Income Tax Department can’t Recover Dues during Liquidation Process under IBC: Hyderabad HC [Read Judgment]

A division bench of the Hyderabad High Court has held that an order of attachment of the subject property by the Income Tax department cannot affect the completion of the sale effected by the liquidator under the provisions of the Insolvency and Bankruptcy Code, 2016. The bench made it clear that the Income Tax department is not a secured creditor once liquidation under IBC begins.

The petitioner- Company approached the Court aggrieved by the action of the Sub-Registrar, Erragadda, Hyderabad, who refused to register its purchase of immovable property in the liquidation proceedings relating to VNR Infrastructures Limited, Banjara Hills, Hyderabad under the Insolvency and Bankruptcy Code, 2016 on the ground that the income tax department had claimed a charge over the immovable property sold, pursuant to the attachment proceedings of the Tax Recovery Officer (Central), Income-tax Department.

The senior standing counsel for the respondents contended that the arrears of VNR Infrastructures Limited, Hyderabad, amount to over Rs.100.00 Crore as on date and recovery of such arrears must necessarily be given priority in the context of the statutory scheme obtaining under the Act of 1961.it was further argued that the attachment effected by the first respondent was on 27.10.2016, long prior to initiation of the liquidation proceedings under the Code. It was also pointed out that though Section 178 of the Act of 1961 was amended by Section 247 of the Code, no amendment was effected in Sections 222, 226 or 232 of the Act of 1961, whereunder tax arrears could be recovered.

After perusing the statutory schemes obtaining under the IBC and the Income Tax Act, 1961 the bench comprising Justices Sanjay Kumar and Amarnath Goud observed that the Income-tax Department does not enjoy the status of a secured creditor, on par with a secured creditor covered by a mortgage or other security interest, who can avail the provisions of Section 52 of the Code.

“At best, it can only claim a charge under the attachment order, in terms of Section 281 of the Act of 1961,” the bench said.

“Even if the order of attachment constitutes an encumbrance on the property, it still does not have the effect of taking it out of the purview of Section 36(3)(b) of the Code. The said order of attachment therefore cannot be taken to be a bar for completion of the sale effected by the fifth respondent under the provisions of the Code,” the bench said.

Rejecting the above arguments of the respondents, the bench held that “In the context of liquidation of an assessee company under the provisions of the Code, the Income-tax Department, not being a secured creditor, must necessarily take recourse to distribution of the liquidation assets as per Section 53 of the Code. Section 53(1) provides the order of priority for such distribution and 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 in respect of the whole or any part of the period of two years preceding the liquidation commencement date comes fifth in the order of priority under Clause (e) thereof.”