Capital Gains Tax on sale of property under the provisions of SARFAESI during Liquidation Process.

 Let’s look into various provisions of the Statutes & case laws.

A, Insolvency and Bankruptcy Code, 2016.

# Section 52. Secured creditor in liquidation proceedings. -

(1) A secured creditor in the liquidation proceedings may-

• (a) relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified in section 53; or

• (b) realise its security interest in the manner specified in this section.

(2) Where the secured creditor realises security interest under clause (b) of subsection (1), he shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realised.

(3) Before any security interest is realised by the secured creditor under this section, the liquidator shall verify such security interest and permit the secured creditor to realise only such security interest, the existence of which may be proved either –

• (a) by the records of such security interest maintained by an information utility; or

• (b) by such other means as may be specified by the Board.

(4) A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it.

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B. Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

# Regulation 37. Realization of security interest by secured creditor

(1) A secured creditor who seeks to realize its security interest under section 52 shall intimate the liquidator of the price at which he proposes to realize its secured asset. (2) The liquidator shall inform the secured creditor within twenty one days of receipt of the intimation under sub-regulation (1) if a person is willing to buy the secured asset before the expiry of thirty days from the date of intimation under sub-regulation (1), at a price higher than the price intimated under sub-regulation (1).

(3) Where the liquidator informs the secured creditor of a person willing to buy the secured asset under sub-regulation (2), the secured creditor shall sell the asset to such person. (4) If the liquidator does not inform the secured creditor in accordance with sub-regulation

(2), or the person does not buy the secured asset in accordance with sub-regulation (2), the secured creditor may realize the secured asset in the manner it deems fit, but at least at the price intimated under sub-regulation (1).

(5) Where the secured asset is realized under sub-regulation (3), the secured creditor shall bear the cost of identification of the buyer under sub-regulation (2).

(6) Where the secured asset is realized under sub-regulation (4), the liquidator shall bear the cost incurred to identify the buyer under sub-regulation (2).

(7) The provisions of this Regulation shall not apply if the secured creditor enforces his security interest under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) or the Recovery of Debts and Bankruptcy Act, 1993 (51 of 1993).

(8) A secured creditor shall not sell or transfer an asset, which is subject to security interest, to any person, who is not eligible under the Code to submit a resolution plan for insolvency resolution of the corporate debtor.

 

Thus, a secured financial creditor (Financial Institution) can enforce its security interest under the provisions of SARFAESI [Section 52(4)] without attracting the provisions of Liquidation Regulations under the Code [Liquidation Regulation 37(7).

C. Income-tax Act, 1961

Company in liquidation.

# Section 178. (1) Every person—

(a)  who is the liquidator of any company which is being wound up, whether under the orders of a court or otherwise; or

(b)  who has been appointed the receiver of any assets of a company,

(hereinafter referred to as the liquidator) shall, within thirty days after he has become such liquidator, give notice of his appointment as such to the Assessing Officer who is entitled to assess the income of the company.

(2) The Assessing Officer shall, after making such inquiries or calling for such information as he may deem fit, notify to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the Assessing Officer, would be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company.

(3) The liquidator—

(a)  shall not, without the leave of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, part with any of the assets of the company or the properties in his hands until he has been notified by the Assessing Officer under sub-section (2) ; and

(b)  on being so notified, shall set aside an amount, equal to the amount notified and, until he so sets aside such amount, shall not part with any of the assets of the company or the properties in his hands :

Provided that nothing contained in this sub-section shall debar the liquidator from parting with such assets or properties for the purpose of the payment of the tax payable by the company or for making any payment to secured creditors whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation or for meeting such costs and expenses of the winding up of the company as are in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner reasonable.

(4) If the liquidator fails to give the notice in accordance with sub-section (1) or fails to set aside the amount as required by sub-section (3) or parts with any of the assets of the company or the properties in his hands in contravention of the provisions of that sub-section, he shall be personally liable for the payment of the tax which the company would be liable to pay :

Provided that if the amount of any tax payable by the company is notified under sub-section (2), the personal liability of the liquidator under this sub-section shall be to the extent of such amount.

(5) Where there are more liquidators than one, the obligations and liabilities attached to the liquidator under this section shall attach to all the liquidators jointly and severally.

(6) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force except the provisions of the Insolvency and Bankruptcy Code, 2016.

D, Case Laws;

i). NCLT New Delhi (22.10.2019) in the matter of Ms. Pooja Bahry Liquidator in Shree Ram Lime Products Pvt. Ltd.  Vs. Gee Ispat Pvt. Ltd.  [CA-666/2019 in (IB) -250 (ND) /2017 ] held that; 

• We therefore hold that the tax liability arising out of the sale shall be distributed in accordance with the provisions of Section 53 of the Code. The applicability of Section 178 or 194 IA of the IT Act will not have an overriding effect on the water fall mechanism provided under Section 53 of the Code, which is a complete code in itself, and the capital gain shall not be taken into consideration as the liquidation cost. 

ii). NCLT Allahabad (31.08.2020) in LML Limited (Under Liquidation) Vs. Office of Commissioner of Income Tax, Mumbai  [C.A. No. 389 of 2019 in CP(IB) No. 55/ALD/2017] held that; 

• Given Section 238 of The Insolvency and Bankruptcy Code, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment, including the Income Tax- Tax Art.

• this Adjudicating Authority is of the view that the applicability of Sec 45 and 46 of The Income Tax Act will not have an overriding effect on the water fall mechanism provided under See 53 of the IBC, 2016, which is a complete code in itself and thus capital gain shall not be taken into consideration as the liquidation cost.

• Sec 178 of IT Act stands excluded by virtue of amendment of Section 178 (6) with effect from 01.11.2016, in accordance with the provision of Sec 247 of the IBC read with Third Schedule appended there to, therefore, as the corporate debtor is in liquidation under the Code, the Income Tax Department can no longer claim a priority in respect of clearance of tax dues as provided Under Sec 178(2) and (3) of the Income Tax Act,1961 as also held in case of Leo Edibles & Fats Ltd v. Income Tax Department.

• Therefore, the tax liability arising out of the sale of assets by the liquidator shall be distributed in accordance with the provisions of Section 53 of the Insolvency and Bankruptcy Code, 2016 and the capital gain tax shall not be treated as the liquidation cost.

 

iii). NCLAT (08.02.2021) in Om Prakash Agrawal Liquidator - S. Kumars Nationwide Limited Vs Chief Commissioner of Income Tax (TDS) [Company Appeal (AT) (Insolvency) No. 624 of 2020] held that; 

• Actually TDS under Section 194 IA, is an advance capital gain tax, recovered through transferee on priority with other creditors of the company. Hence, inconsistent with the provision of Section 53 (1) (e) of the Code and by virtue of Section 238 of the Code, the provision of Section 53(1) (e)shall have overriding effect. Thus, the impugned order is not sustainable in law. Therefore, it is hereby set aside.

iv). Supreme Court (11.10.2001) in Commissioner Of Income-Tax vs Attili N. Rao [AIR 2002 SC 388] held that;.

• What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefore belonged to the assessee. 

• From out of that price, the State deducted its dues towards "kits" and interest due from the assessee and paid over the balance to him. 

• The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it is on the full price realised (less admitted deductions) that the capital gain and the tax thereon has to be computed.

v). ITAT Chennai-C (06.09.2019) in T.S. Hajee Moosa & Co Vs. ACIT (ITAT Chennai) [Appeal Number : ITA No. 2686/CHNY/2018] held that;.

• Thus, it is clear that the assessee availed loan from the Bank under the banner of group concerns by mortgaging its own property and group concerns failed to repay the loan, the bank sold the property and the entire consideration was recovered by the bank. Thus, it cannot be held that the assessee has not received any consideration directly or indirectly, which were liable to tax

• What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefore belonged to the assessee. From out of that price, the State deducted its dues towards “kist” and interest due from the assessee and paid over the balance to him. 

• The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it is on the full price realised (less admitted deductions) that the capital gain and the tax thereon has to be computed.

• It is clear that the mortgaged property sold, in discharge of the mortgage created by the assessee itself, belonging to the assessee and the price realized there-form belonged to the assessee and hence the capital gain is very much warranted on the full price [less admissible deduction].

• Otherwise also, availing loan itself is consideration and in this case, constructive benefit was very well accrued to the assessee when the loan was availed by its group concerns, which was owned partly by the assessee.

E. Now the question is;

• “Whether Liquidator is required to pay Capital Gains Tax on property sold by the lender (secured creditor) under the provisions of SARFAESI [section 52(4) of the Code read with Liquidation regulation 37(7)] as liquidation cost. in light of ITAT ruling in T.S. Hajee Moosa (Supra) read with Hon’ble Supreme Court ruling in Commissioner Of Income-Tax (Supra)] “

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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