By Garima Jain:

The Telangana and Andhra Pradesh High Court has in a recent judgment, held that despite any prior attachment of assets of a corporate debtor, no priority will be given to such a right of the creditor in liquidation proceedings under IBC.

Case No. Writ Petition No. 8560 of 2018
Case Title Leo Edibles & Fats Limited v. The Tax Recovery Officer (Central), Income Tax Department, Hyderabad & Ors.
Court High Court of Judicature at Hyderabad for the State of Telangana and the State of Andhra Pradesh
Bench Justice Sanjay Kumar and Justice T. Amarnath Goud
Date July 26, 2018

The division bench of the High Court passed this judgment in a writ petition by (Leo) challenging sub-registrar’s refusal to register Leo’s purchase of an immovable property in the liquidation proceedings of VNR Infrastructures Limited (VNR). The refusal was a result of Income Tax (IT) Department’s claim of a charge over the immovable property, pursuant to an earlier notice of attachment for non-payment of tax by the corporate debtor, VNR.


Pursuant to an order passed by the National Company Law Tribunal for appointment of a liquidator to liquidate VNR, assets of VNR were pooled to form a liquidation estate to be sold through e-auction. Leo participated in the auction and was declared as the highest bidder for one of VNR’s properties which formed subject matter of this judgment. Subsequently, the liquidator issued a letter, confirming sale of the property in favour of Leo and called upon Leo to make payment of 24% of the bid amount within 24 hours. Leo duly complied with this direction. Thereafter, the liquidator issued the letter of sale in favour of Leo, calling upon it to deposit the remaining amount within 15 days.

At this stage, Leo came to know that the property purchased by it was subjected to attachment by the IT Department. On making enquiries, Leo found out that the sub-registrar was not entertaining any request for registration of the property without lifting up of the attachment order of the IT Department. Aggrieved by this, Leo approached the High Court seeking a direction to the Sub-Registrar to register sale of the property in favour of Leo.

Effect of prior proceedings

Defending the action of sub-registrar, the IT Department submitted out that the order of attachment of the assets of VNR was issued prior to the liquidation proceedings under Insolvency and Bankruptcy Code, 2016 (IBC), and hence, the provisions of IBC would not affect such property. High Court referred to Ananta Mills Ltd. (In Liquidation) v. City Deputy Collector, Ahmedabad, in which the Gujarat High Court had held that the attaching-creditor does not acquire, by merely levying attachment, any interest in the property. Further reference was made to Prem Lal Dhar v. Official Assignee, wherein the Privy Council had held that attachment simpliciter of the properties of a company, which was subsequently ordered to be wound up, without any further action being taken would be of no consequence or effect against the official liquidator and the property could be disposed of by the official liquidator, wholly ignoring the attachment.

Rejecting the claim of the IT Department, the High Court observed:

“In the light of the aforestated statutory schemes obtaining under the Code and the Act of 1961 respectively, it is clear that the Income-tax Department does not enjoy the status of a secured creditor, on par with a secured creditor covered by a mortgage or other security interest, who can avail the provisions of Section 52 of the Code. At best, it can only claim a charge under the attachment order, in terms of Section 281 of the Act of 1961.”

Quantum of debt

 The IT Department contended that VNR’s arrears sum up to over INR 100 Crores and “recovery of such a large amount must be given priority in the context of the statutory scheme under the [Income Tax Act, 1961 (IT Act)]”. It relied on Imperial Chit Funds (P.) Ltd. v. Income Tax Officer, wherein the Supreme Court held that the IT Department is to be treated as a secured creditor in the light of the words occurring in Sections 178(3) and (4) of the IT Act to the effect that the liquidator shall set aside the amount notified by the IT Officer and if it is not so done, the liquidator is personally liable to pay the amount of tax.

Rejecting the application of Imperial Chit Funds to this case, High Court observed that post amendment of Section 178 (6) of the IT Act by Section 247 of IBC, read with its Third Schedule, the whole of Section 178 has no application to liquidation proceedings initiated under the IBC. The High Court observed:

“Therefore, if the only source for treating the Income-tax Department as a secured creditor is the language used in Sections 178(3) and (4) of the Act of 1961, the said provisions stand excluded when it comes to the liquidation proceedings under the Code and such status cannot be conferred upon the Income-tax Department and it would necessarily have to take its place in the order of priority mentioned in Section 53(1) of the Code. This judgment is therefore of no avail to the Revenue.”

Overriding effect of IBC

 The IT Department further raised the issue that though Section 178 of the IT Act was amended by Section 247 of IBC, no amendment was effected in Sections 222, 226 or 232 of the IT Act, whereunder tax arrears could be recovered. The High Court, however, accepted Leo’s counter argument that though Section 178(6) of the IT Act starts with a non-obstante clause but by virtue of the amendment made thereto, liquidation proceeding under IBC is exempted from procedure under Section 178 of the IT Act. High Court further noted that Sections 220 and 222 of the IT Act do not start with any non-obstante clause and therefore, they are subject to the overriding effect of the IBC granted under Section 238e.


After an extensive analysis of the arguments along with the provisions of the IBC and the IT Act, the High Court directed the sub-registrar to register sale of the property in favour of Leo. High Court observed that the IT Department is at liberty submit its claim before the liquidator who may consider it in accordance with the priorities set by Section 53(1) of IBC. The High Court observed:

“..the first respondent cannot claim any priority merely because of the fact that the order of attachment dated 27.10.2016 issued by him was long prior to the initiation of liquidation proceedings under the Code against VNR Infrastructures Limited, Hyderabad. It may be noted that Section 36(3)(b) of the Code indicates in no uncertain terms that the liquidation estate assets may or may not be in possession of the corporate debtor, including but not limited to encumbered assets. Therefore, even if the order of attachment constitutes an encumbrance on the property, it still does not have the effect of taking it out of the purview of Section 36(3)(b) of the Code. The said order of attachment therefore cannot be taken to be a bar for completion of the sale effected by the fifth respondent under the provisions of the Code.”

Read the complete judgment here:

Hat tip to Prasen Gundavaram for the judgment.