Income Tax Department cannot set off tax refunds against past dues during liquidation without filing a claim.

The Corporate Debtor (CD), M/s Shri Jalaram Rice Industries Pvt. Ltd., entered liquidation on 19.09.2019.

During the liquidation process (A.Y. 2022-23), a Successful Auction Purchaser deducted TDS of Rs. 18,77,000 from the sale consideration and deposited it with the Income Tax Department.

The Liquidator filed a return seeking a refund of approximately Rs. 19.39 lakhs.

On 04.11.2022, the Income Tax Department issued an intimation under Section 143(1) of the Income Tax Act, 1961, adjusting the refund against a decade-old outstanding tax demand from A.Y. 2011-12.

The Liquidator challenged this before the Adjudicating Authority (NCLT Ahmedabad), which directed the Department to refund the TDS amount.

The Department appealed this order to the NCLAT.

Whether the Income Tax Department is entitled to exercise a right of set-off under Regulation 29 of the IBBI (Liquidation Process) Regulations, 2016, against a tax refund due to a Corporate Debtor in liquidation when the Department has not filed a formal claim.

Whether the adjustment of a tax refund against pre-liquidation dues violates the waterfall mechanism under Section 53 of the IBC.

The court primarily applied Regulation 29 of the IBBI (Liquidation Process) Regulations, 2016, which allows for the set-off of mutual credits and debts to arrive at a net payable amount during liquidation.

It further relied on Section 238 of the IBC, which grants the Code overriding effect over inconsistent laws.

Section 178(6) of the Income Tax Act, 1961, which recognizes the primacy of the IBC.

The Tribunal also considered the principles of set-off established in *Bharti Airtel Limited v. Vijaykumar V. Iyer* (AIR 2024 SC 27).

*Om Prakash Agarwal v. Chief Commissioner of Income Tax (TDS)*.

The Tribunal reasoned that while Regulation 29 permits set-off in liquidation, such a right is inextricably linked to the 'Claims' process under Chapter V of the Regulations.

The Appellant (Income Tax Department) admitted it had not filed any claim regarding the A.Y. 2011-12 demand in the liquidation proceedings.

The Tribunal held that in the absence of a filed claim, the Department cannot unilaterally invoke a set-off.

Furthermore, the court observed that under Section 36 of the IBC, the tax refund constitutes part of the "Liquidation Estate".

By adjusting the refund against old dues, the Department attempted to bypass the priority of distribution (waterfall mechanism) mandated by Section 53 of the IBC, which is impermissible due to the overriding effect of Section 238.

It held that the Income Tax Department cannot claim a set-off for pre-liquidation arrears against a post-liquidation refund if it has failed to file a claim in the liquidation process.

The Department was directed to refund the entire TDS amount to the Liquidator as it forms part of the Liquidation Estate to be distributed as per Section 53 of the IBC.