Income Tax Department's claim must be submitted during asset distribution under Section 53(1) of the Code.

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Case Name:

Leo Edibles & Fats Limited vs. Tax Recovery Officer (Central) (High Court of Hyderabad)

W.P.8560 of 2018

Key Takeaways

- The Income Tax Department's attachment order does not take precedence over the liquidation process under the IBC.

- The Tax Recovery Officer must submit the department's claim during the asset distribution phase as per Section 53(1) of the IBC.

- The court directed the Sub-Registrar to register the sale deed in favor of the petitioner, subject to the final orders in the writ petition.

Issue

Does the Income Tax Department's attachment order take precedence over the liquidation proceedings under the Insolvency and Bankruptcy Code?

Facts

- VNR Infrastructures Limited went into liquidation, and a liquidator was appointed by the National Company Law Tribunal.

- The petitioner, Leo Edibles & Fats Limited, became the highest bidder for the company's property and paid 25% of the bid amount.

- The Tax Recovery Officer issued an attachment order on the property under Section 272 read with Rule 48 of the Income Tax Act.

- The attachment order was issued before the liquidator's appointment but after the creation of a mortgage on the property.

- The petitioner filed a writ petition seeking to register the sale deed and to recall the attachment notice.

Arguments

- Petitioner (Leo Edibles & Fats Limited):

Argued that the liquidator has precedence in terms of the IBC and Section 26E of the Securitization Act, 2002.

- Income Tax Department:

Claimed that since the attachment order was issued before the liquidation proceedings, it should have precedence.

Key Legal Precedents

- Section 53(1) of the Insolvency and Bankruptcy Code:

Specifies the order of priority for the distribution of assets during liquidation.

- Section 36(3)(b) of the Insolvency and Bankruptcy Code:

States that liquidation estate assets may include encumbered assets.

- Section 26E of the Securitization Act, 2002:

Provides priority to secured creditors over other debts.

Judgement

The High Court ruled in favor of the petitioner, Leo Edibles & Fats Limited. The court held that the Income Tax Department's attachment order does not take precedence over the liquidation process under the IBC. The Tax Recovery Officer must submit the department's claim during the asset distribution phase as per Section 53(1) of the IBC. The court directed the Sub-Registrar to register the sale deed in favor of the petitioner, subject to the final orders in the writ petition.

FAQs

Q1. What was the main issue in this case?

A1. The main issue was whether the Income Tax Department's attachment order takes precedence over the liquidation proceedings under the Insolvency and Bankruptcy Code.

Q2. What did the court decide?

A2. The court decided that the Income Tax Department's attachment order does not take precedence over the liquidation process under the IBC. The Tax Recovery Officer must submit the department's claim during the asset distribution phase as per Section 53(1) of the IBC.

Q3. What is the significance of this decision?

A3. This decision clarifies that the liquidation process under the IBC takes precedence over attachment orders issued by the Income Tax Department. It ensures that the distribution of assets during liquidation follows the order of priority specified in the IBC.

Q4. What should the Tax Recovery Officer do now?

A4. The Tax Recovery Officer must submit the Income Tax Department's claim during the asset distribution phase as per Section 53(1) of the IBC.

Q5. What happens to the sale deed?

A5. The court directed the Sub-Registrar to register the sale deed in favor of the petitioner, subject to the final orders in the writ petition.

Aggrieved bv the action of the Sub-Registrar in refusing toe register a sale executed by the 5th respondent tiquidator appointed by the Nationat Company Law Tribunal, on the asis of an order of attachment passed by the lncome fax O{ficer, the petitioner has come up with the above writ petition.Heard Mr.S.Niranjan Reddy, tearned Senior Counsel appearing for the petitioner and Smt.M. Kiranmayee, learned Senior Standing Counsel for the '1't respondent, Smt.JVL Bharathi, learned counset for the 5th respondent and learned Government Pteader appearing for the 4th respondent.

A company by, name, VNR lnfrastructures Limited went into tiquidation and the National Company Law Tribunal appointed a Liquidator. The property of the company was brought to sate and the petitioner in the above writ petition became the highest bidder. He paid 25% of the bid amount immediatety after the auction.

But in the meantime, the Tax Recovery Officer notified the attachment of the property under Section 272. read with Rute 48 of the ll Schedute of the lncome Tax Act. lt appears that the order of attachment was prior in point of time to the appointment of the Liquidator, but subsequent in point of time to the creation of the mortgage.

ln other worCs, there is now a dispute between the liquidator and the lncome Tax Department about the right of each one of them. The ctaim of the liquidator is that the liquidator wi[[ have precedence in terms of the provisions of the lnsotvency and Bankruptcy code and atso in terms of Section 26 E of the Securitization Act,2002. But, the ctaim of the lncome Tax Department is that since the proceedings for liquidation commenced after the attachment, they witt have precedence.

Caught in the crossfire between the [iquidator and the Income tax Department, the petitioner came up with the above writ petition and sought two interim prayers, one in l.A. No.1 of 2018 to direct the 1't respondent Tax Recovery Officer to recatt his attachment notice and to direct tl-re Sub-Registrar to register the Sate Deed. The other apptication v/as in l.A.No.2 of 2018 for a direction to the liquidator not to insist upon the payment of the batance 75% of the sate consideration.

When the writ petition came up for orders as to admission, this Court passed an order in LA. No.2 of 2018 to the fottowing effect:

"We are not ln lnclined to grant ony interim order to the effect that the petitioner compony should nat deposit the bolance sole considerotion in respect of the ouction as it is bound to comply with its port ol the sale transaction. Howeyer, in the event such deposit is made, the fifth respondent shall not disburse ony of the omounts paid by the petitioner company pending further orders."

ORDBR Therefore, in order not to have the first instaltment forfeited by the liquidator, the petitioner deposited the batance amount. Thereafter, the petitioner has come up with a prayer to attow l.A. No.1 of 2018, The petitioner cannot lose on both ends. Either he shoutd not have been directed to pay the batance of sate consideration or he should at least have the benefit of the registration of sate deed. lf l.A .No.2 of 2018 had been attowed, the prayer in l.A. No.1 of 2018 could have been rejected but after having issued a positive direction in l.A No.2 of 7018, we cannot subject the petitioner to secondary victimization, first at the hands of the liquidator and then at the hands of this Court.

Therefore, there witt be an interim direction in l.A. No.1 of 2018 to the 4th respondent to register the sate deed. However, in view of the fact that the question raised in the writ petition is yet to be decided, we direct the Sub-Registrar also to record that the registration of the sale deed is subject to the finaI orders passed in the writ petition and that the order of attachment will continue titt the disposat of the writ petition irrespective of the registration of the sate deed. Post after Summer Vacation, 201 for hearing.

To For ASSISTANT REGISTRAR

1. The Tax Recovery Officer (Central), Income Tax Department, AaykarBhavan, Basheerbagh, Hyderabad.

2. The Special Chief Secretary, Revenue (Registration and Stamps), State ofTelangana, Secretariat Buildings, Saifabad, Hyderabad.

3. Inspector General of Registration and Stamps, H. No. 5-3-953, M.J. Road, Risala Abdullah Colony, Jam Bagh, Hyderabad - 500095.

4. The Sub-Registrar, 8-3-165/5/4, Deccan Chambers, Enagadda, Hyderabad.

5. The Liquidator, Representing \NR Infrastructures Limited (in Liquidation) ,8-2-3221D,Road No. 3, Banjara Hills, Hyderabad. having ofhce at, Plot No. 16 ( I 1-20-18), Shop-Cum-Flat, HUDA Complex, Hyderabad - 500035. (RR- 1 to 5 by RPAD )

6. One CC to SRI. RUBAINA S KHATOON Advocare [OPUC]

7. Two CCs to the GP for Revenue (TG), High Court ofJudicature at Hyderabad (OUT)

8, One spare copy