NCLT Bengaluru: Unremitted Pre-Liquidation TDS Held In Trust For Government, Excluded From Liquidation Estate
Pranav B Prem
The National Company Law Tribunal (NCLT), Bengaluru Bench comprising Shri Sunil Kumar Aggarwal (Judicial Member) and Shri Radhakrishna Sreepada (Technical Member) has held that unremitted Tax Deducted at Source (TDS) amounts deducted by a corporate debtor prior to liquidation are assets held in trust for the Government and do not form part of the liquidation estate under Section 36(4)(a)(i) of the Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal directed the Liquidator to verify and remit such amounts directly to the Income Tax Department after condoning the delay in filing of the claim.
Background
The liquidation proceedings against M/s. Bhuvana Infra Projects Pvt. Ltd. were initiated by an order dated 10.12.2019, and Mr. Vijay Pitamber Lulla was appointed as the Liquidator. The Income Tax Department, treating itself as an Operational Creditor, filed its initial claim, which was admitted. However, based on subsequent assessments and TRACES records, the Department filed an updated claim in November 2023 seeking recognition of additional TDS dues amounting to ₹59,43,080/-, representing sums deducted but not remitted prior to the commencement of liquidation.
The Liquidator rejected the claim on the ground that it was filed after a delay of 1,423 days, contending that the liquidation process was already at an advanced stage and that the IBC mandates a time-bound resolution. Aggrieved by this decision, the Income Tax Department moved the NCLT seeking condonation of delay and appropriate directions for consideration of its updated claim.
Applicant’s Contentions
The Department contended that the TDS deductions constituted “public money” held in trust for the Government, which by operation of law could not form part of the liquidation estate. Referring to Section 36(4)(a)(i) of the IBC, the Department argued that assets held in trust for third parties are expressly excluded from the liquidation estate. It further submitted that the delay in filing the updated claim was not deliberate but occurred due to pandemic-related disruptions and lack of communication regarding the progress of the liquidation. The Department maintained that the rejection of its claim on technical grounds of delay would cause irreparable injury to a statutory authority and sought condonation in the interest of justice and fairness.
Respondent’s Submissions
The Liquidator opposed the application, arguing that the updated claim was highly belated and beyond the permissible stage under the IBC framework. It was submitted that the liquidation process had substantially progressed, and admitting such a delayed claim could disrupt the statutory timelines.
It was further contended that the Department had already been admitted as an Operational Creditor, and the subsequent attempt to reclassify or expand its claim after four years was impermissible. The Liquidator relied on precedents such as LML Limited v. Commissioner of Income Tax and Leo Edibles & Fats Limited v. Income Tax Department, to argue that the Income Tax Department does not enjoy any priority under Section 53 of the IBC, and that statutory dues must be treated in line with other operational claims. The Liquidator also questioned the accuracy of the claim amount, asserting that departmental records indicated smaller outstanding balances than what was now being claimed, and that the Department failed to produce evidence proving the amounts had not already been recovered from deductees.
Tribunal’s Findings
The Tribunal first drew a clear distinction between TDS liabilities arising prior to the commencement of liquidation and those accruing during the liquidation process. It observed that while claims arising during liquidation are governed strictly by Section 53 of the IBC, unremitted TDS amounts deducted before liquidation are subject to a statutory trust and therefore excluded from the liquidation estate.
Referring to Section 36(4)(a)(i), the Bench emphasized that “where unremitted TDS amounts are deducted prior to liquidation, the company acts as a trustee for the Government and not as a beneficial owner of those funds.” The Tribunal relied on the decision in Official Liquidator, High Court, Madras v. N. Chandranarayanan (Madras HC, 1972), which held that money held in a fiduciary capacity does not constitute part of the assets of an insolvent company. It also cited NCLT Hyderabad, IA 350/2021 in CP (IB) No. 294/7/HDB/2017, wherein it was observed that property held in trust for third parties is excluded from the liquidation estate.
On the issue of delay, the Tribunal accepted the Department’s explanation and found sufficient cause for condonation, noting that as a statutory authority, the Department had acted bona fide amid pandemic-related and procedural constraints. The Bench remarked that “the interests of justice require that the updated claim be adjudicated on its statutory merits.” At the same time, the Tribunal clarified that for any other tax or government dues relating to the period after the commencement of liquidation, no deviation can be made from the distribution priorities prescribed under Section 53 of the IBC.
In light of these findings, the NCLT condoned the delay in filing the updated claim, set aside the Liquidator’s order dated 11.11.2023, and directed that the Liquidator:
Verify the exact quantum of TDS amounts deducted but not remitted prior to liquidation, with reference to TRACES/26AS and statutory records;
Treat such sums as trust property excluded from the liquidation estate under Section 36(4)(a)(i); and
Remit the verified amounts directly to the Income Tax Department, together with legally admissible interest up to the date of liquidation.
The Tribunal further directed that any other admitted government or operational dues not falling within the above category shall be distributed in accordance with Section 53 of the IBC, without preferential treatment. Accordingly, the application was partly allowed, reaffirming that TDS deducted prior to liquidation constitutes trust money for the Government and cannot be included in the liquidation estate.
Cause Title: M/s. New Age Real Properties, LLP Vs. M/s. Bhuvana Infra Projects Pvt. Ltd.
Case No: I.A.Nos.428/2024 & 239/2025 in C.P.(IB) No.122/BB/2017
Coram: Shri Sunil Kumar Aggarwal (Judicial Member), Shri Radhakrishna Sreepada (Technical Member)
