TDS On Interest Alone Not Enough To Cross Insolvency Threshold: NCLT Chandigarh

The National Company Law Tribunal (NCLT) at Chandigarh has dismissed a Section 7 CIRP plea after holding that deduction of TDS on alleged interest cannot be treated as an acknowledgment of liability to cross the statutory threshold under Section 4 of the Insolvency and Bankruptcy Code, 2016.

The Bench after relying on the NCLAT's ruling in P.M. Cold Storage Pvt. Ltd. Through Interim Resolution Professional v. Goouksheer Farm Fresh Pvt. Ltd (2022) observed,

"Applying the above settled position of law to the facts of the present case, we are of the view that deduction of TDS, by itself, cannot be treated as acknowledgment of liability towards interest so as to permit inclusion of the interest amount for the purpose of computing the threshold under Section 4 of the Code.”

The coram of Judicial Member Khetrabasi Biswal and Technical Member Shishir Agarwal was hearing a petition filed by Wild Dreams Trading Company Pvt. Ltd. seeking initiation of CIRP against Ascendancy Financial Services Pvt. Ltd.

The Financial Creditor claimed a default of Rs 1,07,44,700 as of September 30, 2024.

It stated that Rs 2.32 crore had been disbursed to the corporate debtor in multiple tranches as financial assistance carrying interest.

It was undisputed that Rs 1.70 crore had been repaid. The outstanding principal stood at Rs 62 lakh.

To cross the Rs 1 crore threshold under Section 4, the Applicant sought to add accrued interest to the principal. It relied on deduction and deposit of TDS on the alleged interest payable. According to Wild Dreams, this showed that the corporate debtor had acknowledged liability towards interest.

The Corporate Debtor opposed the plea. It argued that the principal outstanding was below the statutory threshold. It further submitted that the Code cannot be used as a recovery mechanism. Reliance on an alleged oral understanding and TDS entries, it said, was insufficient to establish a financial debt of the requisite amount.

The Tribunal framed the core issue: whether interest, supported primarily by TDS deductions on the alleged interest payment, could be added to the principal to meet the threshold requirement.

Answering in the negative, the bench noted that the undisputed principal remained Rs 62 lakh.

It also referred to the Kolkata Bench decision in Sudarshan Paper & Board Pvt. Ltd. v. Verges Properties LLP, which held:

“In view of above, we would infer that TDS deduction on the interest payable does not constitute any acknowledgment of liability as outstanding claimed to be in default.”

Applying the settled position, the tribunal held that interest could not be included merely on the basis of TDS deductions.

Since the principal amount in default was below Rs 1 crore, the statutory requirement under Section 4 of the IBC was not satisfied.

The petition was accordingly dismissed.