TaxTMI 
TaxTMI 
2026 (7) TMI 105
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....ings of Saurashtra Specialities Private Limited/Corporate Debtor (CD). The Corporate Debtor is the Respondent No.3 herein. Ld. Adjudicating Authority vide the impugned order allowed the application of the Resolution Professional (RP)-Respondent No.2 herein, for approval of the Resolution plan of CD submitted by Respondent No.1-Besto Tradelink Limited (Successful Resolution Applicant). The Appellant is aggrieved by treatment of its claim of outstanding GST dues from Corporate Debtor of Rs. 83,05,820/-, which were raised by the Appellant upon corporate debtor for previous Assessment Years. The Appellant has been treated as Operational Creditor in the Resolution Plan instead of Secured Operational Creditor. BRIEF FACTS OF THE CASE The brief facts relevant to deciding the present appeal are as given below: - i) The present Appeal has been preferred by the State Tax Officer, Unit-92, Rajkot, assailing the order dated 01.02.2024 passed by the Adjudicating Authority in IA No. 1467 of 2023 filed by the RP in CP (IB) No. 184 of 2022, whereby the Resolution Plan of Corporate Debtor submitted by SRA & Respondent No.1 (Besto Tradelink Limited) was approved by the Ld. Adjudicatin....
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....y failed to recognize the Appellant as a Secured Creditor despite the existence of a statutory first charge over the assets of the Corporate Debtor. It is contended that Section 82 of the CGST Act creates a first charge upon the property of a taxable person in respect of outstanding tax dues, which constitutes a "security interest" within the meaning of Sections 3(30) and 3(31) of the Code. Since the definition of "security interest" includes any right, title, interest, claim, charge or encumbrance created by operation of law, the holder of such statutory charge necessarily acquires the status of a Secured Creditor. 3. Learned Counsel further submits that the Resolution Professional committed a serious error in treating the Appellant merely as an Operational Creditor while overlooking the statutory charge existing in favour of the State Tax Department. It is further submitted that a first charge had already been created over the properties and bank accounts of the Corporate Debtor on 25.07.2022 and 14.10.2022, prior to commencement of CIRP and imposition of moratorium under Section 14 of the Code. Consequently, the security interest had crystallized before commencement of insolv....
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....perly appreciating the ratio of Rainbow Papers and thereby committed a manifest error of law. 8. Apart from the issue of classification of the claim, Learned Counsel also assails the action of the Resolution Professional in rejecting the updated claim submitted by the Appellant. During the moratorium period, scrutiny proceedings resulted in determination of additional tax liability of the Corporate Debtor, whereupon the Appellant requested the Resolution Professional to take the updated liability into account. 9. Learned Counsel submits that the Resolution Professional wrongly refused to admit the updated claim on the premise that it arose during the moratorium period. Assessment, adjudication, scrutiny or determination of tax liability by a statutory authority does not amount to recovery proceedings and therefore does not violate the moratorium under Section 14 of the Code. Since no coercive recovery action was initiated and the tax authorities merely quantified the liability, there was no legal impediment to considering the updated claim. The rejection of the revised claim has caused substantial prejudice to the Appellant and further vitiated the Resolution Plan. 10. In ....
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....unsecured operational creditor. The Appellant also failed to object when the Resolution Plan was under consideration before the Adjudicating Authority for approval. 14. Learned Counsel submits that the Resolution Plan has been fully implemented. Payments envisaged under the approved Resolution Plan have already been made to the stakeholders and the resolution process has attained finality. It is argued that the Appellant's failure to challenge its categorization at the appropriate stage has resulted in an irreversible situation and therefore no equitable relief can now be granted. 15. Respondent No.1 further submits that the Resolution Professionals correctly appreciated the legal position while examining the nature of the Appellant's claim. It is argued that Section 82 of the Central Goods and Services Tax Act, 2017 cannot be equated with Section 48 of the Gujarat Value Added Tax Act, which was under consideration in Rainbow Papers. Particular emphasis has been laid upon the language employed in Section 82 of the CGST Act, namely, "save as otherwise provided in the Insolvency and Bankruptcy Code, 2016". According to the Respondent, the aforesaid provision itself manifests th....
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....n 48 of the Gujarat Value Added Tax Act, 2003, which creates a first charge over the property of the dealer without any qualification or subordination to the Insolvency and Bankruptcy Code, 2016. In contrast, Section 82 of the Central Goods and Services Tax Act, 2017 expressly provides that any first charge created thereunder shall operate "save as otherwise provided in the Insolvency and Bankruptcy Code, 2016". The aforesaid saving clause is of decisive significance. The legislature, while enacting the CGST Act subsequent to the enactment of the Insolvency and Bankruptcy Code, consciously subordinated the statutory charge under Section 82 to the overriding framework of the Code. Consequently, once insolvency proceedings commence under the IBC, the treatment of claims and distribution of proceeds are governed exclusively by the provisions of the Code. 21. RP submitted that the express legislative recognition accorded to the IBC in Section 82 of the CGST Act clearly demonstrates that the statutory charge contemplated under the GST regime cannot override the insolvency framework or alter the priority mechanism prescribed under the Code. Accordingly, the Appellant's claim could....
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....n Professional, by email dated 24.11.2022, expressly communicated the reasons for not treating the Appellant as a secured creditor and admitted the claim under the category of unsecured operational debt. RP submits that, despite having complete knowledge of the decision taken by the Resolution Professional, the Appellant never challenged the same before the Adjudicating Authority. Instead, the Appellant merely continued to address representations and correspondence seeking reconsideration of its claim. 26. Learned Counsel further submits that even after being informed about approval of the Resolution Plan, the Appellant did not seek any immediate relief before the Adjudicating Authority. Instead, it directly preferred the present Appeal. Appellant thereby sought to bypass the statutory framework contemplated under the Code and the settled principle that grievances concerning actions of the Resolution Professional ought to be raised before the Adjudicating Authority in the first instance. The Appellant remained a silent spectator throughout the CIRP despite full knowledge of the treatment accorded to its claim. Such prolonged inaction, according to the Respondent, amounts to waiv....
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....erson on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer..." 34. State Tax Department of Gujarat under the GVAT Act, 2003, charges Value Added Tax (VAT) from the dealers registered with it for sale of goods by them. As prescribed in the Section 48 of the GVAT Act, 2003 the dues of VAT on account of tax, interest or penalty was to be the first charge upon the property of such dealer. It was held in Rainbow Papers (supra) that in case of distribution of assets of a Corporate Debtor in accordance with Section 53 of the Code, which is done on the basis of categorisation of claims as prescribed in Section 53, the State Tax Authority, Gujarat would be treated as secured creditor on the basis of Section 48 of GVAT Act, 2003. This decision led to consideration of claims of Gujarat Tax Department under Section 53(1)(b)(ii) of the Code in CIRP and Liquidation Proceedings. Prior to the Rainbow (supra) the dues of Gujarat Tax Department were lower in priority at Section 53(1)(e)(i) of Code, under which the dues of all Central & State Government Departments were considered. Thus, the judgment in Rainbo....
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....ourt in Rainbow Papers was concerned only with Section 48 of the Gujarat Value Added Tax Act, 2003, Section 82 of the CGST Act 2017 containing an express saving clause in favour of the Insolvency and Bankruptcy Code was not before the court. The statutory framework involved in Rainbow Papers was therefore materially different from the statutory framework governing the present Appeal. 40. We further notice that subsequent judicial pronouncements have clarified the limited applicability of the judgment in Rainbow Papers. In Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Private Limited, Civil Appeal No.7976 of 2019, the Hon'ble Supreme Court observed that: "The judgment in Rainbow Papers has to be confined to the facts of that case." 41. The claim of the Appellant to be treated as Secured Operational Creditor here is based on interpretation of Section 82 of the CGST Act, 2017 which clearly states that the charge on the property shall be considered as first charge but in case of treatment under IBC, 2016 the same would be considered as per provisions of the Code. This means that the dues of the Central or State Government would be treated in accordance with S....