TMI Blog2014 (9) TMI 1259X X X X Extracts X X X X X X X X Extracts X X X X ..... ateria 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 was told that a large number of files had been stolen from the said office which included the records of the company in liquidation for which Gandhi Maidan P.S. Case No. 224/2008 dated 10.7.2008 under Section 379 IPC had been registered. In the office it was also learnt that M/s. Nacro Chemicals Limited had gone into liquidation which fact was confirmed from the office of the Official Liquidator also and it was learnt that the assets of the company had been sold for Rs. 99/- lacs. Thereafter the present interlocutory application was filed and upon learning that the amounts have already been distributed among the workmen and the secured creditors subsequently another interlocutory application seeking the relief of amendment of prayers was filed which amendment was allowed. Learned counsel for the applicant submits that the sales tax dues of the company in liquidation are in the nature of indirect taxes whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the case of Board of Trustees, Port of Mumbai Vs. Indian Oil Corporation and another: (1998) 4 SCC 302, in paras 12 and 13 of which it has been held as follows:- 12. In M.K.Ranganathan V. Govt. of Madras: AIR 1955 SC 604: (1955) 2 SCR 374: (1955) 25 Comp Cases 344 (SCR at pp. 383,387) this Court considered the position of a secured creditor in a winding-up proceeding as also of a person entitled to attach and sell any property without the intervention of the court. It said that a secured creditor stands outside the winding up and can realize his security without the leave of the court; though if he files a suit or takes legal proceedings he will require the leave of the winding-up court. Attachment or distraint without the intervention of the court are not under the purview of winding-up proceedings (see also Industrial Credit and Investment Corpn. Of India Ltd. V. Srinivas Agencies: (1996) 4 SCC 165. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 Liquidator is marked off as outside the area of the winding-up proceedings and the jurisdiction of the winding-up court. This is the view taken by the Kerala High Court and we are in agreement with it; We would only add that the scope of Section 530(1)(a) is different from that of Section 178 of the Income Tax Act. Under Section 530(1)(a) all taxes which have become due and payable alone are entitled to preferential payment. The amount should have been crystallized into a liability. Under Section 178(2) read with Section 178(3) of the Income Tax Act, provision should be made for any tax which is then or is likely thereafter to become payable. Even the amounts which have not been crystallized into a liability, but which are likely to become due thereafter should be taken note of. And, we should also bear in mind, the non obstante clause -- Section 178(6) of the Income Tax Act. 7. In the judgment under appeal, the Full Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 be declared in respect of the tax liability and not the entire liability as proved in the winding up, so that the section serves only the limited purpose of ensuring that the assets of the company are not distributed beyond recall without reserving sufficient funds for the payment of dividends in respect of the tax liability which might not yet have been determined, and therefore not proved, is hardly in keeping with the wording of the section defective though it be. Sub-section (2) of the section, it may be noted, speaks of the tax payable by the company, and, sub-section (4), of the payment of the tax on behalf of the company, not of the dividends payable in respect of the tax liability. What the section contemplates is the payment of the tax eventually found due out of the amount set aside, not the payment of dividends in respect of the tax eventually found due. And, if this brings the section into conflict with Section 530 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Ltd.:1968 KLT 595(Ker), affirmed in AS No. 225 of 1968 and approved by the Full Bench in the judgment under appeal as also the decision of the Andhra Pradesh High Court in ITO v. Official Liquidator (1975) 101 ITR 470: 1974 Tax LR 2365(AP), lay down the law correctly. On a total view of the relevant statutory provisions, it appears to us that the Income Tax Department is treated as a secured creditor . The decisions of the Mysore, Calcutta, Rajasthan, Gujarat and Delhi High Courts have failed to give due importance to the legislative history and background that led to the enactment of the section and the crucial words occurring in Sections 178(3) and 178(4) of the Income Tax Act to the effect that the Official Liquidator shall set aside the amount notified by the Income Tax Officer and if it is not so done, the Official Liquidator is personally liable to pay the amount of tax which the company would be liable to pay. It should be remembered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: (1995) 2 SCC 19, in paras 10 and 11 of which it has been held as follows:- 10. In the present case, the section creates a first charge on the property, thus clearly giving priority to the statutory charge over all other charges on the property including a mortgage. The submission, therefore, that the statutory first charge created by Section 11-AAAA of the Rajasthan Sales Tax Act can operate only over the equity of redemption, cannot be accepted. The charge operates on the entire property of the dealer including the interest of the mortgagee therein. 11. Looked at a little differently, the statute has created a first charge on the property of the dealer. What is meant by a first charge ? Does it have precedence over an earlier mortgage? Now, as set out in Dattatreya Shanker Mote case: (1981) 2 All ER 555 a charge is a wider term than a mortgage. It would cover within its ambit a mortgage also. Therefore, when a first charge is created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 welfare of the employees maintained by the company are payable in priority to all other debts. This provision existed when Section 11(2) was inserted in the EPF Act by Act 40 of 1973 and any amount due from an employer in respect of the employees contribution was declared first charge on the assets of the establishment and became payable in priority to all other debts. However, while inserting Section 529-A in the Companies Act by Act 35 of 1985 Parliament, in its wisdom, did not declare the workmen s dues (this expression includes various dues including provident fund) as first charge. 50. The effect of the amendment made in the Companies Act in 1985 is only to expand the scope of the dues of workmen and place them on a par with the debts due to secured creditors and there is no reason to interpret this amendment as giving priority to the debts due to secured creditor over the dues of provident fund payable by an employer. Of course, after the amount due from an emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsistent 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 which it was held as follows:- 25. While determining Point (6), however, a stray observation was made to the effect that the workmen s dues have priority over all other creditors, secured and unsecured because of Section 529-A(1)(a). Such a question did not arise in the case as Allahabad Bank was indisputably an unsecured creditor. 26. Such an observation was, thus, neither required to be made keeping in view the fact situation obtaining therein nor does it find support from the clear and unambiguous language contained in Section 529-A(1)(a). We have, therefore, no hesitation in holding that finding of this Court in Allahabad Bank: (2000) 4 SCC 406, to the aforementioned extent does not lay down the correct law. 27. The Court also wrongly placed reliance on National Textile Workers Union V. P.R. Ramakrishnan: (1983) 1 SCC 228. The question which arose therein was only as regards the right of the workers to be heard in the winding-up proceeding. The said decision was, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of the State or workers, read as under. ............. .................... ................... 96.6. 529-A. Overriding preferential payments.--(1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company,-- (a) workmen s dues; and (b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of Section 529 pari passu with such dues, shall be paid in priority to all other debts. (2) The debts payable under clause (a) and clause (b) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions. (emphasis supplied) 126. While enacting the DRT Act and the Securitisation Act, Parliament was aware of the law laid down by this Court wherein priority of the State dues was recognised. If Parliament intended to create first charge in favour of banks, financial institutions or other secured creditors on the property of the borrower, then it would have incorporated a provision like Section 529-A of the Companies Act or Section 11(2) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are reiterated in paragraph 129. It is because the DRT Act and the Securitisation Act did not contain provisions similar inter-alia to Section 529-A of the Companies Act, 1956 that the Supreme Court negated the Appellants contention. In fact in the paragraph 131, the Supreme Court held that the Court could have given effect to the non-obstante clauses contained in the DRT Act and the securitization Act vis- -vis Section 26-B of the Kerala General Sales Tax Act, 1963 only if there was a specific provision in the two enactment creating the first charge in favour of the secured creditors. It is only because Parliament had not made such provision in the said two enactments, that it was held that the first charge created by the State Legislation could not be destroyed by implication or inference. 10. The debtor in the present case is a company in liquidation and the provision of Section 529,529-A and 530 of the Companies Act, 1956 are applicable and these provisions contain such a charge as held by the Supreme Court itself. In view thereof and in view of the observation of the Supreme Court, it must be held that the Applicant s dues do not have priority over the dues which fall wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent municipality was not a secured creditor, the impugned judgment cannot be sustained. 29. Dues of the municipality would also not even otherwise come within the purview of the Crown debt. Even a Crown debt could be discharged only after the secured creditors stand discharged. 30. In Union of India v. Sicom Ltd.:( 2009) 2 SCC 121 it is stated: (SCC pp. 126-27, paras 9- 10) 9. Generally, the rights of the Crown to recover the debt would prevail over the right of a subject. Crown debt means the debts due to the State or the King; debts which a prerogative entitles the Crown to claim priority for before all other creditors . [See Advanced Law Lexicon by P. Ramanatha Aiyar (3rd Edn.) p. 1147.] Such creditors, however, must be held to mean unsecured creditors. Principle of Crown debt as such pertains to the common law principle. A common law which is a law within the meaning of Article 13 of the Constitution is saved in terms of Article 372 thereof. Those principles of common law, thus, which were existing at the time of coming into force of the Constitution of India are saved by reason of the aforementioned provision. A debt which is secured or which by reason of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht into the class of debts identified by section 209(1)(a), (b), (c), (d). Debts of this class are to be paid in priority to all other debts, in priority, therefore, to (amongst others) the unspecified Crown debts. Subject to the priority right of this class, all liabilities are by section 186 to be satisfied pari passu. The specified Crown debts, therefore, are to be paid pari passu with the other debts in the class created by section 209(1), and in priority to all other debts, whether Crown debts or not, which are not in that class. Further, all debts, whether Crown debts or not which are not in that class are to be paid pari passu after satisfying the above priority. This is the statutory administration of the assets, and to this the Crown has given its assent. It follows from what I have said that the Crown is no longer in a position to say I come first . It does not come first. Some debts have been raised by section 209 (1) to a position in which they rank with the specified Crown debts, and that class comes first. Other-debts have been raised by section 186 to a position in which they rank with the unspecified Crown debts, and these are to be postponed and to be paid p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies Act, 1956, is considered, it is clear that it has an overriding effect. Section 529A of the Companies Act was brought in by an amendment and was inserted in the Companies Act by Act of 1985. The said section makes it clear that notwithstanding anything contained in any other provisions of this Act or any other law for the time being in force, dues of the workers and the debts due to secured creditors to the extent such debts rank under clause ( c) of the proviso to sub-section (1) of section 529 pari passu with such dues shall be paid in priority to all other debts. It is also required to be noted at this stage that so far as the dues of the company towards the tax liabilities is concerned, the same would come within section 530(1)(a) of the Companies Act and as per section 530(1) of the Companies Act, the said dues as envisaged under section 530(1)(a), would be subject to the provisions of section 529A and the said dues are to be paid in priority to all other debts subject to the provisions of Section 529A of the Companies Act. Therefore, first, the amount realized, is to be disbursed to the creditors, as mentioned under section 529A of the Companies Act and they would ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01 ITR 470; [1976] 46 Comp Cas 46, the Bombay High Court and the Kerala High Court have held that rights of the secured creditors and the workers as set out under section 529A of the Companies Act would override the claim of the tax authorities in respect of order made under section 178 of the Act. This court is in full agreement with the decisions of the Bombay High Court and Kerala High Court by which the contention of the Income-tax Department that considering the provisions of section 178 of the Act, the dues of the Income-tax Department would have a preference over the secured creditors and the workers, has been negatived. The Official Liquidator, apart from adopting the submission of learned counsel for the IDBI Bank, submits that in the present matter the winding-up order has been passed on the recommendation of the BIFR. So far as the report of the Chartered Accountant is concerned, the same was for the purpose of prosecution and that any of the amounts disclosed in the Chartered Accountant s report has not been admitted by the O.L. and any admission of the ex-Management in their affidavit can be of no avail with respect to the company in winding-up. It is submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t proceedings for determining the amount of tax payable by the company which is being wound up. The liquidation Court would have full power to scrutinize the claim of the revenue after income- tax has been determined and its payment demanded from the liquidator. It would be open to the liquidation court then to decide how far under the law the amount of Income-tax determined by the Department should be accepted as a lawful liability on the funds of the company in liquidation. At that stage the winding up Court can fully safeguard the interests of the company and its creditors under the Act. Incidentally, it may be pointed out that at the bar no English decision was brought to our notice under which the assessment proceedings were held to be controlled by the winding up Court. On the view that we have taken, the decision in the case of Seth Spinning Mills Ltd. (In Liquidation) (1962) 46 ITR 193 (Punj) (supra) and the Mysore Spun Silk Mills Ltd. (In Liquidation) (1968) 68 ITR 295 (Mys) (supra) do not seem to lay down the correct rule of law that the Income-tax Officers must obtain leave of the winding up court for commencing or continuing assessment or re-assessment proceedings. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anding anything contained in any other provision of the Companies Act or any other law for the time being in force . The non obstante clause whittles down the priority of even the crown debts. It is the general concern for the interest of the workmen that is saved by the Apex Court in the decision in Workmen of Rohtas industries Ltd. V. Rohtas Industries Lid. (1987) 62 Comp. Cases 872). The Apex Court held that subsistence and living of the workers is of paramount importance and has to rank with highest priority. Their wages and emoluments upto the date of closure of the company will rank in priority over the secured creditors. In Giovanola Binny Ltd. s case, supra (1990) 67 Comp. Cases 441, this Court has held that tax on capital gains cannot be claimed in preference to dues of Bank and claims of workmen. Learned counsels for the State Bank of India and other secured creditors adopt the submissions made by learned counsel for the IDBI Bank and the O.L. I have considered the submissions of learned counsels for the parties and the O.L. It may at this stage be appropriate to quote the relevant provisions of the Companies Act, namely, Section 529(1) and (2), 529-A and 530(1)(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company-- (a) workmen s dues; and (b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of section 529 pari passu with such dues, shall be paid in priority to all other debts. (2) The debts payable under clause (a) and clause (b) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions. S.530. Preferential payments.- (1) In a winding up subject to the provisions of section 529A, there shall be paid in priority to all other debts-- (a) all revenues taxes, cesses and rates due from the company to the Central or a State Government or to a local authority at the relevant date as defined in clause (c) of sub- section (8), and having become due and payable within the twelve months next before that date; The provisions of Section 17 of the Central Sales Tax Act, 1956 is also quoted below:- S.17.-Company in liquidation. (1) Every person-- (a) who is the liquidator of any company which is being wound up, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (6) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force. It is also relevant to quote Section 29 of the Bihar Finance Act, 1981 which is as follows:- 29. Tax to be first charge on property.- Notwithstanding anything to the contrary contained in any law for the time being in force any amount of tax and penalty, if any, payable by a dealer or any other person under this part shall be a first charge on the property of the dealer or such person. 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 Fund s case (supra). What was held in the said decision was that the provision of Section 178 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing their security, so that the same is paid to more than one secured creditors proportionately and also safeguarding the workmen s dues. The said position is clear from the decision of the Apex Court in Central Bank of India s case (supra) in which it was clearly laid down that any first charge on the asset of the company provided by the provisions of the State Sales Tax Act could not override specific provisions to the contrary created by Section 529A of the Companies Act. The same is also reflected from various decisions, particularly the decision of the Bombay High Court in the case of Poysha Industrial Company Ltd.(supra) and of the Gujrat High Court in Minal Oil Industries Ltd. case (supra). 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 sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Central Government of any nature whether direct or indirect have to be paid from the assets of the company and further all revenue, taxes and rates levied by the State Government or local authorities are in the nature of indirect taxes and to accept the proposition that such taxes do not form the asset of the company would run contrary to the provisions of Section 530(1)(a) of the Act. The said submission has therefore to be rejected as wholly untenable in view of the relevant provisions of the Companies Act. The said proposition is also contrary to what has been held by the Supreme Court in para 62 of the judgment in Maharashtra State Cooperative Bank case (supra), relied upon by learned counsel for the State-applicant. Thus, in the light of the aforesaid discussions, this Court does not find any force in the submission of learned counsel for the State-applicant. The application is, accordingly, dismissed. At this stage however, I may point out that the provision of Section 178 of the Income Tax Act and the pari materia provision of Section 17 of the Central Sales Tax Act, 1956 clearly makes it obligatory upon the liquidator, including the Official Liquidator, to no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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