NCLAT Rules Income Tax Department Cannot Set Off Refunds Against Past Dues Without Filing a Claim in Liquidation

The Hon’ble National Company Law Appellate Tribunal (NCLAT), Principal Bench, in its judgment dated February 24, 2026, addressed the critical issue of whether the Income Tax Department is entitled to set off an income tax refund due to a Corporate Debtor against outstanding tax demands during the liquidation process.

The appeal arose from an order of the Ld. Adjudicating Authority (National Company Law Tribunal (NCLT), Ahmedabad Bench) which directed the Income Tax Department to refund the entire Tax Deducted at Source (TDS) amount to the Liquidator. The Corporate Debtor, M/s Shri Jalaram Rice Industries Private Limited, was ordered into liquidation in September 2019. Subsequently, a successful auction purchaser deposited TDS of approximately Rs. 18.77 lakhs during A.Y. 2022-23. When the Liquidator filed for a refund, the Income Tax Department adjusted it against a demand pertaining to A.Y. 2011-12.

The Appellant (Income Tax Department) argued that under Regulation 29 of the IBBI (Liquidation Process) Regulations, 2016, it was entitled to set off the refund against the mutual credit due from the Corporate Debtor. The Respondent-Liquidator contended that since the Department had not filed any claim in the liquidation proceeding, the question of set-off could not arise.

The Hon’ble NCLAT, while dismissing the appeal and upholding the NCLT’s order, held as follows:

1. Permissibility of Set-off: While Regulation 29 permits mutual credits and set-offs in liquidation proceedings, this is contingent upon the filing of a claim by the party seeking the set-off. In the present case, the Appellant admittedly failed to file any claim regarding the 2011-12 demand; thus, they could not unilaterally adjust the refund amount.

2. Primacy of Insolvency and Bankruptcy Code (IBC): Under Section 238 of the IBC, the provisions of the Code have an overriding effect over inconsistent provisions in other laws, including the Income Tax Act. The NCLAT noted that Section 178(6) of the Income Tax Act itself creates an exception giving primacy to the IBC.

3. Liquidation Estate: Per Section 36 of the IBC, the tax refund forms part of the Liquidation Estate and must be distributed strictly as per the priority set out in Section 53.

The ruling reinforces the “Clean Slate” and collective distribution principles of the IBC, ensuring that statutory authorities do not bypass the priority of claims by utilizing the principle of set-offs. Importantly, the NCLAT noted that it remained open for the Department to have filed a claim and then sought a set-off in accordance with the law, but their failure to participate in the claims process was fatal to their plea.