The issue before the High Court was:

“whether Tax Recovery Officer can claim priority in payment from liquidation estate if attachment order has been issued prior to initiation of liquidation proceedings under Insolvency and Bankruptcy Code (IBC)?”

The High Court held against the department as under:

1) The Tax Recovery Officer (TRO) couldn’t claim any priority merely because of the fact that the order of attachment was issued by him long before initiation of liquidation proceedings under the IBC against the liquidate company.

2) Section 36(3)(b) of the Insolvency and Bankruptcy Code, 2016 indicates in no uncertain terms that the liquidated estates assets may or may not be in possession of the corporate debtor, including but not limited to encumbered assets.

3) Therefore, even if the order of attachment constitutes an encumbrance on the property, it does not have the effect of taking it out of the purview of section 36(3)(b).

4) The said order of attachment couldn’t be taken to be a bar on completion of the sale effected by the liquidator under the provisions of the IBC. The TRO necessarily had to submit the claim of the Income-tax Department to the liquidator for consideration as and when the distribution of the assets was taken up. – [2018] 99 taxmann.com 226 (Andhra Pradesh and Telangana)