I bought a property at the liquidator's e-auction. The Income Tax Department had attached it before the liquidation started and the Sub-Registrar will not register my sale deed. Where do I stand?
Section 178 has no application at all to a liquidation under the Insolvency and Bankruptcy Code, so the department cannot claim the priority that s.178(3) and (4) would otherwise give it. The Income Tax Department is not a secured creditor; at best it has a charge under its attachment order in terms of s.281, and an attached asset still forms part of the liquidation estate under s.36(3)(b) of the Code. The department must file its claim with the liquidator and take its place in the s.53(1) waterfall.
Decided by the High Court (Sanjay Kumar J and T. Amarnath Goud J) on 2018-07-26, reported as Writ Petition No. 8560 of 2018 (High Court of Judicature at Hyderabad for the State of Telangana and the State of Andhra Pradesh). No law-report citation appeared in the text read.. It bears on section 178, section 281, section 222 of the Income Tax Act 1961, in Demand, Recovery & Stay matters.
This is the answer to the situation that stops a great many auction purchases dead: a pre-liquidation income-tax attachment sitting on the encumbrance register. The reasoning is that s.178(6) - which used to give the Income-tax Act overriding effect over any other law - now carries an express exception for the Insolvency and Bankruptcy Code, and once the source of the department's asserted secured status is excluded, nothing else confers it. The point about s.36(3)(b) is the practically decisive one: the liquidation estate expressly includes encumbered assets, so even if the attachment is an encumbrance it does not lift the property out of the estate. Read this with the resolution-plan line (Ghanashyam Mishra, and the entry on AMNS Khopoli): this decision is about liquidation under Chapter III, that line is about an approved resolution plan under s.31. The dating matters - the amendment to s.178(6) operates from 1 November 2016, so for a liquidation commenced before that date the pre-amendment s.178(6), which gave the Income-tax Act overriding effect, is what governs.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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VNR Infrastructures Limited went into liquidation under the Insolvency and Bankruptcy Code 2016, the proceedings having been initiated on 21 September 2017. The Income Tax Department had passed an attachment order over one of its immovable properties on 27 October 2016, to recover arrears exceeding Rs 100 crore, that is, before the insolvency proceedings began. The liquidator held an e-auction on 31 January 2018 at which the petitioner company was declared the highest bidder at Rs 11,55,00,000. When the petitioner presented the sale deed, the Sub-Registrar refused to register it because of the subsisting income-tax attachment. The petitioner moved the High Court.
By virtue of the amendment of s.178(6), the whole of s.178 has no application to liquidation proceedings initiated under the Code. The Income Tax Department does not enjoy the status of a secured creditor on a par with a secured creditor covered by a mortgage or other security interest who can avail s.52 of the Code; at best it can claim a charge under the attachment order in terms of s.281 of the Income-tax Act. Even if the attachment constitutes an encumbrance, s.36(3)(b) of the Code brings encumbered assets into the liquidation estate. The writ petition was allowed, the Sub-Registrar was directed to entertain and register the sale transaction effected by the liquidator in favour of the petitioner if not already done, and the Tax Recovery Officer was left at liberty to submit its claim to the liquidator, who must consider it in accordance with the priorities in s.53(1) of the Code.
The Court set out the scheme of s.178: sub-section (1) requires the liquidator or receiver to give notice of his appointment to the Assessing Officer within thirty days; sub-section (2) requires the Assessing Officer, after such inquiries as he thinks fit, to notify the liquidator within three months of the amount which would be sufficient to provide for tax then payable or likely to become payable; sub-section (3) forbids the liquidator, without the leave of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, from parting with any of the company's assets until notified, and requires him on being notified to set aside an amount equal to the amount notified; sub-section (4) makes him personally liable for the company's tax if he defaults. Sub-section (6), as it stood before amendment, gave s.178 effect notwithstanding anything to the contrary in any other law for the time being in force; after amendment it carries the exception 'except the provisions of the Insolvency and Bankruptcy Code, 2016'. From that the Court drew the conclusion that the whole of s.178 is out of the picture in a liquidation under the Code, and that if the only source for treating the Income Tax Department as a secured creditor is the language of s.178(3) and (4), those provisions stand excluded and the status cannot be conferred; the department must take its place in the order of priority in s.53(1). Turning to the attachment, s.36(3)(b) indicates in no uncertain terms that liquidation estate assets may or may not be in the possession of the corporate debtor, 'including but not limited to encumbered assets', so even if the attachment order constitutes an encumbrance it does not take the property out of s.36(3)(b).
It may however be noticed that by virtue of the amendment of Section 178(6) of the Act of 1961 by Section 247 of the Code read with the Third Schedule appended thereto, the whole of Section 178 has no application to liquidation proceedings initiated under the Code.
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Handle my notice → Ask a CA on WhatsAppSection 178 has no application at all to a liquidation under the Insolvency and Bankruptcy Code, so the department cannot claim the priority that s.178(3) and (4) would otherwise give it. The Income Tax Department is not a secured creditor; at best it has a charge under its attachment order in terms of s.281, and an attached asset still forms part of the liquidation estate under s.36(3)(b) of the Code. The department must file its claim with the liquidator and take its place in the s.53(1) waterfall. This was decided by the High Court (Sanjay Kumar J and T. Amarnath Goud J) and bears on section 178, section 281, section 222 of the Income Tax Act 1961. It is reported as Writ Petition No. 8560 of 2018 (High Court of Judicature at Hyderabad for the State of Telangana and the State of Andhra Pradesh). No law-report citation appeared in the text read.. This is the answer to the situation that stops a great many auction purchases dead: a pre-liquidation income-tax attachment sitting on the encumbrance register. The reasoning is that s.178(6) - which used to give the Income-tax Act overriding effect over any other law - now carries an express exception for the Insolvency and Bankruptcy Code, and once the source of the department's asserted secured status is excluded, nothing else confers it. The point about s.36(3)(b) is the practically decisive one: the liquidation estate expressly includes encumbered assets, so even if the attachment is an encumbrance it does not lift the property out of the estate. Read this with the resolution-plan line (Ghanashyam Mishra, and the entry on AMNS Khopoli): this decision is about liquidation under Chapter III, that line is about an approved resolution plan under s.31. The dating matters - the amendment to s.178(6) operates from 1 November 2016, so for a liquidation commenced before that date the pre-amendment s.178(6), which gave the Income-tax Act overriding effect, is what governs. If it applies to you, the first step is this: Check the date the liquidation or insolvency commenced against 1 November 2016; before that date the pre-amendment s.178(6) gave the Income-tax Act overriding effect and this reasoning does not run.
VNR Infrastructures Limited went into liquidation under the Insolvency and Bankruptcy Code 2016, the proceedings having been initiated on 21 September 2017. The Income Tax Department had passed an attachment order over one of its immovable properties on 27 October 2016, to recover arrears exceeding Rs 100 crore, that is, before the insolvency proceedings began. The liquidator held an e-auction on 31 January 2018 at which the petitioner company was declared the highest bidder at Rs 11,55,00,000. When the petitioner presented the sale deed, the Sub-Registrar refused to register it because of the subsisting income-tax attachment. The petitioner moved the High Court. The matter was decided on 2018-07-26 by the High Court (Sanjay Kumar J and T. Amarnath Goud J). On those facts the High Court held as follows. By virtue of the amendment of s.178(6), the whole of s.178 has no application to liquidation proceedings initiated under the Code. The Income Tax Department does not enjoy the status of a secured creditor on a par with a secured creditor covered by a mortgage or other security interest who can avail s.52 of the Code; at best it can claim a charge under the attachment order in terms of s.281 of the Income-tax Act. Even if the attachment constitutes an encumbrance, s.36(3)(b) of the Code brings encumbered assets into the liquidation estate. The writ petition was allowed, the Sub-Registrar was directed to entertain and register the sale transaction effected by the liquidator in favour of the petitioner if not already done, and the Tax Recovery Officer was left at liberty to submit its claim to the liquidator, who must consider it in accordance with the priorities in s.53(1) of the Code.
The Court set out the scheme of s.178: sub-section (1) requires the liquidator or receiver to give notice of his appointment to the Assessing Officer within thirty days; sub-section (2) requires the Assessing Officer, after such inquiries as he thinks fit, to notify the liquidator within three months of the amount which would be sufficient to provide for tax then payable or likely to become payable; sub-section (3) forbids the liquidator, without the leave of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, from parting with any of the company's assets until notified, and requires him on being notified to set aside an amount equal to the amount notified; sub-section (4) makes him personally liable for the company's tax if he defaults. Sub-section (6), as it stood before amendment, gave s.178 effect notwithstanding anything to the contrary in any other law for the time being in force; after amendment it carries the exception 'except the provisions of the Insolvency and Bankruptcy Code, 2016'. From that the Court drew the conclusion that the whole of s.178 is out of the picture in a liquidation under the Code, and that if the only source for treating the Income Tax Department as a secured creditor is the language of s.178(3) and (4), those provisions stand excluded and the status cannot be conferred; the department must take its place in the order of priority in s.53(1). Turning to the attachment, s.36(3)(b) indicates in no uncertain terms that liquidation estate assets may or may not be in the possession of the corporate debtor, 'including but not limited to encumbered assets', so even if the attachment order constitutes an encumbrance it does not take the property out of s.36(3)(b). In the words reproduced by the source cited on this page: "It may however be noticed that by virtue of the amendment of Section 178(6) of the Act of 1961 by Section 247 of the Code read with the Third Schedule appended thereto, the whole of Section 178 has no application to liquidation proceedings initiated under the Code."
It was decided by the High Court on 2018-07-26 and is reported as Writ Petition No. 8560 of 2018 (High Court of Judicature at Hyderabad for the State of Telangana and the State of Andhra Pradesh). No law-report citation appeared in the text read.. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 178, section 281, section 222, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. By virtue of the amendment of s.178(6), the whole of s.178 has no application to liquidation proceedings initiated under the Code. The Income Tax Department does not enjoy the status of a secured creditor on a par with a secured creditor covered by a mortgage or other security interest who can avail s.52 of the Code; at best it can claim a charge under the attachment order in terms of s.281 of the Income-tax Act. Even if the attachment constitutes an encumbrance, s.36(3)(b) of the Code brings encumbered assets into the liquidation estate. The writ petition was allowed, the Sub-Registrar was directed to entertain and register the sale transaction effected by the liquidator in favour of the petitioner if not already done, and the Tax Recovery Officer was left at liberty to submit its claim to the liquidator, who must consider it in accordance with the priorities in s.53(1) of the Code. It arises in Demand, Recovery & Stay matters, on section 178, section 281, section 222 of the Income Tax Act 1961, and was decided by Sanjay Kumar J and T. Amarnath Goud J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Get the liquidator to write to the Tax Recovery Officer inviting the claim under the Code, and put the department on notice that its remedy is s.53(1), not the attachment. If a Sub-Registrar refuses registration, produce the liquidator's sale certificate together with s.36(3)(b) of the Code - the encumbrance does not take the asset out of the liquidation estate. Do not concede the department is a secured creditor: make it identify the mortgage or security interest it says it holds, because an attachment order is a charge under s.281 and no more. Where the department has already sold or is proceeding under the Second Schedule after liquidation commencement, raise s.238 of the Code and this decision at once, before the sale is confirmed.
Validity check could not be completed. Validity check could not be completed. No search for later treatment of this decision, and no check for an appeal to the Supreme Court, was run. The current text of s.178(6) carried on the Income Tax Department's own section page (https://www.incometaxindia.gov.in/w/section-178-61) matches the amended text the Court applied, so the statutory premise of the decision still holds; but that is corroboration of the statute, not of the decision's standing. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment as read carries no paragraph numbers, so quotations are located by their place in the discussion rather than by number. The Court attributes the amendment of s.178(6) to 'Section 247 of the Code read with the Third Schedule appended thereto'; the batch brief attributes the change to the Finance Act 2018 with retrospective effect from 1 November 2016. Both point to the same operative date and the same words, and the current departmental text of s.178(6) reads '... except the provisions of the Insolvency and Bankruptcy Code, 2016' (https://www.incometaxindia.gov.in/w/section-178-61, which displayed no amendment footnotes). The attribution has since been settled from a primary source and the Court is right, not the brief: the Third Schedule to the Insolvency and Bankruptcy Code 2016, read with s.247 of the Code, is the instrument that inserted the words 'except the provisions of the Insolvency and Bankruptcy Code, 2016' after 'for the time being in force' in s.178(6) of the Income-tax Act 1961, and s.247 was notified into force with effect from 1 November 2016 by S.O. 3355(E). The 1 November 2016 date given in why_it_matters and in what_to_do is therefore sourced, and the brief's attribution of the change to the Finance Act 2018 should not be carried forward. The same judgment's account of s.178(1) to (5) was reproduced verbatim and is the source of the description of the liquidator's duties given here. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
By virtue of the amendment of s.178(6), the whole of s.178 has no application to liquidation proceedings initiated under the Code. The Income Tax Department does not enjoy the status of a secured creditor on a par with a secured creditor covered by a mortgage or other security interest who can avail s.52 of the Code; at best it can claim a charge under the attachment order in terms of s.281 of the Income-tax Act. Even if the attachment constitutes an encumbrance, s.36(3)(b) of the Code brings encumbered assets into the liquidation estate. The writ petition was allowed, the Sub-Registrar was directed to entertain and register the sale transaction effected by the liquidator in favour of the petitioner if not already done, and the Tax Recovery Officer was left at liberty to submit its claim to the liquidator, who must consider it in accordance with the priorities in s.53(1) of the Code.
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