GST V.

IBC – An insight on juxtaposition

By

Name of the Student: K.MEGHANA

Roll No: 2018LLB039

Semester: VII

Name of the Program: 5 year (B.A., LL.B.)

Name of the Faculty Member

Date of Submission

31/12/2021

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

1
 ACKNOWLEDGEMENT

I heartfully express my special thanks to my subject teacher Mr. R. Vishnu Kumar for giving me
the opportunity to do the project on the topic ‘Interpretation of the judgment of 15 June 1962 in
the case concerning the temple of Preah Vihear ( Cambodia V. Thailand) (I.C.J.) ’. It helped me
to know many things and gain knowledge. I also thank him for guiding me throughout the
project and responding for my doubts regarding the project.

I would also like to thank my University ‘Damodaram Sanjivayya National Law University’ for
providing me with all the required materials for the completion of my project and I also came to
know many new things.

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 TABLE OF CONTENTS :-

1.SYNOPSIS ……………………………………………………………………………..…….04

2. INTRODUCTION …………………………………………………………………………....05

3. THE INTERPLAY BETWEEN IBC AND INCOME TAX LAWS …………………………05

4. GST vs IBC – An insight on juxtaposition …………………………………………………...07

5. IMPACT OF GST ON COMPANIES UNDER IBC ……………………………….………..10

6. THE GST – IBC INTERPLAY – A CRITICAL ANALYSIS ………………………………11

7. DISTRIBUTION MECHANISM OF ASSETS SALE PROCEEDS UNDER THE CODE…11

(I) Purpose of the code

POST LIQUIDATION IRRITANT – INTERPLAY BETWEEN IBC AND GST LAWS……..12

9. CASE LAW ………………………………………………………………………………….16

10. ANALYSING THE CURRENT POSITION ………………………………………………22

11.CONCLUSION ……………………………………………………………………….…….23

12. BIBLIOGRAPHY ………………………………………………………………………….23

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 SYNOPSIS

Title of the project :- GST V. IBC – An insight on juxtaposition

Aim of the Study:

The study's goal is to learn about the GST and IBC position

Significance of the Study:

This project specifically deals with the overall content of the GST and IBC briefly

Scope of the Study:

The scope of the study is confined only to the GST and IBC; How those are different

Research Methodology:

This project shall be done by following the doctrinal research of study by referring to certain
acts, articles, journals and judgment.

Hypothesis:

Whether the outbreak of novel coronavirus (COVID-19) has resulted in uncertainty for
individuals and businesses; how it dealt with the current situation.

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 INTRODUCTION

India's preferred taxation scheme is separated into sorts of taxes: direct taxes and oblique taxes.
Direct taxes are the ones charged at the earnings of people and different entities, while oblique
taxes are the ones levied at the sale or buy of products and offerings. In the case of direct taxes,
the weight of paying tax falls immediately at the person or assessee. In the case of oblique taxes,
however, the responsibility of gathering and depositing tax falls at the dealers of products and
offerings in place of on human beings or customers. The Indian Constitution offers the Central
and State Governments the authority to levy and gather taxes.1

Numerous changes have been made to various laws in order to achieve the objectives of the IBC,
such as the Companies Law, the 1993 Law on the Collection of Receivables Due to Banks and
Financial Institutions (RDBFI), securitization and the reconstruction of financial assets and the
enforcement of the 2002 Law on Security Interests (SARFAESI), and so on. The Income Tax
Act is also one such regulation that has undergone revisions to keep the provisions in
compliance with the Bankruptcy and Bankruptcy Code. Therefore, it is necessary to study the
relationship between the IBC and the Income Tax Act in order to assess its impact not only on
taxpayers but also on other stakeholders in the business sector, such as taxpayers. creditors,
corporate debtors, resolution seekers. liquidator. light on the interaction between the two
executives with particular attention to the Leo Edibles and Fats Ltd. case. vs. The Tax
Collection Officer (Central) IT Service

THE INTERPLAY BETWEEN IBC AND INCOME TAX LAWS

The key point to consider when considering the interaction between IBC and income tax laws is
whether the IBC has an advantage over any income tax rule. , that is, whether the provisions of
the IBC will have priority effect in the event of conflict with income tax laws. examining this
issue through the lens of Section 238 of the IBC. This section contains2 -

1
https://www.taxmann.com/research/indian-acts
2
https://www.grantthornton.in/insights/articles/impact-of-gst-on-companies-under-ibc/
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"The provisions of this Code have effect, notwithstanding anything to the contrary contained in
any other law currently in force or in any instrument having effect by virtue of this law".

In order to determine whether the terms of the IBC will prevail over the provisions of the tax
laws, one must rely on a landmark decision of the Supreme Court of India. In the case of Pr
Commissioner of Income Tax v. Monet Ispat and Energy Ltd., the Supreme Court ruled that
Section 238 of the IBC takes precedence over anything inconsistent in any law, including the
Income Tax Act. the Limitation Act, 1963 to various proceedings under the IBC has been the
subject of much discussion.

The Limitation Act provides a specific time limit for limiting the various stages of legal action
as well as other proceedings.In Speculum Plast Private Limited v. PTC Techno Private Limited,
Parag Gupta and Associates v. BK Educational Services Private Limited and Ashlay
Infrastructure Private Limited v. LDS Engineers Private Limited and Innoventive Industries
Limited v. ICICI Bank and Anr, the National The Tribunal of the Company Law Appeal Board
(NCLAT) collectively held that in the absence of specific provisions relating to the applicability
of the limitation period to proceedings under the IBC, it is open to the courts to analyze and
decide whether or not the limitation period applies to such proceedings.Such a decision would
have led to the accumulation of insolvency claims and other related lawsuits and appeals. To
avoid this, section 238A has been included in the Bankruptcy and Bankruptcy Code. This section
provides that 3 –

"The provisions of the Limitation Act of 1963 apply, to the extent possible, to proceedings or
appeals before the judicial authority, the national company law appeals tribunal, the debt
collection tribunal or the court. debt collection appeal, as the case may be.

"This section clearly implies that the limitation period applies as soon as a procedure is
established before any authority. It also shows how the laws are interconnected, the statute of
limitations being linked to the bankruptcy code and the implication of insolvency with income
tax law creates a relationship between the different legislations.

3
https://blog.ipleaders.in/juxtaposition-income-tax-laws-insolvency-bankruptcy-code-2016/
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GST vs IBC – An insight on juxtaposition

The GST in India has encountered many challenges since its implementation in the country.
There are many legislative and procedural issues that have plagued businesses for some time.
The liability and compliance of entities with regard to the GST under the Bankruptcy and
Bankruptcy Code, 2016 (IBC) has generated great confusion and uncertainty in the business,
which has led to a conflict of laws and, subsequently, to thwart the spirit and purpose of the
legislative process..4

The intention and purpose of the IBC legislation is to come up with a resolution plan with the
relaunch of the industry that is falling into oblivion. According to the IBC, the corporate
insolvency resolution process (CIRP) is initiated with the default of a certain threshold amount
and the management of this matter (debtor company) and its activities are entrusted to a
resolution professional. . temporary (IRP) or to a resolution professional. (RP), if applicable.
Subsequently, the IRP / RP is responsible for complying with the requirements of the GST law.

However, there can be many cases of litigation or non-payment on the GST fronts for legitimate
reasons. In a positive gesture, with the intention of bringing certainty and clarity to the issues,
the CBIC provided some clarification that it saw. As for the CIRP entity, this entity ultimately
continues to manage the business and operates continuously until the resolution of the insolvency
proceedings.However, the difficulty lies in the applicability of article 148 of the CGST law and
in compliance with the procedure provided for therein. To facilitate understanding, the
provisions of article 148 of the law are extracted below;

“The government may, on the recommendation of the Council and subject to the conditions and
guarantees which may be prescribed, notify certain categories of registered persons and the
particular procedures to be followed by these persons, in particular those relating to registration,
provision of the declaration, payment of taxes and administration of these persons ”.In view of
the ongoing debate on the matter as described above, in order to allay the fear of conflicts in

4
Bhumika Indulia, Interplay between tax laws and IB Code during liquidation, SCC Blog
(2021), https://www.scconline.com/blog/post/2021/01/23/interplay-between-tax-laws-and-ib-
code-during-liquidation/ (last visited Aug 20, 2021).

7
related provisions, the CBIC has prescribed certain procedures in order to ensure uniformity in
the implementation of the provisions. for debtor companies subject to the CIRP in accordance
with the provisions of the IBC With the aforementioned circular of 23.03.2020 many
fundamental questions have been clarified as indicated above. The new system for entities
subject to the CIRP is clarified. It is clarified how GST allowances are to be treated for the pre-
CIRP period for better clarity and understanding.

Regarding the release of TPS quotas, it is specified that no coercive action may be taken against
the debtor company with reference to the quotas relating to the period prior to the date of the
start of the insolvency or the pre-insolvency period.Allocations from the preCIRP period will be
treated as an “operational debt” and related requests may be submitted by the agent to the NCLT
in accordance with the provisions of the IBC. In addition, it is very important to remember that
Article 14 of the IBC imposes the imposition of a moratorium period, during which the initiation
of legal actions or the continuation of actions or pending proceedings against the debtor
company is prohibited.5

Although the aforementioned circular is intended to address some of the concerns of CIRP
entities, particularly regarding the cancellation, filing of returns or the adoption of enforcement
action by the GST service to prosecute GST defaults, however, it does not contain any clarity.
some issues such as how to deal with credit accumulated under current / old membership. It is
not clear whether it can be transferred to the new registration and used by the IRP / RP to make
the payment of taxes. In a similar case, the Rajasthan High Court recently settled and resolved
disputes by eliminating areas of confusion over GST liability during the CIRP.

A written petition presented by Ultra Tech Nathdwara Cement Ltd (formerly Binani Cements
Ltd) injured by notices of complaint issued from time to time by the GST Department
(Respondent) for the period of April 2012 to June 2017 or before the plaintiff is not taking on
the company in a proceeding under the Bankruptcy Code 2016. Now the question raised by the

5
Insolvency and Bankruptcy Code beyond the Tip of the Iceberg, a Deloitte Research Study,
accessible at <https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/in-tax-ibc1-
noexp.pdf>.

8
High Court of Honorable Members was the validity of the compensation claim raised by the
GST department after the approval of the resolution plan.6

The High Court of Rajasthan in Ultra Tech Nathdwara Cement Ltd v. Union of India has found
that once the complainant's resolution offer is accepted and the resolution plan approved by the
competent authority, it is binding on all interested parties. in which the sector company could
have legal interests. No right of hearing is granted in the resolution procedure to the operating
creditor, that is to say the State. or the state government. As part of the resolution plan with the
revival of the industry at the request of the resolution applicant, their rights have been secured
up to Rs. 72 crore, which is assessed by the resolution professional and has already been filed by
the requester for a positive resolution. . Consequently, the defendant, that is to say the service of
the GST, would have acted in a completely illegal and arbitrary manner by lobbying for the
requests raised in view of the disputed opinions and for any other requests which it could take.
into consideration for the period preceding the conclusion of the resolution plan.Notice of claim
is considered illegal, arbitrary and exfacie lost and may not be retained.7

Therefore, the Rajasthan High Court ruled that the claims made against the disputed opinions in
the written proceedings were illegitimate and arbitrary. As a result, the notices and request orders
and other requests pending on the date of conclusion of the resolution plan issued / extended by
Agenzia delle Entrate Beni e Servizi are canceled and canceled. The relative extract of the
sentence follows;

"... operational creditors, that is, the commercial tax service of the central government or the
state government, as the case may be, have no right of hearing. the law is very clear that he
intends to revive the dying industry offering an opportunity for a resolution seeker to take over
and initiate the operation on a clean slate.

It can be pointed out here that the amount of Rs.72 crore assessed by the resolution practitioner
in favor of the GST department agreed that it has already been deposited by the person entitled
to termination or by the requesting company.The demand notices are ex-facie illegal, arbitrary
and per-se and cannot be sustained."

6
http://www.lawstreetindia.com/experts/column?sid=324
7
https://cleartax.in/s/gst-compliance-company-insolvency-bankruptcy
9
It is clear that the government is doing everything it can to resolve disputes and achieve
legislative harmonization by amending various laws and promulgating clarifications, but the
contribution of the judiciary to ensuring safety and fairness is also commendable. confusion as to
the applicability and supremacy of GST and / or IBC or any other act, however, a decision such
as that of the High Court of Rajasthan as mentioned above would certainly provide the necessary
clarity on ambiguous questions.

In conclusion, it can be said that in the long term, the government will need to be more careful
and pragmatic in drafting laws in order to minimize conflicting provisions across the legal
spectrum. It is hoped that the CBIC circular and the current ruling of the High Court of the
Honorable Rajasthan will provide clarity and certainty on the issue of the GST obligation when
challenged by the IBC. Finally, in order to fulfill the purpose and spirit of the law in the country,
the juxtaposition of GST and IBC must prevail.8

IMPACT OF GST ON COMPANIES UNDER IBC

The Indian government has announced several relief measures in light of the coronavirus
pandemic, which has affected businesses and economies around the world. been revised to INR 1
crore from INR 1 lakh.

To overcome and simplify compliance under the Goods and Services Tax (GST), the government
has prescribed special procedures under the Goods and Services Tax Act for debtor businesses
making the subject to a Corporate Insolvency Resolution Process (CIRP) under the provisions of
the IBC and whose business is handled by an Interim Resolution Professional or a Resolution
Professional.9

This publication explains some of these clarifications and challenges faced by debtor companies
and interim resolution professionals or resolution professionals, with our perspective in
accordance with procedures introduced by the Ministry of Finance to ensure compliance with
the GST of debtor companies subject to the CIRP.
8
Civil Writ Petition No. 9480/2018, Rajasthan High Court (Jodhpur Bench) - 2020-TIOL-760-
HC-RAJ-GST
9
Bankruptcy Law Reforms Committee, Volume I "Report of the Bankruptcy Law Reforms
Committee" (November, 2015)
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THE GST – IBC INTERPLAY – A CRITICAL ANALYSIS

When a business becomes insolvent, many problems arise. The government issued the
Insolvency and Bankruptcy Code, 2016 ("the Code") to address these issues and make the
process smoother. Unfortunately, the government often fails to draft various related laws well.

The problem that arises today is the interaction between the Code and the Goods and Services
Tax ('GST') laws. Recently, companies in the process of resolving insolvency are at an impasse
due to the restriction under Article 39 (10) of the Central Goods and Services Tax Law of 2017
(“Law CGST ”). Businesses have no choice but to go to court for a resolution.10

DISTRIBUTION MECHANISM OF ASSETS SALE PROCEEDS UNDER THE CODE

The Code provides for a mechanism for distributing the proceeds from the sale of assets during
bankruptcy proceedings. Typically, a business in the process of resolution has liabilities greater
than its assets.

The liquidator is an insolvency professional to whom the Code confers all decision-making
powers. Article 35 of the Code, relating to “Powers and duties of the Liquidator”, also includes
the liquidation of creditors' claims as one of the duties of the Liquidator.

The Code also provides for the order of distribution of the proceeds of the sale of goods
regardless of what is contrary to any other law. Upon liquidation by sale of the active
company, the obligation to pay the debts due does not pass to the Purchaser. In fact, the Buyer
only purchases the goods.The liquidator remains responsible for settling past debts. As a
corollary, the Purchaser is not legally bound to pay due compensation.

PURPOSE OF THE CODE

In the 2015 budget speech, Shri.Arun Jaitley discussed the goal of making bankruptcy laws a
priority area to improve the ease of doing business in India. The report led to the publication of

10
Hindustan Lever Ltd. v. State of Maharashtra & Ors., (2004) 9 SCC 438; Vadilal Dairy
International Ltd. v. State of Maharashtra, 2009 (111) Bom LR 3585

11
 the Code in May 2016. The objective of the Code is “to consolidate and modify the laws relating
to the reorganization and insolvency of legal persons, companies and individuals in a binding
manner”.

The Code facilitates the Company's business operations by codifying the insolvency resolution
process. Good insolvency law contributes to the rapid realization of assets, the systematic
distribution of income among claimants, and minimal disruption to the business of the company.
The Code has undergone several modifications since May 2016.This demonstrates the serious
intention of the central government to make timely changes based on the number of issues that
arise from time to time.11

POST LIQUIDATION IRRITANT – INTERPLAY BETWEEN IBC AND GST LAWS

Section 39(10) of the CGST Act bars a registered person from furnishing its return for a tax
period if it has not furnished all the returns for previous tax periods. 

Is the restriction under Section 39(10) invalid? NO 

This restriction is indeed valid as the lawmakers are empowered to put such restrictions to ensure
compliances under the GST laws. However, it is unfortunate that the GST laws do not contain
specific provisions for payment of taxes in insolvency situations provided under the Code. The
Government would have done well to align the Code and GST laws. 

Section 82 and 93 of the CGST Act - Do they show inherent inconsistency in the GST laws?
YES 

Section 82 and 93 of the CGST Act contains specific provisions where the GST laws have been
aligned with the Code. These are:12 

 Tax to be first charge on property(Section 82)

12
Sahoo, M.S. "Resolution: The Soul of IBC", Insolvency and Bankruptcy News, October-
December, 2017

12
 Partition of HUF & AOP, dissolution of Firm, termination of Guardianship & Trust 

While the aforesaid provisions deal with specific situations, the lawmakers have failed to align
GST return filing mechanism with the Code. 

Despite the Code providing a clear moratorium for the Buyers from paying dues (including GST)
for the past period, the above restriction is forcing the Buyer not to file current GST returns as
well. The Buyers have been left with no option except to challenge this restriction in the Courts
being contrary to the Code. 

This issue will not only result into blockage of working capital of the Buyers but also defeats the
entire foundation of insolvency resolution concept in India. Ultimately, it would add to
difficulties in doing business as opposed to promoting ease of doing business in India. 

This very issue (if not addressed soon) is capable of derailing the unbeatable development of the
Code in India. The Government should immediately introduce an exception in the GST laws to
enable the Buyers to file present and future GST returns irrespective of payment of past GST
dues.13

Notwithstanding anything to the contrary contained in any law for the time being in force, save
as otherwise provided in the Insolvency and Bankruptcy Code, 2016, any amount payable by
a taxable person or any other person on account of tax, interest or penalty which he is liable to
pay to the Government shall be a first charge on the property of such taxable person or such
person.”14
 Financial creditor: One who lent money to a company for interest
 Operational Creditor: One who is a creditor in business dealing with the company. e.g. the
vendors, tax authorities, employees
 Corporate Debtor: The company itself can also go for its own liquidation.

Section “238 of IBC provides for its overriding nature on any other law for the time being in
force. It will provide immunity from any proceeding in any Law.

13
Statement of Objects and Reasons to the Insolvency and Bankruptcy Code (Amendment) Bill,
2019, note 3(f)
14
Ministry of Corporate Affairs, Press Release, Jul. 17, 2019
13
“The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith
contained in any other law for the time being in force  or any instrument having effect by
virtue of any such law.”
ULTRATECH NATHDWARA CEMENT LTD., (formerly known as binani cement ltd):

In this case, notices were issued for the dues of Binani Cement. The demand was made after
taking over of Binani Cement by Ultratech. Binani Cement suffered huge losses and their
financial creditor Bank of Baroda preferred an insolvency application. After the due process of
insolvency, NCLAT approved the proposal of Ultratech, to take over Binani Cement. Later on,
the department issued notices due to tax. The appellant filed an appeal under Article 226 of the
constitution of India. Once the resolution plan is approved, there can be no further demand.
Applicant request to quashed the notices and bar any further issuance of notices.15

Information Utility & lodgment of Default under IBC, 2016

SLP filed by the department in Supreme Court was also mentioned. 

Then amendment in section 31 of IBC specifically covers the central and state government. The
resolution plan once approved will be binding on all financial creditors, operation creditors,
central and state governments. This provision was amended. Read the bold and underlined part.
It is the change incorporated in section 31 of IBC. Even if is not amended, Tax authorities are
fairly covered by the operational creditors. Section

Also, the FM in her speech for this amendment ensured the immunity to the resolution applicant
from any dues or liabilities.

Finally, after all these arguments, the honorable Rajasthan high court decided in favor of the
applicant.

15
The Constitution of India, art. 254(1); I. T. C. Limited v. Agricultural Produce Market
Committee & Ors., Appeal (Civil) 6453 of 2001, Supreme Court of India

14
Electrosteel steels limited V. The state of Jharkhand :

Although in this case also demand was raised by the VAT dept. But it has some differences. In
this case, garnishee proceedings were started. The Bank of the insolvent company was asked to
pay.

Three important stands taken by the authorities were

The tax authorities claimed that their dues are not an operational debt. they are not covered by
the term operational creditors. The rationale behind it was.(Para 23)

This Tax liability can very well be treated as the amount of tax already realized by the petitioner
Company from its customers, on behalf of the State Government, and not the direct debt of the
petitioner Company towards the State Government, in which case the tax liabilities of the
petitioner Company, for realising which the impugned garnishee order has been issued, may not
come within the definition of “operational debt”, as defined in the IB Code.
 The resolution plan is not binding on state tax authorities.
The adjudicating authority is required to make a public announcement of the initiation of ICRP
and invite claimed. This was not done in the present case. Section 13 of the IBC Code provides
for this communication immediately. But in the current case, the announcement was made in the
area of Kolkata and nit in Jharkhand. Regulation 6 of  Insolvency and Bankruptcy Board of India
(Insolvency Resolution Process for Corporate Persons) Regulations, 2016, provide for the
detailed procedure of this public announcement.16

Leo Edibles & Fats Ltd. v. The Tax Recovery Officer (Central) IT Dept. 

Facts of the case

The petitioner, that is, Leo Edibles & Fats Ltd. filed a petition before the High Court. The
petition was filed on the grounds that the sub-registrar of Erragadda, Hyderabad did not register
16
Explanatory Notes to the United Kingdom Finance Bill, 2020, cl. 95 note 13

15
its purchase of an immovable property when the liquidation proceedings were going on for VNR
Infrastructures Limited during the time when the IT department claimed charge over such above-
mentioned property which was preceded by an earlier notice of attachment for dues of taxation
by the corporate debtor, i.e., VNR Infrastructures Limited.

Following the order of liquidation by the corporate debtor which was passed by the NCLT
Hyderabad, a liquidation estate was formulated. After the estate being declared as a liquidation
estate, assets belonging to the corporate debtor were sold through the platform of e-auction. This
was when the petitioner bought an asset as he was the highest bidder of a property. Subsequently,
the petitioner paid 25 per cent of the total amount as consideration and the rest of the amount
would be paid within 15 days. Later, he got to know that the property which was bought by him
through the e-auction was attached by the IT Department and therefore the petition was filed by
the petitioner.17

Judgement of the court

The court ordered the petitioner to deposit the rest of the amount for the balance sale
consideration with a condition that the liquidator was not to spend any amounts on any pending
orders further on. The court also directed the sub-registrar to register the property in the favour
of the petitioner and the IT department was instructed to submit the claims according to Section
53 of the Insolvency and Bankruptcy Code.18

Relation of the Income Tax Act, 1961 and Insolvency and Bankruptcy Code with this case

 Section 178 of the Income Tax Act, 1961 suggests the way the income-tax
department shall recover the amount which according to the assessing officer would
be enough to provide for tax during the process when the company is under
liquidation. Section 178(6) gives effect to this section. Section 178 was effectively

17
United Kingdom Draft Finance Bill, 2020, cl. 95, 96

18
S.O. 2953(E), Aug. 16, 2019
16
 not used in this case because the registrar did not register the claims that were put
forth by the petitioner with regards to the property which was bought by the
petitioner. In the judgement as well, the court gave direction to the registrar to register
the property and decided pertaining to the same in favour of the plaintiff, to calculate
the taxable amount of the liquidator company.

 Section 238 of the Insolvency and Bankruptcy Code, 2016, states that the provision of
act shall have supremacy over the other laws, which means that the applicability of
Section 178 of Income Tax shall not supersede the Insolvency and Bankruptcy Code,
2016.

 Section 53(1) of the Code lays down a ‘waterfall mechanism’, which states the
priority according to which debt is to be paid.
“53. (1) Notwithstanding anything to the contrary contained in any law enacted by the
Parliament or any State Legislature for the time being in force, the proceeds from the sale of the
liquidation assets shall be distributed in the following order of priority and within such period
and in such manner as may be specified, namely:19 —

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following: —

(i) workmen’s dues for the period of twenty-four months preceding the liquidation
commencement date; and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security
in the manner set out in section 52;

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve
months preceding the liquidation commencement date;
19
Bankruptcy Law Reforms Committee, "Interim Report of the Bankruptcy Law Reforms
Committee" p.no. 96 (February, 2015)

17
(d) financial debts owed to unsecured creditors;

(e) the following dues shall rank equally between and among the following: —

(i) any amount due to the Central Government and the State Government including the amount to
be received on account of the Consolidated Fund of India and the Consolidated Fund of a State,
if any, in respect of the whole or any part of the period of two years preceding the liquidation
commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of
security interest;

(iii) any remaining debts and dues;

(iv) preference shareholders, if any; and

(v) equity shareholders or partners, as the case may be.”

The debt owed by the income-tax department is not secured and the amount has to go through
the consolidated fund of the respective state. Hence, no priority per se needs to be given to the
Income Tax department and the waterfall mechanism must be complied with.

 The Income Tax department stated that Insolvency and Bankruptcy code did not
apply to them but the fact that Section 14 of the code states that the moratorium starts
as soon as there is an initiation of liquidation.

Sections 178 and 179 of Income Tax Act, 1961 versus Section 53 of IBC

The interplay between Sections 178 and 179 of the Income Tax Act and Section 53 of IBC led to
arising of certain issues during the process of liquidation proceedings of various corporations

18
under the Code. The issues pertained to the levying and collection of taxes while the corporate
debtor was under liquidation and insolvency resolution was under process. For the purpose of
understanding the aspects relating to the relationship between these provisions, one needs to
resort to the cases in which such issues first arose.20 

1. One such case is that of LML Ltd., In re, in which the issue that arose was that “under
which ‘head’ will the payment of capital gain tax on the sale of assets of the corporate
debtor during liquidation fall into.” There were two options under consideration for
the same, including the tax under the “liquidation expense” or making it as creditor’s
due which would then come under “operational debt”. 
The National Company Law Tribunal (NCLT) held that such tax must fall under the purview of
operational debt and the same is liable to be recovered in accordance with the waterfall
mechanism which has been provided under Section 53 of IBC. The reasoning behind such a
ruling of NCLT could be found in Section 178 of Income Tax Act, 1961 which talks about
“company in liquidation”. Sub-clause (6) of Section 178 was taken into consideration for
deciding this case. It reads as, “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.” The court was of the opinion that the
intention of the legislature behind amending this clause of Section 178 was to give an overriding
effect to the provisions of IBC, i.e., Section 53 in this case, over Section 178 of the Income Tax
Act, 1961.

It is pertinent to note here that the legislature did not amend Section 179 but only amended
Section 178. Section 179 provides for the liability of directors of a private company in liquidity
in their personal capacity. It provides that, “where any tax is due from a private company and if
the same could not be recovered, then, every person who was a director of the private company
at any time during the relevant previous year shall be jointly and severally liable for the payment
of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect,
misfeasance or breach of duty on his part in relation to the affairs of the company.”

United Nations Commission on International Trade Law, "Legislative Guide on Insolvency

Law" (August, 2005)
19
 1. Another similar issue was discussed in the case of Pooja Bahry, In re (Liquidator v.
Gee Ispat Pvt. Ltd.). In this case, the liquidator sold off a few properties that were
given up by the secured creditors and the issue that came up was that, whether that
liquidator was required to deposit “capital gains” out of the proceeds of the sold
properties and whether that can be included within the “liquidation cost”. The NCLT
held that the tax on the gains coming from the sold properties was required to be
distributed according to the “waterfall mechanism” under Section 53 of IBC.21

TDS versus Section 53 of IBC

In the case of Om Prakash Agarwal v. CIT (TDS), the issue in the hand of the Tribunal was that
pertaining to deduction of TDS by the successful bidder who had obtained the bid in favour of
himself against one of the assets in liquidation. The liquidator approached the NCLT in order to
prevent the bidder from deducting TDS while making the payment for that asset. 

The NCLT, however, rejected the petition and held that the overriding effect as provided under
Section 238 would only be applicable to issues pertaining to creditor and debtor and it won’t
include issues pertaining to TDS deductions. The reasoning given by the Tribunal was that TDS
deduction would not amount to “payment of dues to the government in priority to other
creditors” because of the fact that it cannot be considered to be a tax demand or realization of tax
by the government as the government is not levying any tax on the corporate debtor. 

It is rather the duty of the purchaser to credit the TDS in pursuance of his purchase to the Income
Tax Department. Hence, the NCLT observed and held that Sections 53 and 238 of IBC would
not be applicable in the cases concerning TDS deductions.22
21
Bankruptcy Law Reforms Committee, Volume I "Report of the Bankruptcy Law Reforms
Committee" para. 5.5.8 (November, 2015)

22
Bankruptcy Law Reforms Committee, "Interim Report of the Bankruptcy Law Reforms
Committee" p.no. 97 (February, 2015)

20
OTHER ISSUES

In addition to the issues that have been discussed above, there exist several other issues and
inconsistencies that may arise while the insolvency resolution process of the corporate debtor is
in progress or even during the course of liquidation proceedings.

One of those inconsistencies lies under Section 5(13) of IBC which defines the term “insolvency
resolution process costs”. It refers to the costs that are incurred by the resolution professional
while the resolution process is going on. It also includes other costs such as fees payable to a
resolution professional, costs incurred while carrying out the business activities of the corporate
debtor, etc. The main issue pertains to levying taxes on all such expenses as to whether an
expense would fall under the ambit of “capital expenditure” or “revenue expenditure.” The same
was dealt with in the case of CIT v. Akzo Nobel India Ltd. In this case, it was held that the costs
of restructuring shall be classified as revenue expenditure and shall be taxed accordingly.

Another issue arises in relation to Section 56(2)(x) of the Income Tax Act, 1961. This section
levies taxes on “gifts” and provides that if a person receives a property, except for immovable
property, as a gift, in exchange for a consideration which is very less than the “fair market value”
of that property by more than fifty thousand rupees, then that person would be liable to pay
income tax on for that property and it will be chargeable under the head “income from other
sources”. The issue arises in the case of a corporate restructuring process when “lenders convert
their outstanding loans into the equity of the borrower company at a price which is less than the
prescribed fair market value of such shares.”

ANALYSING THE CURRENT POSITION

The Insolvency and Bankruptcy Code was enacted for the purpose of making laws for the
rehabilitation of the corporate debtor and reorganisation of the business of the corporate debtor.
It also serves the purpose of carrying out insolvency resolution proceedings in a time-bound
manner so as to protect the interests of all the stakeholders. The IBC provides that once the
resolution plan has been approved by the adjudicating authority after the approval of the

21
committee of creditors, the same is considered to be binding on all the stakeholders who have a
stake in the resolution plan. This would also apply to any governmental authorities on whom any
taxes are due. The decision as to whether priority must be given to the statutory dues rests with
the committee of creditors and after that, the adjudicating authority has the option to consider it
in the resolution plan.23

The issues that have been discussed above clearly reflect the inconsistencies of various income
tax laws in relation to various provisions of IBC and even the objective behind the enactment of
IBC. There are still certain challenges and inconsistencies that need to be settled in order to
avoid any conflicts between the two laws. It can very well be conclusively settled that the laws
relating to taxation have taken a secondary spot when in conflict with the provisions of IBC.
However, Section 179 of the Income Tax Act, 1961 still implies that in case the directors of a
company are personally liable to pay any taxes, then this liability would still exist for the period
of non-recovery of due taxes. Even if the dues are considered as a priority, it would be in
contradiction to the essence of Section 53 of the Code that provides for the “waterfall
mechanism” for the payment of dues and hence, it would then be considered as overriding the
rights of the secured creditors and would go against the objective of the statute. Therefore, the
tax dues are generally not considered as a priority over the dues to secured creditors and other
financial creditors as well.24

CONCLUSION

The interplay of all of the above-mentioned sections of IBC leads us to a perspective wherein it
becomes relevant to assess that the various aspects inherent to taxation cannot be estimated
solely by taking into account the analysis of income tax law due to the inadequacy that would
come along. Meaning thereby, that it would, therefore, be pertinent to look through the

23
Cork, Kenneth "Report of the Review Committee on Insolvency Law and Practice" (1982)
Cmnd 8558

24
R.K. Garg v. Union of India, - 2002-TIOL-1706-SC-IT-CB DG of Foreign Trade v. Kanak
Exports, - 2015-TIOL-275-SC-EXIM; Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India &
Ors., Writ Petition (Civil) No. 99/2018, Supreme Court of India
22
provisions of tax laws, not in a separate mechanism but in a way that it associates its relevance
with the insolvency and bankruptcy code. The above-mentioned inadequacy lies in the very fact
that ever since the IBC came into the picture, it has widened its scope by expanding its wings
into various other legislations.25

BIBLIOGRAPHY :-

1. www.taxmann.in
2. www.manupatra.in
3. www.livelaws.in
4. https://ibclaw.in/ibc-case-laws-subject/gst-vs-ibc/
5. www.lawjournal.in
6. www. blog.ipleaders.in
7. www.GST.in

25
Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., Writ Petition (Civil) No. 99/2018,
Supreme Court of India.
23
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