TDS deduction on interest payment and deposit in Form 16A proved existence of debt: NCLAT

Case Details: Pradeep Tayal v. Essbert Fashion (P.) Ltd. - [2023] 148 taxmann.com 135 (NCLAT-New Delhi)

Judiciary and Counsel Details

• • Justice Ashok Bhushan, Chairperson & Barun Mitra, Technical Member
  • Nitesh Jain & Vatsal Chandra, Advs. for the Appellant.
  • Abhishek Nahta, PCA, Raveena Panika & Rishabh Sachdeva, Advs. for the Respondent.

Facts of the Case

In the instant case, the Respondents (i.e. financial creditors) had provided financial assistance to the corporate debtor. Upon the corporate debtor’s failure to make the re-payment, the respondents issued a demand notice and filed an application u/s 7 of the IBC against the corporate debtor.

The Adjudicating Authority (NCLT) by the impugned order admitted the said application and initiated the CIRP against the corporate debtor. Then, an appeal was made to the National Company Law Appellate Tribunal (NCLAT) against the order passed by the NCLT.

The appellant, (i.e. Suspended director of the corporate debtor) contended that there was no loan agreement entered into between the parties and as a result, there was no financial debt.

However, the financial creditors had brought on record Form 16A, which indicated that Tax Deducted at Source (TDS) was deducted by the corporate debtor and deposited under section 194A of the Income-tax Act, 1961.

NCLAT Held

The NCLAT observed that the mere deduction of TDS and deposit by the corporate debtor does not necessarily prove the existence of the financial debt. However, the deduction of TDS and deposit in Form 16A u/s 194A of the Income-tax Act clearly proved that the deduction which was deposited was related to ‘Interest other than interest on securities’.

The NCLAT held that the financial creditor had placed on record a reply to the demand notice, which contained an admission of the loan by the corporate debtor, Form 16A as well as the balance sheet, indicating that the loan was granted by the respondent to the corporate debtor with interest. As a result, all the essential ingredients of financial debt were fully proved.

Therefore, no error was found in the order of the Adjudicating Authority. Accordingly, the appeal was to be dismissed.

List of Cases Reviewed

• • Essbert Fashion (P.) Ltd. v. Pytex Jewellers (P.) Ltd. [2023] 148 taxmann.com 134 (para 29) affirmed (See annex).
  • Pawan Kumar v. Utsav Securities (P.) Ltd. [2021] 131 taxmann.com 211/168 SCL 692 (para 21) distinguished.

List of Cases Referred to

• • Pawan Kumar v. Utsav Securities (P.) Ltd. [2021] 131 taxmann.com 211/168 SCL 692 (NCLAT – New Delhi) (para 17)
  • Arrow Engineering Ltd. v. Golden Tobacco Ltd. [2022] 134 taxmann.com 272 (NCLAT – New Delhi) (para 22).