TDS Amounts Deducted Before Liquidation Are Assets Held in Trust for Government, Excluded from Liquidation Estate: NCLT

TDS Amounts Deducted Before Liquidation Are Assets Held in Trust for Government, Excluded from Liquidation Estate: NCLT

Introduction

The National Company Law Tribunal (NCLT) Bengaluru bench has held that unremitted Tax Deducted at Source (TDS) amounts deducted by the corporate debtor before liquidation are assets held in trust for the government and therefore stand excluded from the liquidation estate under Section 36 of the Insolvency and Bankruptcy Code, 2016 (IBC).

Factual Background

The liquidation proceedings were initiated against Bhuvana Infra Projects Pvt. Limited on December 10, 2019. The Income Tax Department filed a claim as an Operational Creditor, which was admitted. Based on subsequent assessment and TRACES demands, the department filed an updated claim in November 2023, which was rejected by the liquidator due to delay and the advanced stage of the liquidation.

Procedural Background

The Income Tax Department filed an application before the NCLT seeking to allow its delayed claim and direct the liquidator to verify and remit the TDS amounts directly to the government. The department submitted that the TDS deductions constitute public money held in trust for the government and therefore are excluded from the liquidation estate.

Issues

1.  Whether unremitted TDS amounts deducted by the corporate debtor before liquidation are assets held in trust for the government and excluded from the liquidation estate?
2.  Whether the delayed claim filed by the government should be allowed?

Contentions of the Parties

Appellant's Contention: The Income Tax Department submitted that the TDS deductions constitute public money held in trust for the government and therefore are excluded from the liquidation estate. The delay in filing the claim was due to pandemic disruptions and absence of communication.

Respondent's Contention: The respondent submitted that the liquidation is at an advanced stage, and belated claims can disrupt the time-bound process under the IBC. It was also submitted that the government does not get priority under Section 53 of the IBC.

Reasoning and Analysis

The bench of Shri Sunil Kumar Aggarwal, Member (Judicial) and Shri Radhakrishna Sreepada, Member (Technical) drew a distinction between TDS liabilities arising before and during liquidation. It held that Section 36(4)(a)(i) of the IBC expressly excludes from the liquidation estate 'assets held in trust for any third party.' The Tribunal further held that property held in a fiduciary capacity is not applicable to the assets of the corporate debtor.

Decision

The NCLT allowed the delayed claim filed by the government and directed the liquidator to verify and remit the TDS amounts directly to the government. However, the Tribunal clarified that for any other tax/government dues or for additional liabilities relating to periods after commencement of liquidation, no deviation can be allowed from the priorities and distribution prescribed under Section 53 of the IBC.

Implications

The judgment highlights the importance of distinguishing between assets held in trust and those that form part of the liquidation estate. It also underscores the need for timely filing of claims and the priority of government dues in the distribution of assets under the IBC.