Tax authority fails to prove VAT dues deserve secured creditor status in liquidation proceedings

The NCLAT dismissed an appeal by a tax authority seeking treatment of VAT/Sales Tax dues as secured claims during liquidation. The tribunal held that assessment orders passed during moratorium under Section 14 of IBC were correctly classified as unsecured operational debt. The appellant illegally maintained property attachments despite court orders to lift them. Unlike the Rainbow Paper case involving VAT Act provisions granting first charge rights, Gujarat Sales Tax Act contained no similar secured creditor provisions. The tribunal rejected arguments that the 330-day resolution timeline was mandatory, noting it was directory in nature. The resolution plan approved by CoC properly classified tax dues as unsecured debts under Section 53 waterfall arrangement.

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Issues Involved:
1. Treatment of claims as Secured Creditors vs. Unsecured Creditors.
2. Applicability of moratorium under Section 14 and Section 33(5) of the Insolvency & Bankruptcy Code, 2016.
3. Validity of tax demands and attachment orders during moratorium and liquidation periods.
4. Interpretation of relevant judgments including Rainbow Papers Limited and Sundaresh Bhat cases.

Summary:

Issue 1: Treatment of Claims as Secured Creditors vs. Unsecured Creditors
The Appellant, Commissioner of State Tax Department, challenged the rejection of its claim to be treated as a Secured Creditor during the liquidation process of M/s Anil Limited. The Respondent, the Liquidator, classified claims for Assessment Years (AY) 2007-08 to 2012-13 as Secured Creditors based on Section 48 of the VAT Act and the judgment in Rainbow Papers Limited. However, claims for AY 1994-95 to 1997-98 were treated as Unsecured Creditors since the Gujarat Sales Tax Act did not contain equivalent provisions. Claims for AY 2013-14 to 2016-17 were also treated as Unsecured Creditors due to their assessment during the moratorium period.

Issue 2: Applicability of Moratorium u/s 14 and Section 33(5) of the Code
The moratorium under Section 14 came into effect on 23.08.2017 with the initiation of CIRP and continued under Section 33(5) during liquidation. The Appellant's claims for AY 2013-14 and 2014-15, assessed after the moratorium, were found to be in violation of Section 14. Similarly, claims for AY 2015-16 and 2016-17, assessed during liquidation, violated Section 33(5) of the Code.

Issue 3: Validity of Tax Demands and Attachment Orders During Moratorium and Liquidation Periods
The Appellant issued attachment orders on 16.10.2018, during the moratorium, which was deemed illegal. The Respondent was directed to lift these attachments, but the Appellant continued the attachment unlawfully. The Appellant's argument that the CIRP/liquidation process should have been completed within 330 days was rejected, as this period is indicative, not mandatory.

Issue 4: Interpretation of Relevant Judgments
The judgment in Rainbow Papers Limited was pivotal, establishing that tax dues under Section 48 of the VAT Act are secured. However, this did not apply to claims under the Gujarat Sales Tax Act. The judgment in Sundaresh Bhat confirmed that any legal proceedings, including tax assessments, during the moratorium are invalid. The Appellant's reliance on other judgments was found inapplicable.

Conclusion:
The appeal was dismissed, and the classification of claims by the Respondent was upheld. Claims for AY 2007-08 to 2012-13 were correctly treated as Secured Creditors, while claims for AY 1994-95 to 1997-98 and AY 2013-14 to 2016-17 were rightfully treated as Unsecured Creditors. The actions of the Appellant during the moratorium and liquidation periods were found to be in violation of the Code.

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