No TDS on capital gains from sale of company assets under liquidation: NCLAT

Should a buyer of asset under liquidation deduct 1% TDS on the capital gains as per Income Tax Act?

The National Company Law Appellate Tribunal (NCLAT) in an order passed on 8 February 2021 maintained that the Insolvency and Bankruptcy Code (IBC) does not have a provision for the buyer of an asset through liquidation process to deduct a 1% TDS under Section 194-IA, Income Tax Act, 1961.

The case pertains to liquidation of S Kumars Nationwide Limited. The assets of S Kumars had been bought by Mumbai-based UPL Limited. The liquidator — Om Prakash Agrawal – had moved NCLAT against the order of the New Delhi bench of NCLT, which had declined to pass a direction to the income tax department and the buyer of the asset to deduct 1% TDS on capital gains made on sale of the asset.

The NCLAT concurred with the argument of the counsel of the liquidator that the provision of deduction of TDS under Section 194-IA of Income Tax Act is inconsistent with Section 53 (1) (e) of the IBC and by virtue of Section 238 of Code, Section 53 of Code has over-riding effect.

The NCLAT argued that when the Liquidator of a company in liquidation under the IBC is not required to file Income Tax Return, then there is no question of claiming refund of TDS deducted under Section 194 IA of the IT Act.

The NCLAT in its order said that the Adjudicating Authority had erroneously held that the deduction of Tax at source does not mean raising demand for collection of tax by the department. “Actually TDS under Section 194 IA, is an advance capital gain tax, recovered through transferee on priority with other creditors of the company,” maintained the appellate tribunal.

The counsel of the liquidator successfully argued that Section 53 of IBC postulates the distribution of assets to the Creditors without deduction of the TDS. “It is clear that deduction of TDS runs counter to the scheme and mandate of Section 53 of the Code. Disbursement of Government dues is covered under Section 53 (1) (e) of the Code and the deduction of prior TDS most certainly tinkers with waterfall mechanism stipulated under Section 53 of the Code,” the counsel of the liquidator had argued.

Section 53 of IBC deals with distribution of the proceeds from the sale of the liquidation assets.

The liquidator’s counsel cited the LML Limited Vs. Office of Commercial of Income Tax, Mumbai, where the Allahabad bench of the NCLT had held that the income tax liability arising out of sale of assets by the Liquidator shall be distributed in accordance with the provisions of Section 53 of the Code and the capital gain tax shall not be treated as liquidation cost.

Also Read: NCLAT foils attempt by Supertech to withhold information from homebuyers

Also Read: NCLAT reprimands Excise Dept for delay in filing claims; causing loss to exchequer