The Relation between Tax Law, Insolvency, and Bankruptcy
by CCH Online CCH Tax OnlineIt
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superseded by the provisions of IBC and thus allowed the petition and directed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.