ITAT bats for mechanism for tax dues recovery from sale of distressed assets by ARCs

Income Tax appellate tribunal (ITAT) has observed that Government should seriously consider some mechanism to ensure that the tax liability on the capital gains is duly recovered from the borrower whose property is sold or from the person who receives the proceeds of the sale of such assets. So the interest of the Government is protected.     

Mumbai Bench of ITAT comprising of Vice President Pramod Kumar and Pavan Kumar Gadale, Member Judicial, noted that “With the increasing number of cases in which recovery measures are enforced by selling properties, held by the bankers and ARCs as collateral securities, and inevitable liquidity or bankruptcy issues with such borrowers, there must already be good amount of such avoidable losses to the revenue. Such a position must not continue.”    

Bench further noted that while owners of these assets, in many cases, have no money to pay the tax in question as they are already bankrupt and no part of sale consideration reaches them anyway but the banks and the ARCs who are the recipients of sale considerations in these transactions have no liability to make such payments of taxes. So it ends up in a situation where the income tax department unwillingly subsidizes the banks as banks end up getting the entire sale consideration on sale of properties held as collateral security- including the Governments share by way of tax on long-term capital gains.   

The matter landed up at ITAT Mumbai after an assessee challenged the order passed by Commissioner Appeal (CIT-A) in a matter of reopening of assessment. The assessee’s company had taken a loan from State Bank of India and he stood as a personal guarantor. Later State Bank of India recalled that loan and invoked personal guarantee given by the assessee. At debt recovery tribunal (DRT) assessee was made party in the recovery proceedings.    

Later State Bank of India assigned the land parcel of the assessee which he had given as collateral security to Asset Reconstruction Company of India Limited (ARCIL). The assessee had purchased the land at Rs 2 Lakh in year 1983. ARCIL later sold the land parcel to a developer for a consideration of Rs 2,00,00,000, where the assessee was made a confirming party between ARCIL and the developer. But in the assessment year 2006-07, income tax department took note of the land sale deed where assessee had surrendered all his rights in the favor of the developer. Income tax department made a view and proceeded to tax for the amount of Rs 2,04,93,500, as this was the value derived as per prevailing circle rate though actual sale happened at Rs 2,00,00,000. Assessee appealed before CIT appeals against the assessment order but was denied relief.     

ITAT noted “What is important therefore is the year in which the transfer takes place vis-à-vis the assessee. So far as the transaction before us is concerned, that is between the ARC and the end buyer but the very fact that ARC is selling the property as the owner of the property does indicate that the transfer from the assessee to the ARC, via SBI perhaps, taken place at an earlier stage.”     

After hearing the arguments of both the sides ITAT remanded the matter back to CIT appeal with the order that” We deem it fit and proper to remit the matter to the file of the CIT(A) for recording a specific finding in this regard, after giving a due and reasonable opportunity of hearing to the assessee, in accordance with the law and by way of a speaking order. The question of taxability of capital gains will arise only in the year in which such a transfer takes place.”     

Though under the Insolvency and Bankruptcy Code the sovereign dues are not given any preference and are not counted as secured creditors but in a recent ruling of Supreme Court in the matter of Gujarat State Tax Officer Vs Rainbow Papers, apex court was of the view that claims of the tax authorities will fall in meaning of security interest as defined in IBC and hence state becomes a secured creditor. It also said that a resolution plan which does not consider statutory demands is invalid and bound to be rejected.