Statutory suspension under sick company law barred sales tax penalty proceedings during the protection period.

During the statutory suspension under section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, coercive recovery action against the company's assets was barred unless Board consent was obtained. That protection was held to extend to sales tax recovery proceedings under State law, so a notice and penalty action under rule 16(2) of the Central Sales Tax (Orissa) Rules, 1957 for non-payment of the demanded tax could not be treated as valid during the currency of the embargo. The discretionary penalty power under rule 16(2) had to be exercised judicially and reasonably, and the notice proposing penalty and penalty order were quashed.

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Issues: Whether, during the currency of statutory protection under section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, the sales tax authorities could validly issue a notice and impose penalty under rule 16(2) of the Central Sales Tax (Orissa) Rules, 1957 for non-payment of the demanded tax.

Analysis: On registration of the reference under section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, an inquiry under section 16 commenced, and the statutory embargo under section 22(1) operated to suspend coercive recovery proceedings against the company's assets. The Court applied the settled principle that this protection has a wide overriding effect and covers recovery action under State sales tax law unless consent of the Board is obtained. Rule 16(2) of the Central Sales Tax (Orissa) Rules, 1957 confers only a discretionary power to impose penalty, and such discretion must be exercised judicially and reasonably. Since the demand and the threatened penalty fell within the period of statutory suspension, the company could not be treated as having failed to pay in a manner attracting penal action. The authorities, therefore, did not exercise the penal discretion in accordance with law.

Conclusion: The notice proposing penalty and the order imposing penalty were not sustainable and were quashed; the issue was decided in favour of the assessee.

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