Banks, taxman eye Kingfisher House

According to sources, both the departments have already laid their claim on the proceeds from the sale of the property

When the Kingfisher House in Mumbai goes under the hammer on Thursday, there would be more than one interested party. While SBICap Trustee Company, a wholly-owned subsidiary of SBI Capital Markets and the security trustee for the lenders consortium to the airline, is organising the e-auction, both the income tax (I-T) and the service tax departments will be eyeing the proceeds.

According to sources, both the departments have already laid their claim on the proceeds from the sale of the property. In February 2015, SBICap Trustee had taken possession of the 17,000 sq ft property at Vile Parle near the domestic airport in Mumbai. The trustee company has kept a reserve price of Rs 150 crore (Rs 1.5 billion) and a bid increment amount of Rs 500,000 on the property.

The tussle between the I-T department and banks over the proceeds has been going on for some time. In December 2013, the I-T department had moved the Karnataka high court seeking an order that would direct banks to repay the dues of Rs 370 crore (Rs 3.7 billion) to the department.

It claimed that since the property was already attached by the department under the I-T Act, its dues took precedence over debts owed to banks. In fact, the I-T department has already put a notice inside the premises of Kingfisher House, saying: "The property is under attachment by I-T department. Any person who is interested in buying the property is to first get clearance from department."

Similarly, the service tax department is also seeking recovery of nearly Rs 600 crore (Rs 6 billion) from the defunct airline. "However, in the case of the service tax department, the first right to recover tax dues will not be given priority, according to the provisions of Section 88 of the Service Tax Act," said a legal expert on condition of anonymity. Under this Act, banks' debts take precedence over service tax payment.

Kingfisher Airlines owes the I-T department as it did not pay the tax-deducted at source amount despite deducting the same from salaries of employees.

It is not yet clear whose dues will be given priority. The airline's arrears to the 20 lenders - 17 banks and three non-banking financial companies - are Rs 6,963 crore (Rs 69.63 billion), plus accrued interest. Kingfisher Airlines owes around Rs 370 crore (Rs 3.7 billion) to the I-T department. Subsequently, arrears to the service tax department amount to about Rs 600 crore.

This includes the amount of Rs 140 crore (Rs 1.4 billion) along with interest collected by customers, but not deposited with the department. The remaining amount is on account of disputed tax liabilities, which fall under the service tax net.

Following a debt recast in November 2010, the airline had pledged two properties, one in Mumbai and another in Goa with the lenders, along with personal guarantee of Vijay Mallya, Kingfisher Airline's promoter.

When the airline was operating, the promoters had also pledged the Kingfisher brand, valuing it at Rs 4,500 crore (Rs 45 billion) at that time. So far, the lenders have recovered around Rs 1,600 crore (Rs 16 billion) by selling pledged shares and other collaterals.

Banks are now charging 15.5 per cent compounded interest on this principal amount, which has not been serviced since January 2013. State Bank of India has the highest exposure of Rs 1,600 crore (Rs 16 billion) to Kingfisher Airlines.