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2014 (9) TMI 1259 - HC - VAT and Sales TaxDistribution of the sale proceeds of the assets of the company under liquidation - Direction to return the amounts received - priority over mortgage of the same property - Application of insolvency rules in winding up of insolvent companies - Section 17 of the Central Sales Tax Act 1956 pari materia to the provisions of Section 178 of the Income Tax Act - HELD THAT - The bulk of the dues claimed by the State applicant is under the Central Sales Tax Act to the tune of Rs. 37, 24, 377.30 plus interest thereon and a lesser amount of Rs. 1, 40, 576.68 under the Bihar Finance Act 1981. The dues relate to the period starting from the financial year 1993-94 till 1996-97 for which certificate cases were filed in the year 2000 and 2001 by the Sales Tax Department. So far as the dues under the Central Sales Tax Act are concerned the State-applicant essentially relies upon the decision of the Apex Court in IMPERIAL CHIT FUNDS (P.) LTD. VERSUS INCOME-TAX OFFICER 1996 (3) TMI 397 - SUPREME COURT . What was held in the said decision was that the provision of Section 178 of the Income Tax Act which is pari materia with the provision of Section 17 of the Central Sales Tax Act 1956 goes beyond the provisions of Section 530(1)(a) of the Companies Act. It is evident that the question of setting apart any amount would only arise out of the sale of any assets which are not the asset of secured creditor who has not relinquished the security. Thus it is no part of the 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 - In the present winding-up proceedings it is evident that the secured creditors have not relinquished their security but have proceeded to realize the same under the aegis of the Liquidator who was acting essentially for protecting the interest of the workmen and for recovery of the expenses for the preservation of the said secured assets. It is thus evident that the secured creditors in terms of the provisions of the Companies Act had merely obtained proportionate interest in the security and neither Section 17 of the Central Sales Tax Act nor Section 530(1)(a) of the Companies Act has the effect of overriding the interest of the secured creditors and the workmen in terms of Section 529A read with Section 529 of the Companies Act over such secured assets. This Court does not find any force in the submission of learned counsel for the State-applicant - Application dismissed.
Issues Involved:
1. Distribution of sale proceeds among workmen and secured creditors. 2. Priority of sales tax dues over other debts. 3. Obligations of the Official Liquidator under Section 17 of the Central Sales Tax Act. 4. Interpretation of Section 178 of the Income Tax Act and its applicability. 5. Priority of secured creditors and workmen's dues under Sections 529 and 529-A of the Companies Act. 6. Applicability of state laws versus the Companies Act in liquidation proceedings. 7. Personal liability of the liquidator for non-compliance with statutory obligations. Issue-wise Detailed Analysis: 1. Distribution of Sale Proceeds: The interlocutory application sought a direction to recall the distribution of Rs. 99,00,000/- sale proceeds of M/s. Nacro Chemicals Ltd. among workmen and secured creditors (State Bank of India and I.D.B.I. Bank) and to prioritize payment of sales tax dues amounting to Rs. 38,64,953.98 to the Government of Bihar. The court dismissed the application, holding that the distribution among secured creditors and workmen was in accordance with the law. 2. Priority of Sales Tax Dues: The State of Bihar argued that sales tax dues, being indirect taxes collected by the dealer from purchasers, should have priority over other debts. The court rejected this argument, stating that under Section 530(1)(a) of the Companies Act, sales tax dues do not take precedence over the dues of secured creditors and workmen. 3. Obligations of the Official Liquidator: The Official Liquidator was criticized for not notifying the tax authorities as required under Section 17 of the Central Sales Tax Act, which mandates setting aside an amount equal to the notified tax dues. However, the court noted that the liquidator is not debarred from parting with assets for payment to secured creditors, as clarified in the proviso to Section 17(3). 4. Interpretation of Section 178 of the Income Tax Act: The court referred to the Supreme Court's decision in Imperial Chit Funds (P) Ltd. v. Income Tax Officer, which held that the provisions of Section 178 of the Income Tax Act (similar to Section 17 of the Central Sales Tax Act) require the liquidator to set aside amounts for tax dues. However, this does not override the rights of secured creditors and workmen under Sections 529 and 529-A of the Companies Act. 5. Priority of Secured Creditors and Workmen's Dues: The court emphasized that under Sections 529 and 529-A of the Companies Act, the dues of secured creditors and workmen have priority over other debts, including tax dues. The secured creditors had not relinquished their security and were entitled to realize their security, with the liquidator ensuring the pari passu charge for workmen's dues. 6. Applicability of State Laws versus the Companies Act: The court held that the provisions of the Companies Act, being a special enactment by the Union Parliament, override the provisions of state laws like the Bihar Finance Act in the context of winding-up proceedings. The court cited the Supreme Court's decision in Central Bank of India v. State of Kerala, which held that state laws creating a first charge on the property cannot override the specific provisions of the Companies Act. 7. Personal Liability of the Liquidator: The court reiterated the statutory obligation of the liquidator to notify tax authorities under Section 17 of the Central Sales Tax Act and Section 178 of the Income Tax Act, failing which the liquidator could be personally liable. The court directed the Official Liquidator to ensure compliance with these statutory requirements in all pending and future winding-up matters. Conclusion: The application was dismissed, with the court affirming the priority of secured creditors and workmen's dues under the Companies Act over sales tax dues. The court also underscored the statutory obligations of the liquidator to notify tax authorities and set aside amounts for tax dues, while clarifying that this does not override the rights of secured creditors and workmen.
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