2026 (1) TMI 395 - AT - IBC

Central Sales Tax arrears and asset priority: whether s.9(2) creates a statutory first charge; dues held unsecured

Whether Central Sales Tax (CST) dues constitute 'secured debt' by creation of a statutory first charge on the corporate debtor's assets under s.9(2) CST ... Claim under Central Sales Tax dues - secured debt or unsecured debt - Resolution Plan - creation of statutory charge on the assets of the Corporate Debtor (“CD”) - deeming provision - Whether by virtue of Section 9 sub-section (2) of the CST Act, a security interest has to be held to be created on the assets of the Corporate Debtor (“CD”) - HELD THAT:- The claim of the Appellant under Gujarat Value Added Tax Act, 2003 (“GVAT Act”) has been accepted as secured creditor and with regard to which there is no dispute between the parties. The only issue which needs to be considered in the present case with regard to the dues of the Appellant under the CST Act as secured creditor. Learned Counsel has referred to Section 137 of the Gujarat Land Revenue Code, 1879 and submits that a conjoint reading of Section 9 sub-section (2) of the CST Act and Section 48 of the GVAT ACT clearly indicate that Section 48 of the GVAT ACT also applies to the tax levied under CST Act. As per above mentioned provisions, the Appellant has also created first charge over the property. The Adjudicating Authority committed error in not recognizing the claim of the Appellant under CST Act as secured debt. Section 9 sub-section (2), the heading of Section 9 starts with “Levy and collection of tax and penalties”. When we look into Section 9 sub-section (2), the provision empowers the Authorities under general sales tax law to assess, re- assess, collect and enforce payment of any tax, payable by a dealer under the CST Act as if the tax or interest payable under the general sales tax law of the State and further it provides and for this purpose they may exercise all or any of the powers they have under the general sales tax law of the State. The provision further provides “and for this purpose they may exercise all or any of the powers they have under the general sales tax law of the State”. Section 48 of the GVAT Act specifically provides that any amount payable by a dealer, the Government shall have the first charge on the property of such dealer. Section 9 sub-section (2) clearly applies to machinery provision for recovery and enforcement of payment of tax, but it does not create any first charge on the assets of the CD. We, thus, are in agreement with the submission of the learned Counsel for the Respondent that Section 9 sub-section (2) is a machinery provision and not a provision creating separate statutory charge unlike Section 48 of GVAT Act. The provision of Section 9 sub-section (2) expressly limited to procedural matters – assessment, returns, recovery steps, appeals, penalties etc. and does not import any substantive rights of the State, much less a statutory first charge as created under Section 48 of the GVAT Act. Section 9 sub-section (2) of the CST Act, which is sheet anchor submission of the Appellant has been noticed above. We have observed that provisions of Section 9 sub-section (2) cannot be read to mean that by virtue of said provision any charge can be created on the assets of the CD by operation of law. Although Section 9 sub-section (2) refers to various provisions, which had been made applicable specially to recovery by CST Act as was applicable in the general sales tax laws, but the provision of creating first charge on the assets of the CD is absent in Section 9 sub-section (2), nor it can be impliedly imported with respect to dues under CST Act. We, thus, are of the view that Adjudicating Authority did not commit any error in not accepting the claim of the Appellant insofar as central dues of CST Act are concerned. We, thus, are not persuaded to accept the submission of the Appellant that dues under CST Act has to be treated as secured debt. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether dues assessed and admitted under the Central Sales Tax Act, 1956 can be treated as a 'secured debt' in the insolvency process on the basis of Section 9(2) of the Central Sales Tax Act, by importing the State VAT law's first-charge provision. (ii) Whether approval of the resolution plan warranted interference on the ground that it violated Section 30(2) of the Insolvency and Bankruptcy Code, 2016, due to classification and payment treatment of Central Sales Tax dues as unsecured. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Central Sales Tax dues-secured or unsecured Legal framework (as discussed by the Court): The Court examined Section 9(2) of the Central Sales Tax Act, 1956, which authorises State sales tax authorities to 'assess, re-assess, collect and enforce payment' of Central Sales Tax 'as if' it were tax under the State's general sales tax law, and applies various State-law provisions for that purpose. The Court contrasted this with the State VAT law provision that expressly creates a 'first charge' on the dealer's property for VAT dues, and noted that secured status in insolvency depends on existence of a 'security interest,' which may be created by operation of law where the statute explicitly creates such charge. Interpretation and reasoning: The Court held that Section 9(2) is a machinery/procedural provision enabling assessment and recovery of Central Sales Tax through State authorities using State-law procedures and powers. While Section 9(2) contains an inclusive reference to multiple procedural aspects (returns, recovery steps, appeals, penalties, etc.), it does not itself create any statutory charge or 'first charge' over the corporate debtor's assets. The Court rejected the contention that the first-charge provision in the State VAT law can be substantively imported into Central Sales Tax merely because State recovery machinery applies; the deeming fiction in Section 9(2) was read as limited to procedural enforcement, not as conferring substantive proprietary security rights absent express statutory language in the Central Sales Tax Act. Conclusions: Central Sales Tax dues were conclusively held to be unsecured because Section 9(2) does not create a statutory charge by operation of law, and no other basis for secured status under the Central Sales Tax Act was established. The Court affirmed the determination that only the State VAT dues (backed by an express first-charge provision) constituted secured debt, whereas Central Sales Tax dues did not. Issue (ii): Whether the resolution plan approval violated Section 30(2) due to treatment of Central Sales Tax dues Legal framework (as discussed by the Court): The Court considered whether the approved resolution plan contravened Section 30(2) of the Insolvency and Bankruptcy Code, 2016, in light of the appellant's claim that Central Sales Tax dues should have been treated as secured and provided for accordingly. Interpretation and reasoning: Having held that Central Sales Tax dues are unsecured, the Court found no infirmity in the resolution plan's classification and distribution for those dues. The Court further noted that the appellant failed to demonstrate any independent violation of Section 30(2) arising from the plan's terms, once the secured-status claim for Central Sales Tax was rejected. Conclusions: No ground was made out to interfere with the plan approval under Section 30(2). The orders approving the resolution plan and declining secured status for Central Sales Tax dues were upheld, and the appeals were dismissed.