Income Tax Department Cannot Be Considered As A Secured Creditor In Liquidation Proceedings: NCLT Chennai

Background

The CIRP of the corporate debtor was ordered by the tribunal, and subsequently, its liquidation process commenced by the order of the tribunal. On 08.01.2022, the liquidator made the public announcement and invited claims from the creditors. During liquidation period, the Income Tax Department received Rs 1.12 Cr. from the liquidator based on a prior attachment of the corporate debtor's property in 2017 for unpaid tax dues. Canara Bank challenged this disbursement, arguing it violated the priority order under Section 53 of the Insolvency and Bankruptcy Code (IBC), 2016, since the Income Tax Department was not a secured creditor.

Contention of the Canara Bank

The applicant argued that prior to CIRP and liquidation proceedings, the income tax department attached the mortgaged property of the corporate debtor due to non-payment of tax. It was highlighted that the respondent failed to file the claim before the liquidator within the specified time limit.

The applicant objected to the decision of the SCC meeting where the liquidator referred to the judgment of State Tax Officer v. Rainbow Papers Ltd. (13) SCR 808 and treated the income tax department as a secured creditor u/s 53 of the IBC, 2016. The applicant argued that the respondent cannot be treated as a secured creditor.

Submission of the Liquidator

The liquidator submitted that the income tax department filed their claim before him within the time specified in the advertisement. It was also highlighted that the liquidator invited the income tax department to be part of the 2nd SCC meeting; thereafter, the list of modified claims was filed before the tribunal, and the same was allowed as well.

The liquidator highlighted that the income tax department was made a secured creditor due to the reason of the attachment of security interest in its favor. It also pointed out that the applicant never objected to the inclusion of the Income Tax Department.

Relying on the judgment of the Principal Commissioner of Income Tax vs. Assam Company, Ltd., in Company Appeal No.241 of 2022, it submitted that if the statutory liability is backed by the attachment, then it has to be dealt with as per Section 53 of the IBC, and the authority is included as the secured creditor.

Submission of the Income Tax Department

The income tax department denied the contentions of the applicant as well as the respondent. And it submitted that the judgment in the case of State Tax Officer vs. Rainbow Papers Ltd. is applicable to the present case. It highlighted that by virtue of the attachment of the property, a security interest was created in its favor, which made them a secured creditor.

Judgment of the NCLT

The NCLT found that the income tax department failed to file their claim with the liquidator within the time specified by the IBC.

The NCLAT observed that the ratio laid down in the case of Rainbow Paper Mills is not applicable to the present case, as the income tax dues are sovereign dues and cannot be declared as secured debt solely because the attachment was made seeking recovery of dues. The tribunal also held that the character of past dues cannot change, regardless of whether any attachment was made.

Keeping in mind the overriding nature of the IBC, any attachment of the asset of the corporate debtor seeking recovery of the dues would not survive, and the only option available to the income tax department for recovering the dues is to file a claim following the procedure laid down u/s 53 of the IBC.

The NCLT further observed that the judgment of the NCLAT in the case of Principal Commissioner of Income Tax vs. Assam Company India Ltd. cannot be applied here in this case, as the facts differ. The bench held that the act of appropriation of the tax due during the moratorium and not complying with Section 53 of the IBC is impermissible.

The bench also noted that since the claim has been filed by the Income Tax Department in the Form B, which implies that it is an operational creditor. Hence, the question of it being treated as the secured creditor does not occur.

The NCLT further pointed towards the ruling of the Hon'ble Supreme Court in the case of Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Private Ltd., Civil appeal 7976 of 2019, wherein the court emphasized the supremacy of the IBC and observed the judgment of the Rainbow Papers is limited to the specific facts and circumstances.

The bench also noted that the Rainbow judgment is related to Section 48 of the GVAT Act, where statutory backing is present as secured debt for tax dues; hence, it does not apply here.

Referring to the Supreme Court's judgment in the case of the Principal Commissioner of Income Tax v. Monnet Ispat and Energy Ltd., SLP No. 6483 of 2018, the bench concluded that the income tax is the crown debt, and it does not hold precedence over the secured creditors who are private persons.

The bench also discussed the judgment of the NCLAT in the case of Principal Director General of Income Tax v. Ms. Synergies Dooray Automative Ltd. and held that the statutory dues should not be considered as operational debt.

The bench observed that, as per the ruling of State Bank of India vs. The Tax Recovery Officer, Income Tax Department, the income tax department cannot claim priority over the secured creditors based on an attachment. The bench finally held that the liquidator erred in treating the Income Tax Department as a secured creditor, and it also failed to consider the ruling of Paschimanchal Vidyut Vitran Nigam Ltd.

The NCLT concluded that the income tax department's claim cannot be treated as a secured creditor and hence cannot be given preference by sidelining the process u/s 53 of the IBC, 2016.

Case Title: Canara Bank v. Mr. B. Ramana Kumar (Liquidator of Krishna Energy Pvt. Ltd.) & Income Tax Department

Case Number: Company Appeal (AT) (CH) (Ins) No. 190/2025 ; IA Nos.532 & 533/2025

For Applicant: Mr. Varun Srinivasan, Advocate

For1st Respondent: Mr. B.Rmana Kumar, Advocate

For 2nd Respondent: Mr. Raj Jabakh, Advocate

Bench: Shri Jyoti Kumar Tripathi (Member-Judicial) and Shri Ravichandran Ramasamy (Member-Technical)

Judgment Date: 02/05/2025

Click Here To Read/Download The Order