NCLT Chandigarh: TDS Deduction on Interest Cannot Inflate Default to Trigger Insolvency Under IBC

NCLT Chandigarh: TDS Deduction on Interest Cannot Inflate Default to Trigger Insolvency Under IBC

Introduction

The National Company Law Tribunal dismissed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), holding that deduction of TDS on alleged interest cannot, by itself, be treated as acknowledgment of liability so as to cross the statutory threshold under Section 4 of the Code. The Bench relied on the ruling of the National Company Law Appellate Tribunal in P.M. Cold Storage Pvt. Ltd. Through IRP v. Goouksheer Farm Fresh Pvt. Ltd. (2022) and held that interest cannot be included solely on the basis of TDS deductions.

Factual Background

The petition was filed by Wild Dreams Trading Company Pvt. Ltd. seeking initiation of Corporate Insolvency Resolution Process (CIRP) against Ascendancy Financial Services Pvt. Ltd.

The Financial Creditor claimed a default of ₹1,07,44,700 as on September 30, 2024. It asserted that ₹2.32 crore had been disbursed to the Corporate Debtor in multiple tranches as financial assistance carrying interest. It was undisputed that ₹1.70 crore had been repaid, leaving an outstanding principal of ₹62 lakh.

To meet the ₹1 crore threshold prescribed under Section 4 of the IBC, the applicant sought to add accrued interest to the principal amount. In support, it relied on the deduction and deposit of TDS on the alleged interest component, contending that such deduction amounted to acknowledgment of liability towards interest.

Procedural Background

The matter was heard by a coram comprising Judicial Member Khetrabasi Biswal and Technical Member Shishir Agarwal. The Tribunal considered the pleadings and examined whether the alleged interest, supported primarily by TDS deductions, could be included to satisfy the minimum default requirement under Section 4 of the IBC. The Corporate Debtor opposed the petition, arguing that the principal outstanding was below the statutory threshold and that the Code could not be invoked as a recovery mechanism.

Issues

1. Whether deduction of TDS on alleged interest amounts to acknowledgment of liability.

2. Whether such interest can be added to the principal amount to meet the ₹1 crore threshold under Section 4 of the IBC.

3. Whether the petition under Section 7 was maintainable when the undisputed principal was below the statutory minimum.

Contentions of the Parties

The Financial Creditor contended that the Corporate Debtor had acknowledged liability towards interest by deducting and depositing TDS on the alleged interest payments. It argued that once such acknowledgment was demonstrated, the accrued interest could be added to the principal to cross the statutory threshold of ₹1 crore.

The Corporate Debtor submitted that the outstanding principal was only ₹62 lakh, which was below the statutory threshold. It argued that reliance on alleged oral understandings and TDS entries was insufficient to establish a financial debt of the requisite amount. It further contended that insolvency proceedings under the IBC cannot be used as a substitute for recovery proceedings.

Reasoning and Analysis

The Tribunal framed the core issue as whether interest, supported primarily by TDS deductions, could be included to meet the threshold requirement under Section 4. The Bench reiterated that deduction of TDS, by itself, cannot be treated as acknowledgment of liability towards interest. It also referred to the Kolkata Bench ruling in Sudarshan Paper & Board Pvt. Ltd. v. Verges Properties LLP, which held that TDS deduction on interest payable does not constitute acknowledgment of liability for the purpose of computing default.

Applying the settled position of law, the Tribunal held that the undisputed principal amount remained ₹62 lakh. Since the alleged interest could not be included merely on the basis of TDS deductions, the statutory requirement under Section 4 of the IBC was not satisfied. The Bench emphasised that insolvency proceedings are not intended to serve as recovery mechanisms and that strict compliance with the statutory threshold is mandatory.

Decision

The NCLT Chandigarh dismissed the Section 7 petition, holding that deduction of TDS on alleged interest cannot, by itself, be treated as acknowledgment of liability to include such interest for the purpose of crossing the ₹1 crore threshold under Section 4 of the IBC. Since the principal default was below the statutory minimum, the petition was not maintainable.

In this case the appellant was represented by Amitabh Tewari and Satvik Bansal, Advocates. Meanwhile the respondent was represented by Vaibhav Sahni, Advocate.