TaxTMI 
TaxTMI 
2014 (9) TMI 1259
X X X X Extracts X X X X
X X X X Extracts X X X X
....r Finance Act and for the financial years 1993-94 to 1996-97 it had outstanding dues of Rs. 1,40,576.68 towards Bihar Sales Tax and Rs. 37,24,377.30 towards Central Sales Tax, totaling to Rs. 38,64,953.98 for which certificate proceedings for recovery of the amount had been filed and are pending before the Court of Certificate Officer, Patna being Certificate Case Nos. 1/1999-2000, 1/2000-01 and 2/2000-01 having been filed respectively on 7.1.2000, 27.3.2001 and 27.3.2001 but the said amounts could not be recovered from the said company. It is also the stand of the applicant that a Chartered Accountant had been appointed for submitting an investigation report with respect to the company by the Official Liquidator who has in the said report stated that the sales tax liability of the company is to the tune of Rs. 25,76,427/-. It is the further stand that the company in liquidation in its show cause admitted the said sales tax liability of Rs. 25,76,427/-. It is also stated that since the certificate cases had remained pending for long, therefore, in August, 2010 the Officers of the Department enquired from the office of the Certificate Officer about the progress of the cases and w....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... company or the properties in his hands, makes him personally liable for the payment of tax which the company would be liable to pay. It is also pointed out that the provisions of the said Section have been given overriding effect over anything to the contrary contained in any other law for the time being in force. It is thus submitted by learned counsel for the State-applicant that the Official Liquidator was enjoined by the provision of Section 17 of the Central Sales Tax to give notice to the Sales Tax Authorities and thereafter on being notified of the amount due or likely to become due on the company in liquidation ought to have set apart that amount for satisfaction of those sales tax dues and only thereafter any distribution of the amounts could have been made. In the said circumstances, it is submitted that the amounts wrongly distributed to the workmen and secured creditors ought to be directed to be repaid to the Official Liquidator and only after satisfying the dues of the company, if any amount remains, the same should be paid to the workmen and secured creditors. In support of the aforesaid propositions, learned counsel relies upon a decision of the Supreme Court in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hould not be conferred. The Committee's recommendations were not completely accepted by the legislature. That apart, the report of the Direct Taxes Administration Inquiry Committee was referred to (Srinivasan's book on Income Tax Vol. II, p. 345), wherein necessity was pointed out, for the Liquidator to obtain tax clearance certificate or to compel him to set aside the amounts to cover the amounts due under income tax or amounts which may become due, and it was thereafter, Section 178 of the Income Tax Act, 1961 was enacted in the present form. After referring to the above materials in paragraph 4 of the judgment, the Full Bench of the High Court observed, thus: "With respect, these decisions (Decisions of other High Courts) fail to take note of the object and purpose with which Section 178 of the Income Tax Act was put into the statute book; and the significance and the implications of "setting aside" of an approximate amount needed to meet the tax liability of the company. These have been noticed in the Kerala and the Andhra decisions to which we shall refer. Before we do so, we may briefly indicate that the effect of Section 178(3)(b) is that the amount "set aside" by the Liquid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r sub-section (4) of Section 47 of the Provincial Insolvency Act, or to a creditor who, although he has not relinquished his security, has agreed to the Liquidator selling the property free of his encumbrance on condition of his being given the same charge over the sale proceeds -- seems to regard these as cases of priority, they are really not so much cases of priority as of the particular asset not being available for distribution among the creditors in the winding up. They stand on the same footing as, for example, trust funds. What is really available for distribution are the assets which come into the hands of the Liquidator minus the trust monies, or the encumbrance of a secured creditor, or, in a case falling under Section 178 of the Income Tax Act, the amount set aside or earmarked for the payment of the tax. For, reading sub-sections (2), (3) and (4) of that section together there can be no doubt that what the section does is to create a first charge on the amount set aside by sub-section (3) thereof for payment of the tax that might be admitted to proof. To say as the Liquidator has done that the amount is set aside only for the purpose of paying the dividends that might ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l aspects in a few sentences. We respectfully agree with the view taken by the learned Judge." Approving the above dicta, the Full Bench has further laid stress on the crucial words occurring in Sections 178(2) and 178(3)(b) of the Income Tax Act, which behoves the Official Liquidator to "set aside the amount" equal to the amount notified by the Income Tax Officer and held that these words mean "keeping separate for special purpose" and the words "set aside" or "set apart" are synonymous with the word "appropriate". The Full Bench has observed in paragraph 6 of the judgment thus: "The shades of meaning thus attached to the expression "set aside" convey the idea of an appropriation or an allocation of the income tax dues; with the result, that it stands outside the winding up by the Company Court -- an idea suggested in the judgment of Ag. Chief Justice Raman Nayar, confirmed by the Division Bench." The Andhra Pradesh High Court in the decision reported in ITO v. Official Liquidator: (1975) 101 ITR 470: 1974 Tax LR 2365(AP), has taken a similar view. We are of the opinion that the judgment of the learned Single Judge of the Kerala High Court in ITO v. Indian Traders Bank Lt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fficial Liquidator has failed to discharge his duty under Section 17 of the Act and the distribution of the assets is vitiated and goes to the root of the matter so far as the recovery of the dues under the Central Sales Tax Act is concerned. Learned counsel further submits that under Section 29 of the Bihar Finance Act, 1981 it has been laid down that any amount of tax and penalty payable by the dealer or any other person under the said act shall be a first charge on the property of the dealer or such person. It is thus submitted that dues of the State Sales Tax, being a first charge on the property of the company in liquidation by virtue of statutory charge created under Section 29 of the Act, would have priority over mortgage of the same property with the secured creditors and would have precedence over even existing mortgages on the date of the enactment and the payment to the secured creditors could only have been made after the sales tax dues were realized from the assets in question. In support of the same learned counsel relies upon a decision of the Supreme Court in the case of State Bank of Bikaner & Jaipur Vs. National Iron & Steel Rolling Corporation and others: (....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t in diluting the mandate of Section 11 of the EPF Act, sub-section (2) whereof declares that the amount due from an employer shall be the first charge on the assets of the establishment and shall be paid in priority to all other debts. The words "all other debts" used in Section 11(2) would necessarily include the debts due to secured creditors like banks, financial institutions, etc. The mere ranking of the dues of workers on a par with debts due to secured creditors cannot lead to an inference that Parliament intended to create first charge in favour of the secured creditors and give priority to the debts due to secured creditors over the amount due from the employer under the EPF Act. 49. At the cost of repetition, we would emphasise that in terms of Section 530(1), all revenues, taxes, cesses and rates due from the company to the Central or State Government or to a local authority, all wages or salary of any employee, in respect of the services rendered to the company and due for a period not exceeding 4 months, all accrued holiday remuneration, etc. and all sums due to any employee from a provident fund, a pension fund, a gratuity fund or any other fund for the welfa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion of the Apex Court in the case of Allahabad Bank Vs. Canara Bank & anr: (2000) 4 SCC 406 in which it was held that even where the winding up petition is pending or a winding-up order is passed against the debtor company, the adjudication of liability and execution of the certificate in respect of debt payable to banks and financial institutions are respectively within the exclusive jurisdiction of the Debts Recovery Tribunal and the Recovery Officer and in such a case the Company Court's jurisdiction under Sections 442, 537 and 446 of the Companies Act stands ousted and no leave of the company Court is necessary for initiating such proceedings nor can the company Court transfer to it or otherwise interfere with such proceedings; even the priorities among various creditors can be decided only by the Debts Recovery Tribunal in accordance with Section 19(19) of the RDB Act read with Section 529-A of the Companies Act and in no other manner and the provisions of RDB Act are inconsistent with those of Companies Act. The said decision was partly modified in the subsequent decision in the case of Andhra Bank Vs. Official Liquidator and another: (2005) 5 SCC 75, in paras 25 to 27 of whi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bad Bank Vs. Canara Bank's case (supra) is concerned, the same has no relevance in the present matter and the said decision, as a matter of fact, supports the stand regarding the priority of the debts of the secured creditors and workmen in terms of Section 529A of the Companies Act. In support of his aforesaid stand, learned counsel relies upon a decision of the Supreme Court in the case of Central Bank of India Vs. The State of Kerala and others: (2009) 4 SCC 94, in paras 96, 96.6, 126 and 129 of which it has been held as follows: "96. Section 14-A of the Workmen's Compensation Act, 1923, Section 11 of the Employees" Provident Funds and Miscellaneous Provisions Act, 1952 (for short "the EPF Act"), Section 74(1) of the Estate Duty Act, 1953, Section 25(2) of the Mines and Minerals (Regulation and Development) Act, 1957, Section 30 of the Gift Tax Act, 1958 and Section 529-A of the Companies Act, 1956 are some of the Central legislations by which statutory first charge has been created in favour of the State or workers, read as under." ............. .................... ................... "96.6. "529-A. Overriding preferential ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....udge of the Bombay High Court in Company Application No. 341/2010 (State of Kerala Vs. The Official Liquidator of Poysha Industrial Company Ltd.), in paras 9 and 10 of which, relying upon the above decision of the Apex Court in Central Bank of India's case (supra), it has been held as follows:- "9. The Supreme Court held that there was no provision in the DRT Act and the Securitisation Act by which the first charge has been created in favour of the Banks, Financial Institutions or the secured creditors on the property of the borrower. To that extent, the Appellant's case qua these Acts, was not accepted.............. The observations in paragraph 126 that if the parliament intended to create a first charge in favour of secured creditor on the property of the borrower then it would have incorporated a provision like Section 529-A of the Companies Act, 1956 indicate that Section 529-A in fact created a first charge in favour of the parties mentioned therein namely the secured creditors and worker in the case of a company in liquidation. These observations are reiterated in paragraph 129. It is because the DRT Act and the Securitisation Act did not contain provisions....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o winding up of proceeding is otherwise a special law. While distributing the assets between the creditors and unsecured creditors, the provisions of Sections 529 and 530 must be complied with. 26. All claims against the companies were required to be filed before the liquidator until the property was sold as provided for under Section 457 of the Companies Act. In terms of Section 456 thereof once an order for winding up is made the liquidator has to take into custody the properties, effects and actionable claims to which the company is or appears to be entitled. Section 528 provides that all debts payable on a contingency and all claims against the company, present or future are admissible to proof against the company. Section 529 provides for the same rule as in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent. Section 530 provides for certain priorities to secured creditors and other unsecured creditors. 27. Once the property is sold, the assets of the company are required to be distributed to the creditors in order of preference. As the respondent municipality was not a secured creditor, the impugned....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ollows: "With this preface, I go on to consider, first, what is the prerogative or (if there be more than one) what are the prerogatives of the Crown, and, secondly, what is the operation of the statute in respect of them. The Crown, by virtue of its prerogatives, is entitled to say: "In payment of debt I have the right to come first and to enforce that right I can proceed by way of writ of extent. I should not myself describe this as two prerogative rights, of which one is larger than the other, but rather as one prerogative right and a prerogative remedy to enforce the right, I can understand that the Crown might surrender the latter, while retaining the former, but not that it could surrender the former while retaining the latter. If the right to come first is surrendered, the prerogative remedy to enforce that right by writ of extent must have been surrendered also. The question for decision, therefore, I think is, and is only, whether the Crown has surrendered the prerogative right to come first. The effect of section 209 is as follows: By section 209, sub-section (1)(a), certain Crown debts, which I will call the specified Crown debts, are brought into the clas....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f Assistant Commissioner of Income Tax V. Official Liquidator of Minal Oil and Industries Ltd. and others: (2007) 136 Company Cases 399 (Guj), in paras 11 and 12 of which it has been observed as follows:- "11. Therefore, even considering the proviso to section 178(3) of the Act, the official liquidator is not debarred from making any payment to secured creditors, whose debts are entitled under the law to priority of payment over debts due to the Government on the date of liquidation. Thus, the said provision itself provides that payment can be made to secured creditors having priority in law over the Government. Therefore, the contention on behalf of the applicant that on notifying the claim by the Assessing Officer under section 178(2) of the Act, the official liquidator is required to set apart the said amount and only thereafter the balance amount can be disbursed amongst other secured creditors, cannot be accepted. If such interpretation is given, the same would be contrary to the proviso to sub-section (3) of Section 178 of the Act. Under the circumstances, the contention on behalf of the applicant to that effect is required to be rejected. If section 529A of the Comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....before the hon"ble Supreme Court was whether the claim of the tax would have precedence over the claim of other creditors under section 530 of the Companies Act in view of the provisions of sub-section (5) of section 530 of the Companies Act and it is to that extent that the hon"ble Supreme Court held that an order passed under section 178 of the Act will prevail over the rights of other unsecured creditors under section 530 of the Companies Act and therefore, the decision of the hon"ble Supreme Court in the case of Imperial Chit Funds (P.) Ltd. [1996] 219 ITR 498; [1996] 86 Comp. Cas 555; AIR 1996 SC 1887 is not of any assistance to the applicant. Identical questions came to be considered by the Bombay High Court and the Kerala High Court in the cases of Syndicate Bank [1999] 98 Comp Cas 487; AIR 1999 Bom 243, Venad Pharmaceuticals and Chemicals Ltd. ( in liquidation), In re [2003] 114 Comp Cas 185 respectively and considering the decision of the hon"ble Supreme Court in the case of Imperial Chit Funds (P.) Ltd. [1996] 219 ITR 498; [1996] 86 Comp Cas 555; AIR 1996 SC 1887 as well as the decision of the Andhra Pradesh High Court in the case of ITO V. Official Liquidator [1975] 101 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pari passu with that of the secured creditors. Thus, it is submitted by the O.L. that the payment of the amount of Rs. 99/- lacs from the secured assets of the company in no way contravenes the provisions of Section 17 of the Central Sales Tax Act. The O.L. further submits that any dues of tax of the State or the Central Government do not stand above the scrutiny of the company Court and after an assessment order is made by the taxation authorities, it is open for determination by the liquidation court for the purpose of safeguarding the interest of the company and its creditors under the Companies Act. In support of the same, he relies upon a Constitution Bench decision of the Apex Court in the case of S.V. Kandeakar v. V.M. Deshpande, : AIR 1972 SC 878, in para 8 of which it has been held as follows: "8. The argument that the proceedings for assessment or re-assessment of a company which is being wound up can only be started or continued with the leave of the liquidation Court is also, on the scheme both of the Act and of the Income-tax Act, unacceptable. We have not been shown any principle on which the liquidation court should be vested with the power to stop assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct cannot override the provisions under the Companies Act and thus the amounts which were realized on sale of the properties which were secured to the secured creditors have rightly been distributed pari passu among the secured creditors and the workmen, the dues of the secured creditors being to the tune of Rs. 11,66,65,088/- whereas the payment made to them was Rs. 99/- lacs. In support of his stand the O.L. also relies upon a decision of a Division Bench of Kerala High Court in K.T.C.Tyres (India) Limited ( in liquidation) In re: (2003) 114 Company Cases 185, at page 189 of which it has been held as follows: "We have to examine the claim of the Income Tax Department vis-à-vis Section 529-A of the Companies Act. Section 529A was inserted in the Companies Act by Act 35 of 1985. Ss. 529- A and 530 confer special rights and benefits on the workmen of the undertaking. Workmen get rights pari passu with those of the secured creditors on the assets of the company in liquidation. Purpose of the Section is to ensure that workmen should not be deprived of their rights in the event of liquidation of the company. Section 529-A has employed a non-obstante clause which says....
X X X X Extracts X X X X
X X X X Extracts X X X X
....his proviso or the amount of the workmen's portion in his security, whichever is less, shall rank pari passu with the workmen's dues for the purposes of section 529-A. (2) All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up, and make such claims against the company as they respectively are entitled to make by virtue of this section. Provided that if a secured creditor instead of relinquishing his security and proving for his debts proceeds to realize his security, he shall be liable to pay his portion of the expenses incurred by the Liquidator (including a provisional Liquidator, if any) for the preservation of the security before its realization by the secured creditor. Explanation.- For the purposes of this proviso, the portion of expenses incurred by the Liquidator for the preservation of a security which the secured creditor shall be liable to pay shall be the whole of the expenses less an amount which bears to such expenses the same proportion as the workmen's portion in relation to the security bears to the value of the security." "529-A - Overriding preferential p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l debar the liquidator from parting with such assets or properties in compliance with any order of a court or for the purpose of the payment of the tax payable by the company under this Act or for making any payment to secured creditors whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation or for meeting such costs and expenses of the winding up of the company as are in the opinion of the appropriate authority reasonable. (4) If the liquidator fails to give the notice in accordance with sub-section (1) or fails to set aside the amount as required by, or parts with any of the assets of the company or the properties in his hands in contravention of the provisions of sub-section (3), he shall be personally liable for the payment of the tax which the company would be liable to pay: Provided that if the amount of any tax payable by the company is notified under sub-section (2), the personal liability of the liquidator under this sub-section shall be to the extent of such amount. (5) Where there are more liquidators than one, the obligations and liabilities attached to the liquidator under this section shall attach to all the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he duty of the O.L. to set apart any amount realized out of the assets which are the security of a secured creditor who has not relinquished the security and proceeded to realize the same. In such case the role of the O.L. is only to see that the pari passu charge of the workmen on such assets to be realized by the secured creditors are protected for the purpose of realizing the workmen's dues. It is nowhere stated in Imperial Chit Funds's case (supra) that even such assets of the secured creditors are to be sold for the purpose and the amounts realized from such assets of the secured creditors which are sold are also to be kept apart. As a matter of fact, as rightly submitted by the O.L., it has been made clear in the proviso to sub-section (3) of Section 17 of the CST Act that the said sub-section does not debar the O.L. from making any payment to the secured creditors. As a matter of fact, the so called payment by the O.L. to the secured creditors is not really a payment to the secured creditors. It is only distribution of the money among the secured creditors of the security asset on which they have the charge and with regard to which they have right to stay outside the winding....
X X X X Extracts X X X X
X X X X Extracts X X X X
....purposive interpretation keeping in view the directive principles of State Policy contained in Articles 38 and 43 of the Constitution. No such principles of interpretation can be invoked in favour of Section 17 of the Central Sales Tax Act or Section 29 of the Bihar Finance Act. The Board of Trustees, Port of Mumbai case (supra), relied upon by learned counsel for the State, was based upon the principle that the statutory lien of a harbour authority has paramountcy even over the claims of secured creditors in a winding up and in exercise of that paramount right under Section 64 of the Major Port Trusts Act, 1963 the harbour authority has a right to arrest and sell the vessel without any leave of the winding up Court. No such paramount lien is conferred upon the Sales Tax authorities. At this stage I may also consider the submission made by learned counsel for the State-applicant that the sales tax dues do not form part of the asset of the company as having been recovered by the dealer from the purchasers. The provisions of the Companies Act under Section 531(1)(a) themselves clearly go to show that the tax to be recovered by the State Government whether they are in the nature....