment received from R-1 is not in the nature of revenue receipts, but capital receipt, as there was cessation of source of income and there shall be no revenue receipts in future. Being a capital receipt, it was not taxable and TDS should not have been made on the same.

# 11. It is also asserted that that the non- obstante clause in Section 238 of IBC provides that its provisions will override anything inconsistent contained in any other enactment including the Income Tax Act, 1961 and the Applicant acting as liquidator was not required to file Income Tax returns and therefore, the question of claiming refund of TDS deducted does not arise.

# 12.  It is also averred that in terms of Income Tax Act 1961, there is no applicability of TDS on transfer of intangible assets and therefore, in the instant case the act of transferring the concession rights as defined in Concession Agreement (being an intangible assets of the Corporate Debtor) pursuant to execution of Settlement Agreement does not mandate deduction of TDS.

Decision:

# 13. The central question in this case is whether the Liquidator appointed under IBC is required to file income tax return? If this question was to be answered in the affirmative, then the Liquidator can simply file tax return of the Company in Liquidation (the Company), make appropriate claims and seek refund of excess taxes paid on behalf of the Company. Conversely, if the answer is in the negative, then this application deserves to succeed and TDS for the Company needs to be refunded/returned without the Liquidator having to file the tax return on behalf of the Company.

# 14. To address the question at hand, one must begin by examining section 139 of the Income Tax Act, 1961 (IT Act) which mandates that every individual must file a tax return before the specified due date. Importantly, the definition of 'person' under section 2(31)(iii) of the Act encompasses companies, making it incumbent upon them to file their income tax returns, much like any other individual. It is worth noting that a company in the process of liquidation remains legally recognized as a company until its eventual dissolution and the removal of its name from the companies register. Consequently, a company undergoing dissolution is also obligated to file its tax return, akin to any other functioning company.

# 15. Section 140(c) of IT Act, specifies by whom the tax return is to be signed and verified:

• Return by whom to be verified.

• 140. The return under section 115WD or section 139 shall be verified—

• (c) in the case of a company, by the managing director thereof, or where for any unavoidable reason such managing director is not able to verify the return, or where there is no managing director, by any director thereof [or any other person, as may be prescribed for this purpose] [ Inserted w.e.f. 01.04.2020 by the Act no. 12 of 2020]

• (emphasis supplied)

Rule 12AA [ Inserted by the IT (Twenty Fourth Amdt.) Rules, 2021, w.e.f. 18-8-2021.] of the Income Tax Rules, 1962 (IT Rules) elaborates the ‘prescribe person’ to be:

• Prescribed person for the purposes of clause (c) and clause (cd) of section 140

• 12AA. For the purpose of clause (c) or clause (cd), as the case may be, of section 140, any other person shall be the person, appointed by the Adjudicating Authority for discharging the duties and functions of an interim resolution professional, a resolution professional, or a liquidator, as the case may be, under the Insolvency and Bankruptcy Code, 2016 (31 of 2016) and the rules and regulations made thereunder.

• Explanation.—For the purposes of this rule, "Adjudicating Authority" shall have the same meaning as assigned to it in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016).

• (emphasis supplied)

It is clear from the above that the Company ordered for Liquidation by this Adjudicating Authority is also to submit its return of income like any other person. Furthermore, the Liquidator appointed under IBC is competent to verify and sign the said return of income on behalf of the Company in Liquidation.

# 16. Given the specific provisions of the IT Act which govern who should sign the tax return for companies undergoing liquidation under IBC, the general provisions applicable to other companies in liquidation, as indicated by the second proviso under section 140(c), is irrelevant in this context. Therefore, any reference to section 178, as mentioned in the aforementioned proviso below section 140(c), is unnecessary. Moreover, it's important to note that section 178 places certain requirements on the Liquidator that are not applicable under IBC, such as informing the Assessing Officer of their appointment, allocating specific funds for potential taxes, and obtaining approval from Income Tax Authorities before disposing of any company assets, which are also irrelevant in this particular case.

# 17. As the provisions of section 139(1) in conjunction with section 140(c) of the IT Act, along with the corresponding Rule 12AA of the IT Rules, which became effective on 18.08.2021, were indeed in force at the time when the liquidator was appointed on 08.04.2022, they are directly applicable in the present case.

# 18. Regarding the conflict between the provisions of section 53 of the IBC and the requirement to file returns under the IT Act and Rules, it is evident that section 53 of the IBC outlines the distribution of proceeds from the sale of liquidation assets, prioritizing tax dues after CIRP/Liquidation Costs, workmen's dues, and debts owed to secured and unsecured creditors. The requirements of the IT Act and Rules do not impede the implementation of section 53 of the IBC. Importantly, there is no provision in section 53 of the IBC that exempts a company in liquidation from the obligation to file a tax return, as mandated under section 139(1) of the IT Act, which applies to every person, including a company in liquidation.

# 19. Similarly, the responsibility for deducting tax at source, as per section 194C of the IT Act, rests with the deductor and not with the liquidator of the Company, from whose income the tax is to be withheld. Furthermore, it's essential to recognize that TDS is not the final tax liability for any entity. The final tax liability is contingent on the filing of tax returns and their processing. While tax demands for the period before the CIRP/Liquidation process are subject to section 53 of the IBC, tax refunds and tax demands raised during the CIRP/Liquidation process are not. A company in liquidation can file a tax return through the Liquidator and claim a refund for any taxes paid in excess of the due amount. As indicated in the previous paragraph, section 53 of the IBC also does not introduce any conflicting requirements in this regard.

# 20. Even IBBI (Liquidation) Regulations do not have any provision, which is in conflict with return filing requirement of the IT Act/Rules as enumerated in earlier part of this order. Regulation 5 of these Regulations provide:

5. Reporting.

(1). The liquidator shall prepare and submit:

1. a preliminary report;

2. an asset memorandum;

3. progress report(s);

4. sale report(s);

5. minutes of consultation with stakeholders; and

6. the final report prior to dissolution to the Adjudicating Authority in the manner specified under these Regulations.

(2) The liquidator shall preserve a physical as well as an electronic copy of the reports and minutes referred to in sub-regulation (1) for eight years after the dissolution of the corporate debtor.

(3) Subject to other provisions of these Regulations, the liquidator shall make the reports and minutes referred to sub-regulation (1) available to a stakeholder in either electronic or physical form, on receipt of

1. an application in writing;

2. costs of making such reports and minutes available to it; and

3. an undertaking from the stakeholder that it shall maintain confidentiality of such reports and minutes and shall not use these to cause an undue gain or undue loss to itself or any other person.

# 21. There is nothing in these regulations which bars filing of tax returns. An argument has been presented that, since Regulation 5 under the IBC does not explicitly mention the reporting of income by the Liquidator, the requirement to report income through an income tax return under Income Tax laws constitutes a conflicting requirement. It was contended that, under section 238 of the IBC, Regulation 5 should take precedence, and thus, the Liquidator of the Company was not obligated to file an income tax return.

# 22. We strongly disagree with this proposition. The requirements outlined in Regulation 5 of the IBC and section 139(1) of the IT Act are distinct and operate in parallel as obligations under two different legal frameworks. The absence of a particular requirement in one law does not automatically place them in conflict with the other. Therefore, section 238 of the IBC is not applicable in this context, as there is no inherent conflict between the two sets of requirements.

# 23. We are also not persuaded by the judgment of Hon’ble NCLAT in the case of Om Prakash Agarwal (Supra), as that judgment predates the amendments brought into the IT Act/Rules. Hon’ble NCLAT judgment of 08.02.2021 had no occasion to consider the amended provisions of Section 140 of the IT Act and Rule 12AA of IT Rules which came into effect from 18.08.2021.

# 24. In conclusion, we are of the view that the Company ordered in Liquidation under IBC, is also required to file its return of income under section 139(1) of the IT Act, which is to be verified by the Liquidator appointed under IBC under section 140 of IT Act read with Rule 12AA of the IT Rules.

# 25. Accordingly, we direct the Liquidator to file the Return of Income of the Company in Liquidation and make whatever claims he believes appropriate to claim refund of the taxes deducted at source.

Prayers made in the application are declined

--------------------------------------

Shri Kanekal Chandrasekhar (Liquidator) Vs. Chief Commissioner of Income Tax (CCIT) - TDS need not be paid on liquidation sale since that would amount to Government’s dues gaining priority in liquidation of the Corporate Debtor when compared to other creditors, thereby disturbing the order of disbursement (waterfall mechanism) under Section 53 of the Code.

NCLT Bengaluru (2024.08.02) in Shri Kanekal Chandrasekhar (Liquidator) Vs. Chief Commissioner of Income Tax (CCIT) [(2024) ibclaw.in 673 NCLT, I.A. No.272 of 2024 in C.P. (IB)No.357/BB/2019] held that; 

• TDS need not be paid on liquidation sale since that would amount to Government’s dues gaining priority in liquidation of the Corporate Debtor when compared to other creditors, thereby disturbing the order of disbursement (waterfall mechanism) under Section 53 of the Code.

Excerpts of the order;

# 1. The instant Application is filed by Shri Kanekal Chandrasekhar, (‘Applicant’) under Section 60(5) of the IBC, 2016 r/w Rule 11 of the IBBI (Liquidation Process) Regulations, 2016 by inter alia seeking to direct the Respondent/Income Tax Department to refund the amount of Rs.1,20,50,000/- paid as TDS on the liquidation auction sale of the assets of the Corporate Debtor to the bank account of the CorporateDebtor, i.e., Southern Batteries Pvt. Ltd., A/c number:7478002061, IFSC:IDIB000B009, Indian Bank, Bengaluru City Branch, K.G. Road, Bengarluru-560009.

# 2. Brief facts of the case, as mentioned in the Application, which are relevant to the issue in question, are as follows:

i. It is stated that the Corporate Debtor was ordered to be liquidated in terms of Section 33(3) of the IBC, 2016 vide order dated 02nd March 2023 of the Adjudicating Authority. In terms of the said order, the Applicant Shri Kankal Chandrasekhar was appointed as the Liquidator of the Corporate Debtor. By way of public notice dated 14th December 2023, the Liquidator announced the 04th e auction of the Corporate Debtor’s assets on 12th January 2024. One M/s. Godha Realtors (India) Pvt. Ltd. (‘Godha Realtors’) emerged as the successful auction purchaser having submitted the highest bid at INR 127.50 crore for purchased of all the assets of the Corporate Debtor as a composite block.

ii. Subsequently, the results of the 4th e-auction were announced to the stakeholders on 13th January 2024 and a letter of demand was also issue to Godha Realtors on 17th January 2024 calling upon them to make the payment of the Bid Amount as per the Asset Sale Process Memorandum within 16th February 2024, without interest or within 16 April 2024 with interest of 12% in terms of Clause 1(12) of Schedule I of the Liquidation Regulations. After the deduction of TDS amount of INR 1,20,50,000 being 1% of the consideration of the immovable property, Godha Realtors has made the payment of the balance e-auction sale consideration of INR 126,29,50,000 to the account of the Corporate Debtor designated for the purpose of liquidation.

iii. It is also stated that as per the judgment dated 08th February, 2021 passed by the Hon’ble NCLAT, Delhi in Company Appeal (AT)(Ins) 624 of 2020- Om Prakash Agarwal vs. CIT, TDS need not be paid for sale of assets of a company through a liquidation auction since Section 53 of the Code, which provides a “non-obstante clause”, has an overriding effect over Section 194IA of the Income Tax Act, 1961, under which TDS is made payable. Section 53 provides for distribution in liquidation of “any amount due to the Central Government and the State Government including the amount to be received on account of the consolidated fund of India and the consolidated fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;” only after distribution of the amounts due to secured creditors. Since TDS under Section 194IA is nothing but advance capital gains tax recovered through the purchaser, the Hon’ble NCLAT has ordered that TDS need not be paid on liquidation sale since that would amount to Government’s dues gaining priority in liquidation of the Corporate Debtor when compared to other creditors, thereby disturbing the order of disbursement (waterfall mechanism) under Section 53 of the Code. 

iv. It is further stated that subsequent to the order of the Hon’ble NCLAT in Om Prakash Agarwal, various NCLTs have also ordered the refund of the TDS paid on the basis of the judgment passed in Om Prakash Agarwal. The NCLT, Mumbai, in C.P.(IB)No.619/MB/2018 - Nico Extrusions Ltd. Vs. Nicomet Industries Ltd. and the NCLT, Ahmedabad, in C.P.(IB)No.149 of 2017 - Sunil Kumar Agarwal Liquidator for Varia Engineering Works Pvt. Ltd. vs. Chief Commissioner of Income Tax (TDS), Ahmedabad, have opined that no tax is deductible at source for amount paid in liquidation sale and have ordered refund of the TDS paid on liquidation sale, to be made to the respective liquidators of the companies. The NCLTs have also noted that such a deduction is contrary to the objects and provision of the Code.

v. It is stated that in light of the above judgments, no TDS is deductible form payment made towards liquidation sale of assets of the Corporate Debtor and any such deduction is to be refunded to the Corporate Debtor. As such, the TDS payment of Rs.1,20,50,000 made by Godha Realtors on the sale of the assets of the Corporate Debtor in liquidation auction are to be refunded by the Income Tax Department to the Corporate Debtor at the earliest in order to enable expedited dissolution of the Corporate Debtor.

# 3. The Income Tax Department has filed its objections vide diary no.4304 dated 22.07.2024.

# 4. Heard the learned Counsel for the Applicant/Liquidator. We have carefully perused the pleadings of the party and extant provisions of the Code, and the Regulations made thereunder.

# 5. In the circumstances, and in view of the order passed by the Hon’ble NCLAT in the matter of Om Prakash Agarwal (supra), which has been followed by co-ordinate Benches, i.e., NCLT Mumbai in the matter of Nico Extrusions Ltd. Vs. Nicomet Industries Ltd in I.A. 1634 of 2022 in C.P.(IB)No.619/MB/2018) vide order dated 17.10.2023 and NCLT Ahmedabad in the matter of Sunil Kumar Agarwal Liquidator of Varia Engineering Works Pvt. Ltd. vs. Chief Commissioner of Income Tax (TDS) in I.A. No.678 of 2022 in C.P.(IB)No.149/NCLT/AHM/2017 vide order dated 11.12.2023, the instant I.A. No.272 of 2024 in C.P.(IB)No.357/BB/2019 is hereby disposed of by directing the Income Tax Department to refund the amount of Rs.1,20,50,000/- into the account of Corporate Debtor, within one month from the date of this order.

---------------------------------------------

LML Limited (Under Liquidation) Vs. Office of Commissioner of Income Tax, Mumbai - Capital gain tax out of the sale of assets by the liquidator shall not be treated as the liquidation cost.

 NCLT Allahabad (31.08.2020) in LML Limited (Under Liquidation) Vs. Office of Commissioner of Income Tax, Mumbai  [C.A. No. 389 of 2019 in CP(IB) No. 55/ALD/2017] held that; 

• Given Section 238 of The Insolvency and Bankruptcy Code, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment, including the Income Tax- Tax Art.

• 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 See 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.

• 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 also held in case of Leo Edibles & Fats Ltd v. Income Tax Department.

• Therefore, 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.

Excerpts of the order;

# 1. The present application has been filed under Section 60(5) of The Insolvency and Bankruptcy Code, 2016 by the liquidator seeking directions as to whether the capital gain tax is to be paid on the proceeds received from sale of assets of the corporate debtor and is to be included in the liquidation cost or to be distributed as per waterfall mechanism under Sec 53 of IBC.

# 2. As per the averment made in the application, various auctions were held and a sum of Rs. 113,88,40,170/- has been realised so far and the applicant has already distributed majority of the amount realised and further he has to proceed with the distribution of the pending amounts in accordance with the waterfall mechanism prescribed under Sec 53 of the Insolvency and Bankruptcy Code, 2016. However, he is faced with the issue as to whether the capital gains tax would be attracted on sales of such assets as part of liquidation estate to be included as liquidation costs, if so, he would be required to first make provision for the capital gains and accordingly after deduction of the amount, the balance shall be distributed amongst the stakeholders.

# 3. Further the counsel for the liquidator has referred Sec 52 of the Code wherein a secured creditor has the option to either:

• a) Relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified in Section 53; or

• b) Realise its security interest in the manner specified in this Section.

# 4. It is contended that in the present case the secured creditors have opted for proceeding under Sec 52(a) i.e. by relinquishing their security to the liquidator who proceed to sell the assets in terms of the Code and the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

# 5. Further, it is stated that a secured creditor is entitled to effect sale under the SARFAESI Act and appropriate the entire amount towards its dues, without any liability to first pay the capital gain tax. It is only upon residual liquidity that the distribution of the assets has to be made according to the other creditors. If the capital gain is first to be provided for and then be included as liquidation cost, it would create anomalous situation in the secured creditor getting a lesser remittance than what they could have realised, the security into the common corpus. Therefore, it is submitted that in case capital gains tax is treated as liquidation costs, to be defrayed at the first instance on such transactions, the secured creditors would not relinquish their security to the liquidators. Further stated that none of the provisions of the Income Tax Act, 1961 as referred by the respondent provide for distribution at all and is provided only in the waterfall mechanism provided in Sec 53 of the IBC which is as quoted:

• 53. (1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely:-

• - (a) The insolvency resolution process costs and the liquidation costs paid in full; secured creditor in liquidation proceedings. ………...

# 6. It is further contended that from the perusal of above hierarchy of the waterfall mechanism it is clear that the debts owed to a secured creditor and workmen are on higher hierarchy rather than the liability towards government dues and no provision has been pointed out nor any claim has been Laid by the respondent by which state dues would get precedence over the distribution proposed to be made to the secured, unsecured financial creditor and workmen.

# 7. Further referring to Sec 238 of IBC and Sec 178(6) of the Income Tax Act which provides as

Follows:’

• Section 238: Provisions of this Code to override other laws;

The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. 

• Section 178(6) of The Income- Tax Act

(6) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force. [except the provisions of the  Insolvency and Bankruptcy Code, 2016].

It is argued that the provisions of IBC, 2016 would prevail over Income Tax Act, 1961 and the provisions of lncome Tax Act have also been amended in view of the provisions of the Insolvency and Bankruptcy Code.

# 8. Thy counsel for the applicant in support of his arguments has relied on the judgment of Hon'ble Supreme Court. in the case of M/S Commissioner of Income Tax v. KTC Tyres India Ltd. in which it was held that capital gain tax cannot be treated as liquidation cost. And also referred to the case of M/S Shree Ram Lime Products Pvt. Ltd vs Gee Ispat Pvt. Ltd. of the Principal Bench, New Delhi stating that the same issue has already been decided in this matter.

# 9. In reply to the above, the counsel for income Tax submitted that the amount received on sale of assets of the Corporate debtor till 30.07.2019 was realised net of TDS. Thus TDS was deducted by the purchasers of the assets of the Corporate Debtor while making payment and the sum so deducted must have been paid to the credit of the Central government. Further the counsel has refer to Sec 45 and Sec 46 of The Income Tax Act which is related to the capital gains on distribution off assets by the companies in Liquidation and how such money or assets will be chargeable to income Tax under the head Capital gain.

# 10. Further it was contended on behalf of Income Tax Department that the bare reading of provisions of Sec 238 of IBC it is seen that the provisions of the Code override the provisions of the Act to the extent the provisions of the Act are inconsistent with the provisions of the Code and in the present case there is no inconsistency with respect chargeability of tax on capital gains between the provision of Code and Act and provisions of Sec 45 of IT Act shall remain in operation and further stated that decision of NCLT New Delhi Bench in matter of M/S Shree Ram Lime Products Private Limited on which the applicant relied will not be applicable to the facts of the present case.

# 11. After hearing the submissions of both the parties and referring to the facts of the case this Adjudicating Authority do not find favour with the arguments raised on behalf of the Income Tax and further at this juncture I would refer to the case of Hon'ble Supreme Court : Principal Commissioner of Income Tax v. Monnet Ispat And Energy Ltd. dated 10.08.2018 in which the Hon'ble Apex Court held "Given Section 238 of The Insolvency and Bankruptcy Code, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment, including the Income Tax- Tax Art.."

# 12. Thus referring to this, 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 See 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.

# 13. 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 also held in case of Leo Edibles & Fats Ltd v. Income Tax Department.

# 14. Further 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(1) and has to be dealt accordingly.

# 15. Therefore, 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.

# 16. Accordingly, CA No.389/2019 is disposed of.

----------------------------------------------------------