Judgment Summaries (High Court) Leo Edibles & Fats Ltd. v. The Tax Recovery Officer

  March 3, 2022

Case Summary

Leo Edibles & Fats Ltd. v. The Tax Recovery Officer (Central), Income Tax Dept., Hyderabad)

W.P. No. 8560 of 2018 High Court of Hyderabad, Decided on 26.07.2018

The petitioner purchased an immoveable property from the liquidation of VNR Infrastructures Limited under the Insolvency and Bankruptcy Code 2016 (‘IBC’). However, the registering authority refused to register the said property in Petitioner’s name, at the behest of the Income Tax Department (‘IT Dept.’) that claimed a charge over the said property pursuant to the attachment proceedings qua the said property. The petitioner, through this writ petition, sought a release of the charge by the IT Dept. and the registration of the said property in its name. In an earlier order, the court had directed the registration authority to record that the registration of the said property would be subject to the final judgment of this writ petition. It also clarified that the attachment by the IT Dept. would also continue till the disposal of this writ petition.

The main issue decided in this case was regarding the construction of the IBC and the Income Tax Act 1961 (‘1961 Act’).

  • Income tax department – not a secured creditor under IBC

Based on the legal framework of the IBC and the 1961 Act, the court observed that the IT Dept. is not a secured creditor or at par with a secured creditor, who can relinquish his security interest as per Section 52, IBC in a liquidation under IBC. The IT Dept. can take recourse under the Section 53 distribution mechanism, under which, it come fifth in the order of priority of creditors/stakeholders, as the proceeds from income tax go to the Consolidated Fund of India and of the States. The legislature itself has assigned this order of priority, therefore, the court observed that it ought not delve into the rationale underlying the same.

  • Overriding effect of the IBC over the tax default provisions under the 1961 Act

Further, it held that since Sections 220 and 220 of the 1961 Act, dealing with penalty for tax default, do not come with a non-obstante clause, but Section 238 of the IBC does. Therefore, IBC would prevail over these provisions of the 1961 Act.

  • No priority to income tax dues over the secured creditors’ dues

It further held that the fact that the commercial tax dues were prioritised over the dues of secured creditors under the SARFAESI Act in the case of Central Bank of India v State of Kerala, does not mean that the income tax dues would be prioritised over the secured creditors’ claims under IBC by the same logic. 

Further, no priority can be claimed by the IT Dept. merely because the order of attachment was issued long before the commencement of the corporate insolvency resolution process of VNR Infrastructures.

  • Property under attachment also forms a part of the liquidation estate

The court observed that Section 36(3)(b) of the IBC clarifies that the liquidation estate assets may or may not be in the possession of the corporate debtor. It may also include encumbered assets. Therefore, the fact that an asset is encumbered, does not take it away from the liquidation estate for standalone attachment/realisation. Pertinently, since the IT Dept. is not a secured creditor, it cannot independently relinquish its security interests outside of the liquidation estate under Section 52. Hence, the NCLAT held that an attachment order over the properties would not bar the completion of the sale of the said property in favour of the petitioner. As far as the IT Dept. it concerned, it has to submit a claim before the resolution professional who would allocate the proceeds of liquidation as per the Section 53 priority order.

 

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