The Income Tax Appeal Tribunal (ITAT) observed that the government should seriously consider a mechanism to ensure that the capital gains tax payable is duly collected from the borrower whose asset is sold or the person who receives the proceeds from the sale of those assets. . Thus, the interest of the government is protected.

The Mumbai bench of ITA, consisting of Vice President Pramod Kumar and Judiciary member Pavan Kumar Gadale noted that “with the increasing number of cases in which remedial measures are applied by selling properties , held by bankers and CRAs as collateral, and the unavoidable liquidity or bankruptcy issues with these borrowers, there must already be a fair amount of these avoidable revenue losses. Such a position should not continue.

Bench further noted that while the owners of these assets, in many cases, do not have the money to pay the tax in question because they are already bankrupt and none of the sale consideration reaches them anyway, but the banks and CRAs who are the beneficiaries of the sale counterparties in these transactions have no obligation to make such tax payments. This therefore results in a situation where the income tax department unwittingly subsidizes the banks, as the banks end up getting all of the consideration from the sale of properties held as collateral, including the governments share as long-term capital gains tax.

The case landed at ITA Mumbai after an assessee challenged the order made by the Commissioner of Appeals (CIT-A) in an assessment reopening case. The assessee’s company had taken out a loan from the State Bank of India and he acted as personal guarantor. Later, the State Bank of India recalled this loan and relied on the personal guarantee given by the assessee. At the Debt Collection Court (DRT), the assessee was named party to the collection proceedings.

Later, the State Bank of India surrendered the assessee’s plot of land which he had given as collateral to Asset Reconstruction Company of India Limited (ARCIL). The assessee had purchased the land at Rs 2 Lakh in the year 1983. ARCIL then sold the plot of land to a developer for a consideration of Rs 2,00,00,000, where the assessee was appointed as confirming party between ARCIL and the promoter. But during the 2006-07 tax year, the tax department became aware of the deed of sale of the land where the assessee had renounced all his rights in favor of the promoter. The Income Tax Department issued an opinion and proceeded to tax an amount of Rs 2,04,93,500 as it was the derived value according to the prevailing circle rate, although that the actual sale took place at Rs 2,00,00,000. The assessee appealed to CIT against the assessment order, but was denied a remedy.

The ITAT noted: “What is therefore important is the year in which the transfer takes place vis-à-vis the assessee. With respect to the transaction before us, that is, between ARC and the ultimate purchaser, but the very fact that ARC is selling the property as the owner of the property indicates that the transfer of the CRA review, via SBI perhaps, took place at an earlier stage.

After hearing arguments from both parties, the ITAT remanded the matter to the CIT(A) appeal with the order that “we deem it appropriate and appropriate to return the matter to the CIT(A) record to register a specific conclusion in this regard, after giving the assessee the opportunity to be heard in due form, in accordance with the law and by means of a speaking order. will only arise in the year in which such transfer takes place.

Although under the Insolvency and Bankruptcy Code sovereign dues do not enjoy any preference and are not considered as secured creditors, but in a recent Supreme Court decision in Gujarat State Tax Officer Vs Rainbow Papers, the Supreme Court was of the view that the claims of the tax authorities will fall within the meaning of security as defined in the IBC and, therefore, the State becomes a secured creditor. He also said a resolution plan that disregards statutory demands is invalid and doomed to rejection.