1973 (9) TMI 75 - HC - Companies Law

Court ruling: Sales tax dues not priority, penalty claim allowed, post-winding up penalties rejected.

The court ruled that sales tax dues for the specified period did not have priority as they were due before the relevant date. The penalty amount of Rs. ... Winding up – Application of insolvency rules, Preferential payments, Principles for interpretation of statutes Issues Involved:1. Priority in payment of sales tax dues under the Bombay Sales Tax Act and Central Sales Tax Act.2. Admissibility of penalty as a debt entitled to payment pari passu with other unsecured creditors.3. Admissibility of penalty for the period subsequent to the date of winding up.Detailed Analysis:1. Priority in Payment of Sales Tax Dues:The primary issue was whether the sales tax dues under the Bombay Sales Tax Act and Central Sales Tax Act, for the period from April 1, 1957, to December 31, 1965, should be given priority in payment as per section 530(1)(a) of the Companies Act, 1956. The Sales Tax Officer argued that the sales tax dues became due and payable within 12 months before the relevant date (June 26, 1967), thus entitling them to priority.The court analyzed section 530(1)(a), which states that for a debt to be given priority, it must be 'due' at the relevant date and must have 'become due and payable' within 12 months before that date. The court interpreted 'due' in the first part of the clause to mean 'outstanding at the relevant date' and 'having become due and payable' to mean that the debt must have arisen and become enforceable within the specified 12-month period.The court concluded that sales tax becomes due when the taxable event (sale of goods) occurs, not when the assessment order is made. Therefore, the sales tax dues for the period from April 1, 1957, to December 31, 1965, were not entitled to priority as they became due long before the 12-month period preceding the winding-up date.2. Admissibility of Penalty as Debt:The Sales Tax Officer also sought the inclusion of the penalty amount as a debt entitled to payment pari passu with other unsecured creditors. The court noted that the liquidator had rejected the entire penalty claim. However, the liquidator conceded that the penalty amount of Rs. 1,225.35, levied up to the relevant date, could be admitted as an ordinary claim.The court directed the liquidator to admit the penalty amount of Rs. 1,225.35 as an ordinary claim, over and above the claim already admitted.3. Admissibility of Penalty for the Period Subsequent to the Date of Winding Up:The petitioner also claimed penalty for the period after the winding-up order and requested it to be admitted as an ordinary claim. The court examined whether the penalty for non-payment of tax due would be payable for an insolvent company for the period after the winding-up order.The court considered that the liquidator, upon stepping in, takes time to collect assets and invite proofs of claims. It would be inequitable to penalize the liquidator for delays inherent in the statutory process. The court also noted that the theory in bankruptcy is to stop all things at the date of bankruptcy, implying that no further liability should accrue post the winding-up order.The court held that penalty for the period after the winding-up order could not be admitted as it would be punitive and not a debt incurred by the liquidator. Therefore, the claim for penalty for the period subsequent to the relevant date was rightly rejected by the liquidator.Conclusion:The appeal was partially allowed to the extent of admitting the penalty amount of Rs. 1,225.35 as an ordinary claim. The rest of the liquidator's order, including the rejection of priority for sales tax dues and penalty for the period after the winding-up order, was confirmed.