Articles

The Relation between Tax Law, Insolvency, and Bankruptcy

by CCH Online CCH Tax Online

It all started with a Writ Petition where the petitioners argued about the clash of the Insolvency and Bankruptcy Code, 2016 (IBC) and the Income Tax Act, 1961 where the two governmental authorities were at loggerheads. The IT department had initiated attachment proceedings on petitioner’s property prior to the initiation of the liquidation of assets under the IBC. Such a setting has led to a heated debate about which law stood in the over ruling process.

2018, in the case of Leo Edibles and Fats Limited v/s TRO, under Writ Petition No. 8560, Telangana and Andhra Pradesh High Court (HC), held that Section 178 of the IT Act which entails that the liquidator must keep aside certain notified sums for paying up pending tax dues, before liquidation process, shall be superseded by the provisions of IBC and thus allowed the petition and directed the registration of transfer of property by the Registrar. Therefore, keeping in check this interplay between the IT Act and the IBC, the HC held that the tax authorities are not at par with the “secured creditors” under the IBC.

The applicability of the precedence to IBC over the direct taxation department given under Section 33 of the IBC was argued as void because the attachment of property was initiated before the commencement of liquidation proceedings by the NCLT. But this was countered with Section 36 of IBC which defines the “liquidation estate assets” to include encumbered assets as well. Hence, even though the attachment was already made, but such property would still become part of the to-be-liquidated-assets.

It is interesting to note that although the IT department never argued the applicability of remedy under Section 281 of the IT Act, HC by itself suggested such remedy. The Section stipulates that where a taxpayer has transferred any assets in favor of the other party during the ‘pendency of any proceeding’, such transfer would be null and void as against any claim in respect of ‘any other sum’. In addition to this, it also provides that such provision shall not apply if the transfer is made without notice of any other pendency of proceedings. This was a case of the observation being an “obiter dicta”, i.e. an incidental non-binding observation, which could or could not form the basis of litigation at ground level.

Thus, if the remedy under Section 281 was sought by the tax authorities, then the company might have to furnish a bank guarantee in favor of the IT department inclusive of the applicable service tax rates in India (now GST). Such a situation would create an environment of ambiguity for the authorities as well as the taxpayer and might not really expedite the case or the proceedings.


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Created on Oct 12th 2018 04:42. Viewed 338 times.

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