No Power Under IBC To Order TDS Refund; Issue To Be Decided By Income Tax Dept.: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Chennai has recently observed that tribunals under the Insolvency and Bankruptcy Code (IBC), 2016 cannot order a refund of Tax Deducted at Source (TDS) and that such issues must be decided by the Income Tax Department, even in cases involving companies under liquidation.

A bench of Judicial Member Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain made the observation while dismissing an appeal filed by S. Dhanapal, the liquidator of Servalakshmi Paper Limited, who had challenged the deduction of TDS by State Bank of India on interest earned from fixed deposits created out of liquidation proceeds.

The bench observed, “Under I & B Code, 2016, there is no such provision of law, which prescribes for conferring of the power on the Ld. Adjudicating Authority, to issue any such direction for refund of the TDS already made on the interest accruing on the fixed deposit. The exercise of powers of refund of the TDS, would always be the prerogative to be exercised by the Income Tax Authorities under prevailing income tax laws, particularly when they have to consider the aspect of their ambit and exercise of their powers of deduction of TDS on the interest accruing on the fixed deposit, in relation to a company which is under liquidation, whether there could be a refund or not. These are all the issues which are yet to be decided by the Income Tax Authorities, which has been directed to be considered by the Income Tax Authorities in pursuance to the impugned order of 25.11.2025."

The dispute arose after State Bank of India deducted TDS on interest accruing on fixed deposits created from Rs 105 crore realised through the sale of Servalakshmi Paper Limited's assets during liquidation. The liquidator argued that such deduction was unlawful and claimed exemption from filing income tax returns under Section 140 of the Income Tax Act for the purpose of seeking a refund.

The National Company Law Tribunal (NCLT), Chennai, had disposed of his application by directing him to submit a statement of income and expenditure of the company during the liquidation period so that the Income Tax Department could examine the refund claim.

Challenging this direction, the liquidator approached the NCLAT.

Dismissing the appeal, the appellate tribunal clarified that the IBC does not empower the NCLT or NCLAT to direct the refund of TDS, and that such relief can only be granted by the Income Tax Department under the Income Tax Act.

It further held that questions such as whether the liquidator is required to file income tax returns, whether filing returns is a precondition for claiming a refund, and whether any exemption under Section 140 applies must all be examined by the Income Tax Department.

The tribunal also clarified that the NCLT's direction requiring submission of accounts was only an enabling step to facilitate consideration of the refund claim and did not impose any undue burden on the liquidator.

On the argument that the IBC would override tax laws under Section 238, the NCLAT held that any issue of inconsistency would arise only after the Income Tax Department takes a concrete decision on the refund claim.