Sanctioned compromise scheme binds tax creditor; recovery notices cannot exceed the reduced liability fixed under the arrangement.

A writ petition challenging recovery notices was maintainable where the grievance was against enforcement of demand notices, not the underlying assessment orders, and the pending statutory appeals did not furnish an equally efficacious remedy. In the context of a sanctioned compromise under Section 391 of the Companies Act, 1956, the term "creditor" was applied in a wide winding-up sense and included contingent or future tax claims arising before assessment. The sales tax department was therefore bound by the scheme and could not recover more than the percentage fixed under it. The recovery notices were held unlawful because the company's liability stood restricted by the sanctioned scheme.

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Issues: (i) Whether a writ petition under Article 226 of the Constitution of India was maintainable against demand notices when statutory appeals against the assessment orders were pending; (ii) Whether the sales tax department was a creditor of the company for the purposes of Section 391 of the Companies Act, 1956, so as to be bound by the scheme of reconstruction and limited to 25 per cent of its claim.

Issue (i): Whether a writ petition under Article 226 of the Constitution of India was maintainable against demand notices when statutory appeals against the assessment orders were pending.

Analysis: The grievance was directed against the demand notices and not against the assessment orders. The company asserted that, by virtue of the sanctioned scheme under Section 391 of the Companies Act, 1956, the department could recover only the reduced percentage payable under the scheme. In that setting, the existence of appellate remedies against assessment did not provide an equally efficacious remedy for the challenge to the recovery notices.

Conclusion: The writ petition was maintainable and the preliminary objection failed.

Issue (ii): Whether the sales tax department was a creditor of the company for the purposes of Section 391 of the Companies Act, 1956, so as to be bound by the scheme of reconstruction and limited to 25 per cent of its claim.

Analysis: Section 391 operates in the context of companies liable to be wound up and binds creditors once a compromise or arrangement is sanctioned by the court. The expression "creditor" in that setting is used in a wide sense, consistent with winding-up law, and includes contingent and future claims. A sales tax liability arises when the taxable turnover is earned, though the amount is quantified later by assessment. The department therefore had a claim in existence when the scheme was sanctioned, even though the assessment was made later. Once the scheme bound unsecured creditors, the department could not recover more than the proportion fixed by the scheme.

Conclusion: The sales tax department was a creditor bound by the scheme and was not entitled to recover more than the amount payable under the scheme.

Final Conclusion: The recovery notices were unlawful because the department's claim stood restricted by the sanctioned compromise and the company was liable only for the reduced percentage already provided under the scheme.

Ratio Decidendi: In a sanctioned scheme under Section 391 of the Companies Act, 1956, the term "creditor" includes a person or authority having a contingent or future pecuniary claim against a company in winding up, and a tax claim is within that class even before formal assessment quantifies the debt.

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