2008 (3) TMI 631 - HC - VAT and Sales Tax

Court upholds rejection of tax deferral request, rules protection under SICA does not cover post-registration tax liabilities

Balaji Distilleries Ltd. Versus The Secretary to Government, State of Tamil Nadu, Chennai and others

The court upheld the second respondent's decision to reject the petitioner's request to defer tax recovery, finding it justified due to the petitioner's ... Scheme of rehabilitation - Recovery of tax arrears seeked to be stayed - Held that:- Having regard to the totality of the circumstances and considering the principles laid down by various judgments, we are of the considered opinion, despite the laudable preventive, ameliorative and remedial measures to be taken by the Board, for rehabilitation, the safeguard guaranteed under section 22(1) of the Act against action for execution, distress, or like against the properties of the industrial unit, etc., have been grossly misused by the petitioner. Issues Involved:1. Legality of the order rejecting the petitioner's request to defer tax recovery.2. Applicability of protection under Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).3. Determination of the cut-off date for tax liabilities.4. Validity of coercive steps for tax recovery during the post-reference period.Detailed Analysis:1. Legality of the Order Rejecting the Petitioner's Request to Defer Tax Recovery:The petitioner sought to quash the order of the second respondent dated April 10, 2007, which rejected their request to defer the recovery of sales tax arrears until the finalization of a rehabilitation scheme by the Board for Industrial and Financial Reconstruction (BIFR). The court found that the second respondent's order was neither arbitrary nor illegal. The court noted that the petitioner had consistently paid taxes from April 2004 to March 2007, indicating awareness of their obligations. The court concluded that the second respondent's decision to reject the request was justified, considering the petitioner's continued business operations and tax payments during the post-reference period.2. Applicability of Protection under Section 22 of SICA:Section 22 of SICA provides for the suspension of legal proceedings, contracts, etc., against a sick industrial company during the pendency of an inquiry or the preparation or implementation of a rehabilitation scheme. The court examined whether the protection under Section 22 extended to the tax liabilities incurred after the date of registration of the reference. The court held that the protection under Section 22 is not absolute and is confined to liabilities included in the reference and the scheme under preparation or consideration. The court emphasized that the statutory protection does not cover tax liabilities arising in the post-reference period, as it would lead to an unreasonable state of affairs, allowing the company to indefinitely withhold tax amounts due to the government.3. Determination of the Cut-off Date for Tax Liabilities:The petitioner argued that the cut-off date for tax liabilities should be March 31, 2007, as per the BIFR's guidelines for the preparation of the rehabilitation scheme. The court clarified that the cut-off date mentioned in the BIFR's proceedings was for the preparation of the viability study report and not for deferring tax payments. The court held that the cut-off date for availing the bar under Section 22 of SICA would be the date of registration of the reference, which in this case was February 4, 2004. Consequently, the court concluded that the tax liabilities for the period after the registration date were not covered under the protection of Section 22.4. Validity of Coercive Steps for Tax Recovery During the Post-Reference Period:The court examined whether the government could initiate coercive steps to recover tax dues collected by the petitioner during the post-reference period. The court referred to several judgments, including Core Healthcare Limited v. State of Gujarat and Sol Pharmaceuticals Limited v. Mandal Revenue Officer, which held that the government is entitled to recover current tax dues collected by a sick industrial company. The court concluded that the petitioner had no legal or statutory right to withhold the sales tax collected during the post-reference period and that the government could lawfully recover these dues without obtaining the consent of the BIFR.Conclusion:The court dismissed the writ petition, upholding the second respondent's order rejecting the petitioner's request to defer tax recovery. The court ruled that the protection under Section 22 of SICA did not extend to tax liabilities incurred after the date of registration of the reference. The government was entitled to recover the sales tax collected by the petitioner during the post-reference period, and the petitioner's actions were found to be contrary to the spirit of the statute.