2005 (5) TMI 630 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Whether the prescribed authority could refuse to issue declaration form No. 40 to a sick industrial company under the Entry Tax Act due to non-payment of tax arrears.
2. Interpretation of section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 in the context of the refusal to issue statutory forms.

Detailed Analysis:

Refusal to Issue Declaration Form No. 40:
The core issue in this writ appeal is whether the prescribed authority under the Karnataka Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1979 (Entry Tax Act) can refuse to issue declaration form No. 40 to a sick industrial company for failing to pay tax arrears. The appellant, a public limited company engaged in cement manufacturing, faced financial difficulties and was declared a "sick industrial company" under the Sick Industrial Companies (Special Provisions) Act, 1985 (1985 Act). The company sought form No. 40 to issue to dealers for claiming tax exemption, but the Deputy Commissioner of Commercial Taxes refused to issue the form until the tax dues were cleared. The appellant challenged this refusal, arguing it violated section 22(1) of the 1985 Act, which prohibits coercive measures against sick companies.

Interpretation of Section 22(1) of the 1985 Act:
Section 22(1) of the 1985 Act states that no proceedings for the winding up, execution, distress, or the like against the properties of a sick industrial company shall proceed without the consent of the Board for Industrial and Financial Reconstruction (BIFR). The appellant argued that the refusal to issue form No. 40 amounted to a coercive measure to compel payment of tax dues, thus violating section 22(1). The court, however, held that section 22(1) aims to prevent positive actions to recover dues, such as initiating legal proceedings, but does not mandate the government or creditors to facilitate the business operations of the sick company.

The court emphasized that the legislative intent behind section 22(1) is to preserve the properties of the sick company during the inquiry or rehabilitation process. The refusal to issue form No. 40 does not constitute "execution, distress or the like" against the company's properties but may exert pressure to clear tax dues. The court noted that issuing the forms would only help the company retain its customers, which is not within the scope of section 22(1).

Dissent with Himalaya Rubber Products Limited Case:
The appellant relied on the Calcutta High Court's decision in Himalaya Rubber Products Limited v. The Board for Industrial and Financial Reconstruction, where the court held that refusal to issue sales tax declaration forms to a sick company was a coercive measure prohibited by section 22(1). However, the Karnataka High Court disagreed, stating that non-issuance of forms does not amount to coercive recovery actions but is merely a pressure tactic. The court clarified that section 22(1) does not obligate creditors to take steps enabling the sick company to conduct competitive business.

Conclusion:
The court dismissed the writ appeal, upholding the refusal to issue form No. 40 as it does not violate section 22(1) of the 1985 Act. The decision underscores that section 22(1) aims to prevent coercive recovery actions but does not compel creditors or authorities to facilitate business operations of sick companies. The court also expressed dissent with the Calcutta High Court's interpretation in the Himalaya Rubber Products Limited case.