NCLT Chennai Rules, Income Tax Department Cannot Be Considered As A Secured Creditor In Liquidation Proceedings
Pranav B Prem
The National Company Law Tribunal (NCLT), Chennai Bench, comprising Shri Jyoti Kumar Tripathi (Judicial Member) and Shri Ravichandran Ramasamy (Technical Member), held that the Income Tax Department cannot be treated as a secured creditor in liquidation proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC), solely on the basis of a pre-CIRP attachment made for recovery of dues. The Tribunal emphasized that sovereign tax dues, in the absence of statutory recognition as secured debt under the IBC, must be dealt with under the waterfall mechanism of Section 53 and cannot bypass its priority scheme.
The ruling came in an application filed by Canara Bank under Section 60(5) of the IBC read with Rule 11 of the NCLT Rules, 2016, seeking a refund of ₹1,12,58,549/- disbursed by the liquidator of Krishna Energy Private Limited to the Income Tax Department during the course of liquidation. The Bank, a financial creditor, contended that the payment was made in violation of the IBC’s priority provisions, as the Income Tax Department could not be regarded as a secured creditor.
Background and Procedural History
Krishna Energy Private Limited, incorporated in 2008 and engaged in the manufacture of electrical control panels and allied products, was admitted into Corporate Insolvency Resolution Process (CIRP) by order dated 22.11.2019. The Tribunal later ordered the commencement of liquidation proceedings on 06.01.2022, appointing Mr. B. Ramana Kumar as the liquidator.
Canara Bank had sanctioned various credit facilities to the corporate debtor, whose loan account was classified as a Non-Performing Asset on 09.04.2015. The Bank took symbolic possession of assets under SARFAESI and initiated proceedings before the DRT, which culminated in a recovery certificate dated 25.01.2019 for an amount nearing ₹20 crore.
The Bank filed its claim with the liquidator on 05.02.2022, amounting to over ₹54 crores, and chose to relinquish its security interest to be treated along with other stakeholders. Meanwhile, the Income Tax Department, which had attached the corporate debtor’s immovable property on 08.12.2017 for unpaid tax dues, was later included in the stakeholder list based on its claim of ₹3.66 crores, allegedly filed on 12.01.2022.
Dispute and Legal Arguments
Canara Bank objected to the treatment of the Income Tax Department as a secured creditor. It argued that the claim was not filed within the time prescribed under the Code and that the judgment in State Tax Officer v. Rainbow Papers Ltd [2022 (13)SCR 808] could not be invoked to give the Department such status. The Bank further pointed out that the Department had filed its claim in Form B—used for operational creditors—implying that it had no claim to secured creditor status.
The liquidator defended the disbursement, stating that the claim had been filed within 30 days of the public announcement and that its omission from the preliminary list was inadvertent. He cited the Rainbow Papers judgment and contended that the attachment made by the Tax Department created a security interest in its favor under Section 3(31) of the IBC.
The Income Tax Department supported this position, asserting that the attachment constituted a security interest. It also referred to the judgment in Principal Commissioner of Income Tax v. Assam Company India Ltd [Company Appeal No.241 of 2022], where the NCLAT had accepted statutory dues backed by attachment as secured debts to be dealt with under Section 53.
Tribunal’s Findings
After hearing all parties, the Tribunal examined the question of whether the Income Tax Department’s dues could qualify as secured debt merely by virtue of an attachment order. It noted that while the Department claimed to have filed its claim on 12.01.2022, the claim was not included in the liquidator’s initial report and was added later by way of a modified list allowed by the Tribunal.
The NCLT observed that while the attachment occurred on 08.12.2017, long before CIRP began, such action under the Income Tax Act did not automatically convert tax dues into secured debt under the IBC. It reiterated that "attachment is only one of the means of recovery of taxes" and does not constitute the creation of a secured interest as defined under Section 3(31) of the Code.
Rejecting the applicability of the Rainbow Papers ruling, the Tribunal held that the facts of that case, which involved a statutory charge under Section 48 of the Gujarat VAT Act, were distinguishable. Unlike the VAT Act, the Income Tax Act does not confer the status of secured creditor on the Tax Department.
The Tribunal also emphasized the overriding effect of the IBC under Section 238, stating that any attachment for tax recovery under other laws must yield to the waterfall mechanism under Section 53. It cited the Supreme Court’s decision in Principal Commissioner of Income Tax v. Monnet Ispat and Energy Ltd [SLP. No.6483 of 2018], which held that tax dues, being crown debts, do not override claims of secured creditors under the IBC.
Further support was drawn from Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd [ Civil appeal no.7976 of 2019], where the Supreme Court clarified that Rainbow Papers must be confined to its own facts. The NCLT found that the liquidator had misapplied Rainbow Papers and erred in treating the Income Tax Department as a secured creditor without following proper consultation with the Stakeholders Consultation Committee (SCC) or obtaining Tribunal approval.
The NCLT also relied on the NCLAT’s ruling in Synergies Dooray Automotive Ltd., holding that statutory dues are to be treated as operational debt, and on the High Court decision in State Bank of India v. Tax Recovery Officer, which rejected claims of priority by the Income Tax Department over secured creditors.
Final Directions
Concluding that the disbursal of ₹1,12,58,549/- to the Income Tax Department was contrary to Section 53 of the IBC, the Tribunal directed the Department to return the said amount to the liquidation estate within six weeks. The liquidator was further directed to redistribute the liquidation proceeds strictly in accordance with the priority laid down in Section 53.
Appearance
For Applicant: Mr. Varun Srinivasan, Advocate
For1st Respondent: Mr. B.Rmana Kumar, Advocate
For 2nd Respondent: Mr. Raj Jabakh, Advocate
Cause Title: Canara Bank V. Mr. B. Ramana Kumar (Liquidator of Krishna Energy Pvt. Ltd.) & Income Tax Department
Case No: IA/(IBC)/2361(CHE)/2023 In IBA/1075/2023
Coram: Shri Jyoti Kumar Tripathi [Member-Judicial], Shri Ravichandran Ramasamy [Member-Technical]
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