Gujarat High Court
Official Liquidator Of Satnam Exports ... vs I.D.B.I. Bank Ltd & 9 on 2 July, 2015
Author: Vipul M. Pancholi
Bench: Vipul M. Pancholi
O/OLR/12/2015 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
OFFICIAL LIQUDATOR REPORT NO. 12 of 2015
In COMPANY PETITION NO. 277 of 1997
With
COMPANY APPLICATION NO. 281 of 2014
In
COMPANY APPLICATION NO. 555 of 2011
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE VIPUL M. PANCHOLI
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1 Whether Reporters of Local Papers may be
allowed to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the
fair copy of the judgment ?
4 Whether this case involves a substantial
question of law as to the interpretation
of the Constitution of India or any order
made thereunder ?
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OFFICIAL LIQUIDATOR OF SATNAM EXPORTS (INDIA)
LTD....Applicant(s)
Versus
I.D.B.I. BANK LTD & 9....Respondent(s)
==============================================================
Appearance:
MR JS YADAV, ADVOCATE for the Applicant(s) No. 1
OFFICIAL LIQUIDATOR for the Applicant(s) No. 1
DS AFF.NOT FILED (N) for the Respondent(s) No. 9
MR BH BHAGAT, ADVOCATE for the Respondent(s) No. 1
MR RJ OZA, ADVOCATE for the Respondent(s) No. 4
MR UT MISHRA, ADVOCATE for the Respondent(s) No. 3
NOTICE SERVED for the Respondent(s) No. 2 , 5 8 , 10
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CORAM: HONOURABLE MR.JUSTICE VIPUL M. PANCHOLI
Date : 02/07/2015
Page 1 of 43
O/OLR/12/2015 JUDGMENT
ORAL JUDGMENT
1. Official Liquidator has filed this report for the following relief.
"(A) This Hon'ble Court may be pleased to permit the Official Liquidator to disburse an amount of Rs.3,22,55,000/ or such other amount as may be decided by this Hon'ble Court amongst the Creditors U/s. 530 of the Companies Act, 1956 and thereafter balance amount may be permitted to disburse amongst the Unsecured Creditors as per the ratio worked out by the Chartered Accountant as per the annexure 'P' of this report as stated in para23 & para26 subject to filing an undertaking that, if any demand raised by Official Liquidator, the same shall be returned back by the Creditors / Unsecured Creditors to the Official Liquidator at prevailing rate of interest."
2. Whereas, Company Application No.281 of 2014 has been filed by applicantIDBI Bank Limited, taking out judges summons for the following relief: "(A) The respondent may be directed to disburse and pay with permission of this Hon'ble Court the amount found due and payable to secured creditors under Sec 530 of Companies Act from the Balance amount Rs.5.5 crores approximately plus accruing interest out of total sale proceeds i.e. Rs.6 Crores realized from the sale of the Assets and Properties of the Vatwa unit of M/s Satnam Exports Ltd in appropriate proportion between secured creditors of the company or the amount which is found due and payable."
3. Both the aforesaid matters are connected and Page 2 of 43 O/OLR/12/2015 JUDGMENT therefore are taken up for a hearing together and by way of this common order, the same are disposed of together.
4. Heard learned advocate Mr.J.S.Yadav for Official Liquidator, learned advocate Mr.B.H.Bhagat for IDBI Bank Limited, learned Senior Counsel Mr.R.J.Oza for Central Excise Department, learned advocate Mr.U.T.Mishra for Kamdar Hit Rakshak Union.
5. Learned advocate Mr.J.S.Yadav appearing for the Official Liquidator in Official Liquidator Report No.12 of 2015 mainly submitted that by an order dated 16.01.2001 rendered by this Court in Company Petition No.227 of 1997 M/s.Satnam Experts (India) Limited was ordered to be wound up. The Official Liquidator attached to this Court has been appointed as liquidator of the said company. This Court also directed the Official Liquidator to take the possession of the immovable as well as immovable properties of the companies and books of accounts. In pursuance to the order passed by this Court, Official Liquidator has taken over the possession of the assets of the company, situated at Chhatral and Vatva. Page 3 of 43
O/OLR/12/2015 JUDGMENT Thereafter, Official Liquidator filed Official Liquidator Report No.61 of 2001. This Court vide an order dated 24.09.2001 directed the Official Liquidator to constitute sale committee for disposal of the assets of the company by advertisement in the newspapers and by conducting public auction. In pursuance to the order passed by this Court, the following properties of the company have been sold by the sale committee after confirmation by this Court.
Sr. Description of Sale Amount Remarks
No. Properties confirmatio (Rs.)
n Date
1 Factory premises 31.08.2010 5.11 The
(movable & Passed in Crores purchaser
Immovable) OLR No.81 namely
situated at Plot of 2010 M/s.Jinal
No.106, 107 and Properties
108, GIDC, Pvt. Ltd.
Chhatral, has paid
Tal.Kalol full payment
2 Factory premises 31.08.2010 6.00 The
(movable & Passed in Crores purchaser
Immovable) OLR No.81 namely M/s.
situated at Plot of 2010 Manibhadra
No.47, GIDC, Sales
PhaseI, Vatva, corporation
Ahmedabad. has paid
full payment
6. Official Liquidator thereafter invited the claims of the secured creditors and the workers of the company under Section 529 and 529A of the Companies Act of 1956 by issuing advertisement in one English Page 4 of 43 O/OLR/12/2015 JUDGMENT Daily and one Gujarat Daily Newspapers, both in Ahmedabad editions on 03.12.2010. In pursuance to the aforesaid advertisement, Official Liquidator received claims from the secured creditors and workers Union of the company in liquidation. Thereafter, Official Liquidator appointed M/s.J.M.Parikh and Associates, Chartered Accountant for the purpose of verification and examination of the claim submitted by the secured creditors and the workers of the company. The aforesaid Chartered Accountant submitted verification report after considering the claims submitted by the secured creditors as well as workers. Said report was submitted before this Court by Official Liquidator by filing Company Application No.268 of 2011. This Court passed an order on 17.08.2011 and 19.09.2011 in the aforesaid application, whereby, the Official Liquidator was directed to disburse an amount of Rs.5.11 Crores received from the sale of movable and immovable properties of Chhatral Unit of the company. Out of the said amount of Rs.5.11 Crores, Rs.8 Lacs was disbursed to the workers of both the units of the company in liquidation i.e. Unit at Chhatral and unit at Vatva. Balance amount of Rs.4,30,06,500/ was Page 5 of 43 O/OLR/12/2015 JUDGMENT disbursed to Indian Bank, whereas, Rs.72,93,500/ was disbursed to IDBI Bank.
7. By way of order dated 17.08.2011 passed in Company Application No.268 of 2011, this Court further directed the Official Liquidator to again invite claims from secured and unsecured creditors and the workers, so that before final decision with regard to disbursement of the amount available with Official Liquidator received from sale proceeds of assets of Vatva Unit of the company is taken the picture about the claims of secured, unsecured creditors and workers may become clear. In view of the said direction given by this Court, Official Liquidator also invited the claims from secured creditors/unsecured creditors and the workers of the Vatva Unit of the company under Section 529, 529A and 530 of the Companies Act by issuing advertisement in the newspapers. Thereafter, one of the secured creditor viz. Indian Bank filed Company Application No.555 of 2012 before this Court, wherein, it was prayed that the Official Liquidator be directed to disburse an amount of Rs.6 Crores received from the sale of Vatva property of the company. This Court passed an order on 08.02.2012, whereby, Official Page 6 of 43 O/OLR/12/2015 JUDGMENT Liquidator was directed to disburse amount received from the sale of the properties of the Vatva units. This Court directed Official Liquidator to disburse amount of Rs.50,61,728/ to IDBI Bank after undertaking is filed by IDBI Bank Limited and therefore the Official Liquidator disbursed the said amount under Section 529 of the Companies Act. The said amount was disbursed from the sale proceeds received from the properties of Vatva unit. IDBI Bank was having exclusive charge over the said movable property of Vatva unit. Rs.5,49,36,000/ was received from the sale of immovable property of Vatva unit and IDBI Bank or Indian Bank were having no charge on the said immovable property of Vatva unit of the company in liquidation.
8. In pursuance to the order dated 08.02.2012 passed by this Court in Company Application No.555 of 2011, the Official Liquidator filed Official Liquidator Report No.28 of 2012, wherein, the details with regard to the claims received from the creditors were also given. The Official Liquidator also sought permission to avail services of Chartered Accountant viz. M/s.J.M.Parikh and Associates for verification of Page 7 of 43 O/OLR/12/2015 JUDGMENT claims of the creditors received under Section 530 of the Companies Act. This Court by order dated 28.02.2012 permitted the Official Liquidator to avail services of Chartered Accountant. The claims were sent to the said Chartered Accountant for the purpose of verification under Section 530 of the Companies Act. Said Chartered Accountant filed the verification report on 22.03.2012. The said report was also sent to the creditors for their consent and acceptance of the report of the said Chartered Accountant. IDBI Bank and Indian Bank have accepted the recommendation of the Chartered Accountant. However, the Central Excise Department, Ahmedabad Municipal Corporation and Lloyds Finance Limited have raised objection, regarding verification of their claim and distribution of ratio. Official Liquidator therefore sent copies of the objection letters received from the aforesaid authorities and company to the concerned Chartered Accountant for reverification with a request to submit supplementary report. The said Chartered Accountant submitted supplementary report with regard to the objection raised by the Central Excise Department, Ahmedabad. The Chartered Accountant has Page 8 of 43 O/OLR/12/2015 JUDGMENT stated that as per Section 530, if a tax becomes due and payable within 12 months, next before the relevant date, then only it can be treated as preferential debt. The Chartered Accountant further stated that the raising of demand by Excise Department, which is contested by assessee cannot be treated as debt which has become due and payable. The excise duty becomes due and payable only with the adjudication order passed in favour of the departments. Therefore, as per the Chartered Accountant, the debt becomes due and payable on the day of the order. Supplementary report sent by Chartered Accountant was also forwarded to Central Excise Department, Ahmedabad and Lloyds Finance Limited for their comments and acceptance of the recommendations. Lloyds Finance Limited agreed with the observations made by the Chartered Accountant. However, once again Ahmedabad Municipal Corporation as well as Central Excise Department did not accept the supplementary report. Central Excise Department stated that it is not correct that the liability arises on issuance of order in original, but it arises on the date of manufacturing activities which is a taxing event. The excise dues will be Page 9 of 43 O/OLR/12/2015 JUDGMENT treated as preference dues irrespective of the fact that dues might have arisen prior to one year of the passing of the winding up order. M/s.J.M.Parikh and Associates, Chartered Accountant, has thereafter submitted revised rectification report dated 02.05.2013.
9. Learned advocate Mr.J.S.Yadav appearing for Official Liquidator further pointed out that in pursuance to the advertisement issued in the newspaper, various claims were received from the creditors of the company under Section 530 of the Companies Act. The said claims were divided into three parts. (I) Claims from Government Department, (II) Claims from other private parties, (iii) Claims from Banks and demand of workers. As per the report of the Chartered Accountant, following dues shall be paid to the following parties.
Sr. Name of the Party Amount Due u/s. 530 of No. the Companies Act, 1956 (in Rs.) 1 Excise Department 1000 2 Ahmedabad Municipal 15,00,387 Corporation Page 10 of 43 O/OLR/12/2015 JUDGMENT Total 15,01,387
After paying these dues, the unsecured creditors may be distributed their claims as per the following table:
Sr Name of the Outstanding Dues Unsecured % No Party Dues (Rs.) covered Creditors u/s. 530 (Rs.) 1 Excise 9,79,97,446 1000 9,79,96,446 59.66 Department 2 Ahmedabad 19,93,149 15,00,387 4,92,762 1.33 Municipal Corporation 3 Uttar Gujarat 4,43,124 Nil 4,43,124 0.27 Vij Company Limited 4 Sun On Peak 20,44,253 Nil 20,44,253 1.24 Hotel Private Limited 5 Inductotherm 4,35,639 Nil 4,35,639 0.26 (India) Limited 6 Lloyds 30,66,131 Nil 30,66,131 1.87 Finance Limited 7 Indian Bank 1,43,75,238 Nil 1,43,75,238 8.75 8 IDBI Bank 4,32,91,635 Nil 4,32,91,635 26.36 9 Workers 4,28,000 Nil 4,28,000 0.26 TOTAL 16,40,74,615 15,01,387 16,25,73,228 100
10. At this stage, learned counsel Mr.Yadav submitted that the Official Liquidator had not received the claim from Income Tax Department in pursuance to the advertisement issued in the newspaper. The Official Page 11 of 43 O/OLR/12/2015 JUDGMENT Liquidator therefore requested M/s.Kiran Shah and Associates, Chartered Accountant, to inform the income tax liability/capital gain tax of the company in liquidation. The said firm of Chartered Accountant determined a tax liability of Rs.3,32,00,000/ (approx.) on account of sale proceeds of the company.
The Official Liquidator therefore deducted an amount of Rs.3,32,00,000/ towards future expenses. Rs.3,03,677/ is deducted towards miscellaneous (contingent) expenses. Thus, out of Rs.6,57,58,637/, Rs.3,22,55,000/ remains with the Official Liquidator.
11. Learned advocate Mr.Yadav appearing for the Official Liquidator further submitted that Incometax Department has issued various notices and letters to the Official Liquidator, invoking various provisions of the Incometax Act, whereby, the Official Liquidator is called upon to file the returns and pay Incometax on realization of the sale of the assets of the company. The Official Liquidator has therefore filed this report, seeking permission of this Court to disburse remaining amount of Rs.3,22,55,000/ or such other amount amongst the creditors under Section 530 of the Companies Act and as per the prayer made in the Page 12 of 43 O/OLR/12/2015 JUDGMENT report.
12. Learned Senior Counsel Mr.R.J.Oza appearing for the Central Excise Department mainly submitted that M/s.J.M.Parikh and Associates, Chartered Accountant has wrongly given the verification report and supplementary report ignoring the provisions of the Companies Act as well as Central Excise Act, 1944 and Central Excise Rules, 1944. Findings recorded by Chartered Accountant that the Excise Department is unsecured creditor except for claiming amount of Rs.1000/ under Section 530 of Companies Act, 1956 is misconceived and contrary to the provisions of the Central Excise Act. Learned counsel submitted that the department has filed claim for the company in liquidation supported by the affidavits of proof of debt and relevant documents in support of the said affidavit was also given to the Chartered Accountant. Learned counsel referred to the averments / details referred in para 4.1 to 4.7 of the affidavit in reply filed by the respondent No.4 and submitted that finding given by the Chartered Accountant that Excise Department is entitled for claim of Rs.1,000/ under Section 530 of the Companies Act is not correct. For Page 13 of 43 O/OLR/12/2015 JUDGMENT rest of the claim i.e. claim of Rs.9,79,96,446/ is considered in the category of unsecured creditor and accordingly alloted 59.66% of the claim of the Excise Department. Said observation of Chartered Accountant is not correct and in violation of provisions of the Excise Act and the Rules framed thereunder. While calculating the ratio, Chartered Accountant has wrongly held that excise duty debt which become due between period 25.01.2000 to 24.01.2001 shall be considered and treated as preferential debt under Section 530 of the Companies Act. He further committed an error by holding that liability to pay the excise duty as accrued on the date on which the order in original was issued to the company in liquidation and accordingly by applying the relevant debt to be date of issue of order in original, the excise department is entitled to claim only Rs.1000/ in the category of preferential creditor under Section 530 of the Companies Act. Learned counsel further submitted that Chartered Accountant also committed an error in rejecting the claim of Excise Duty, penalty and interest submitted by affidavit of debt dated 30.10.2003, 27.12.2002 and 17.02.2003 without looking Page 14 of 43 O/OLR/12/2015 JUDGMENT into the relevant material and evidence. Learned counsel further contended that Chartered Accountant has wrongly ignored Section 11E of the Central Excise Act under the said provision, amount of duty, penalty and interest recoverable from the company in liquidation as first charge in preference to any other charge which may be created under any Central Act or State Act.
13. Learned Senior Counsel Mr.Oza further referred to Section 3 of the Central Excise Act and Rule 7 and Rule 9 of Central Excise Rules and submitted that Central Excise Duty is leviable by applying Section 3 of the said Act. Such type of excise duty was payable by the company in liquidation immediately after manufacturing of the goods and before removal of the said goods from the registered factory premises. The company in liquidation has not paid excise duty according to the provisions of the Act and the Rules, removed the goods without payment of duty and sold the said goods by recovering excise duties from the consumers. Collection of duties made by the company in liquidation from the customer had been on behalf of the Government and hence the said company became Page 15 of 43 O/OLR/12/2015 JUDGMENT custodia legis of the said amount. Learned senior counsel therefore contended that manufacturing process which has occurred prior to even one year of winding up, remained continuous dues and accordingly it is to be categorized as preferential debt. He further submitted that the concerned Chartered Accountant appears to have wrongly applied concept of 'Assessment Year' for reading Section 530 of the Companies Act. In fact, the said concept is available in case of direct tax and not in case of levy of excise duty which is indirect tax. Learned counsel therefore submitted that the Chartered Accountant ought to have considered entire dues as continuous dues. Learned counsel once again contended that due to nonpayment of tax liability, show cause notices were issued. Thereafter, the same were adjudicated. The adjudication takes place only with a view to give an opportunity to the assessee about its liability as well as for imposition of penalty and interest in case of default. Thus, liability cannot be said to have arisen on the date of adjudication or on the date on which the order in original is passed. Thus, the Chartered Accountant ought to have considered the Page 16 of 43 O/OLR/12/2015 JUDGMENT claim putforward by the Excise Department by way of eight affidavits for debt which covered under Section 530 of the Companies Act.
14. Learned Senior Counsel Mr.Oza thereafter referred to Section 11E of the Central Excise Act, 1944 and submitted that this section provides for first charge on the property of the assessee or the person and sum payable by such assessee being amount of duty, penalty, interest is having preference over all dues which might have prescribed in any Central Act or State Act except the sum payable as provided in Section 529A of the Companies Act, 1956 Recovery of debts due to Banks and Financial Institutions Act of 1993 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2003. Learned Senior counsel contended that the department is not disputing preferential claim of workers. However, claim of the Bank cannot be treated to be preferential claim unless and until recovery of amount due is sought to be recovered under the provisions of Recovery of Debts due to Banks and Financial Institutes Act of 1993. He further contended that claim of municipal corporation and Page 17 of 43 O/OLR/12/2015 JUDGMENT proposal to make payment of Incometax Department in preference to claim of answering respondent has also not capable of being considered in preference in view of Section 11E of Central Excise Act, 1944.
15. In support of his contention, learned counsel has placed reliance upon the decision rendered by the Hon'ble Supreme Court in case of Shree Synthetics Ltd. v. Union of India & Ors., reported in 1999 (113) E.L.T. 774 (S.C.) as well as in case of Wallace Flour Mills Company Ltd. v. Collector of C. EX., reported in 1989 (44) E.L.T. 598 (S.C.).
16. Learned Senior Counsel Mr.Oza has also placed reliance on the decision rendered by the Hon'ble Supreme Court in case of Central Bank of India v. State of Kerala, reported in (2009) 4 SCC 94 and mainly relied upon the observations made in para 157, 177, 178, 180 and 185 of the said decision. The said paragraphs reads as under:
"157. Section 11 of the Central Excise Act, which was considered by the two judges Bench in SICOM case, does not contain a provision similar to those in Central legislation like Section 14A of the Workmen's Compensation Act, 1923, Section 11 of the EPF Act, Section 74(1) Page 18 of 43 O/OLR/12/2015 JUDGMENT of the Estate Duty Act, 1953, Section 25(2) of the Act Mines and Minerals (Regulation and Development) Act, 1957, Section 30 of the Gift Tax Act, 1958 and Section 259A of the Companies Act, under which statutory first charge has been created in respect of the dues of workmen or gift tax etc.
177. The facts of the case have been set out in the earlier part of the judgment. A recapitulation therefore shows that suit filed by the appellant Bank in 1996 for recovery of its dues was, later on, transferred to the Tribunal and decreed on 1122000. Before that the Tahsildar, Mavelikara had attached the properties of the borrower on 222000 and again on 492000 for recovery of the arrears of the arrears of sales tax. The Bank challenged the notice issued by the Tahsildar for recovery of the arrears of sales tax but could not persuade the learned Single Judge who held that in view of Section 26B of the Kerala Act, dues of the State will have priority. The order of the learned Single Judge was approved by the Division Bench.
178. In our opinion, the view taken by the Kerala High Court is in consonance with what we have held in the earlier part of the judgment regarding primacy of the state's first charge over the dues of banks, financial institutions and secured creditors. Therefore, the impugned orders do not call for any interference.
180. The view taken by the High Court is expectational and calls for no interference.
185. In our opinion, the Bank cannot claim priority over the dues of sales tax because statutory first charge had been created in favour of the State by Section Page 19 of 43 O/OLR/12/2015 JUDGMENT 26B which was inserted in the Kerala Act with effect from 01.04.1999 and the Courts below did not commit any error by refusing to decree the suit for injunction filed by the Bank."
17. On the other hand, learned advocate Mr.B.H.Bhagat appearing for IDBI Bank Limited submitted that the judges summons taken out by IDBI Bank Limited by filing Company Application No.281 of 2014 be allowed. Learned advocate Mr.Bhagat referred to the Official Liquidator's report and submitted that as per the direction issued by this Court from time to time, the property of the company in liquidation has been disposed of. Amount is lying before the Official Liquidator. The Official Liquidator disbursed the amount under Sections 529 and 529A of the Companies Act, 1956 and therefore now the remaining amount of Rs.5.5 Crores with interest may be disbursed under Section 530 of ies Act.
18. In response to the Official Liquidator's Report No.12 of 2015 and in response to the arguments canvassed on behalf of learned Senior Counsel Mr.Oza for Central Excise Department, learned advocate Mr.B.H.Bhagat submitted that incometax dues cannot fall under Section 530 of the Companies Act. Income Page 20 of 43 O/OLR/12/2015 JUDGMENT tax Department has not passed any order under the provisions of the Incometax Act and therefore, the disbursement ratio fixed by the concerned Chartered Accountant, which is reproduced at page 16 of the Official Liquidator Report report No.12 of 2015 may be confirmed and as per the said ratio, the Official Liquidator be directed to disburse the amount amongst unsecured creditors under Section 530 of the Companies Act. Learned advocate Mr.Bhagat further submitted that this Court delivered a judgment on 30.06.2014 in Company Application No.245 of 2012 and allied matters, wherein, this Court has discussed about the priorities of dues of the Income Tax Department under the provisions of the Companies Act. The issue before this Court was as under:
"10. In light of the rival claims and submissions, the issue which arises for consideration is: whether the Department has a preferential right in matter of payment of dues over the right of the secured creditors (including the workmen) from the proceeds received upon sale of assets."
Thereafter this Court observed in para 25.2 as under:
"25.2 However, under the same Act, i.e. under the Companies Act order of priority is created, by virtue of section
530. Now, so far as said section 530 is concerned, even a glance at the said section Page 21 of 43 O/OLR/12/2015 JUDGMENT would mark that the order of priority created by section 530(1) of the Companies Act is "subject to the provision of section 529A" of Companies Act. Thus, under Companies Act, order of priority and above that order and mode of preferential payment is prescribed, therefore in the matter of payment of dues the said procedure shall prevail."
Thereafter, after discussing various decisions of this Court as well as the Hon'ble Supreme Court, this Court held in para No.29 to 32 as under:
"29. In light of the above discussion and for the foregoing reasons, the claim of the Income Tax Department, except so far as the Department's request relates to the liquidator's obligation to inform the Department about liquidator's appointment in each case, cannot be sustained and the claim and submissions of the Department deserve to be rejected and are, accordingly, rejected.
30. Now, so far as the Department's request that the liquidator be directed to inform the Department about the order appointing liquidator in each case and to file returns are concerned, it is relevant to mention that the liquidator, in his report being OLR No.35/2012, has averred in paragraph No.13 that "before passing any orders of disbursement, this Hon'ble Court may be pleased to hear the respondent No.2 i.e. Commissioner of Income Tax, Range 4, Ahmedabad in this matter". The request made by the Department and the submission made by the Official Liquidator are in consonance with the obligation imposed by virtue of section 178 of Income Tax Act and that, therefore, appropriate intimation to the Department in each case when order appointing liquidator is passed and when the process for disposal of assets and/or disbursement of Page 22 of 43 O/OLR/12/2015 JUDGMENT sale consideration received by liquidator begins, ought to be given to the concerned authority / officer of the Department.
31. On this count it is relevant to mention that this Court is given to understand that so as facilitate this process, the Department has nominated one officer as Nodal Officer who may be informed about the appointment of liquidator and/or about the process of sale of properties or about disbursement of sale proceeds. In this view of the matter, it appears appropriate to direct, inter alia, that as and when the Court passes an order appointing liquidator in any matter and so also when the process of disbursement in accordance with section 529A commences and at the stage when the process of disbursement under section 530 begins, the Official Liquidator shall give proper intimation to the Nodal Officer. It is clarified that such intimation is not a substitution of the obligation under section 178 of Income Tax Act. It is also clarified that by law the liquidator is obliged to regularly file the returns and that, therefore, the liquidator shall take necessary action in all cases.
32. As a result of the above discussion and this decision, the Official Liquidator may, after seeking appropriate permission and directions, proceed, according to the directions by the Court, to make the payments in accordance with the provisions contained under section 529A of the Companies Act."
19. Learned advocate Mr.Bhagat therefore submitted that the Official Liquidator cannot set apart the claim of the Incometax Department in the present case and therefore, entire amount of Rs.5.50 Crores with interest be disbursed between the unsecured creditors Page 23 of 43 O/OLR/12/2015 JUDGMENT as per the ratio fixed by the concerned Chartered Accountant.
20. Learned advocate Mr.B.H.Bhagat submitted that the Excise Department is also not having any preferential right over the claim of the secured creditors as well as workmen. As per the report given by the concerned Chartered Accountant, IDBI Bank Limited and the Central Excise Department both would fall under Sections 529 and 530 of the Companies Act. Section 11E of the Central Excise Act of 1944 is not helpful to the department and the decision relied upon by the learned counsel appearing for the Central Excise Department are not applicable to the facts of the present case. Learned advocate Mr.Bhagat has relied upon the observations made in para (4) of the decision rendered by the Hon'ble Supreme Court in case of Commissioner of Income Tax v. KTC Tyres (India) Limited and others, reported in [2014] 185 Comp Cas 17 (SC).
21. I have considered the arguments canvassed on behalf of learned advocates for the parties. I have also gone through the documents produced on record and Page 24 of 43 O/OLR/12/2015 JUDGMENT the decisions relied upon by the learned advocates.
22. The following important facts emerged from the record.
A. Rs.5.11 Crores have been received by the Official Liquidator from the sale of factory premises (movable and immovable) of the company in liquidation situated at plot No.106, 107 and 108, GIDC, Chhatral, whereas, Rs.6 Crores have been received from the sale of factory premises including (movable and immovable) properties of the company in liquidation, situated at Plot No.47, GIDC, PhaseI, Vatva.
B. Official Liquidator disbursed an amount of Rs.5.11 Crores received from the sale of movable and immovable properties of Chhatral unit of the company in liquidation under Section 529 and 529A of the Companies Act, 1956 between Indian Bank, IDBI Bank and workers.
C. Now the dispute is with regard to disbursement of Rs.6 Crores received from the sale of property of the company in liquidation, situated at Vatva unit.
D. Out of Rs.6 Crores, Rs.50,64,000/ fetched from the sale of the movable property of Vatva unit has been disbursed to IDBI Bank limited because the said bank is having exclusive charge Page 25 of 43 O/OLR/12/2015 JUDGMENT of the said movable property. Undertaking was obtained from IDBI Bank by the Official Liquidator.
E. So far as remaining amount of Rs.5,49,36,000/ is concerned, the said amount is fetched from sale of immovable property of Vatva unit. IDBI or Indian Bank is having no charge over the said property.
F. Claims were invited from the creditors of the company in liquidation under Section 530 of the Companies Act by issuing advertisement. The claims which were received from the creditors were sent to M/s.J.M.Parikh Associates, Chartered Accountant, for verification. The said Chartered Accountant sent verification report dated 22.03.2012. The said report was sent to the concerned creditors for their comments and acceptance of the recommendation. IDBI Bank and Indian Bank have accepted the recommendation whereas Central Excise Department, Ahmedabad Municipal Corporation and Lloyd Finance Limited raised objections regarding the verification of their claim and distribution ratio.
G. Said objections were sent for re verification to the concerned Chartered Accountant with a request to give supplementary report.
H. Supplementary report was forwarded by the
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O/OLR/12/2015 JUDGMENT
said Chartered Accountant which was accepted by Lloyd Finance, whereas, the Excise Department as well as Ahmedabad Municipal Corporation have not accepted even the supplementary report given by the said Chartered Accountant.
I. As per the report of the Chartered Accountant, Rs.1,000/ is due and payable to the Excise Department under Section 530 of the Companies Act and Rs.15,00,387/ is required to be paid to Ahmedabad Municipal Corporation and after paying the said dues, the remaining amount is required to be distributed between the unsecured creditors as per their claims in the ratio mentioned by the Chartered Accountant in his report.
J. Official Liquidator has requested that Rs.3,32,00,000/ is required to be kept aside for the future liability towards income tax. Thus, from the total fund available in the company's account as on 01.12.2014 i.e. Rs.6,57,58,637/, Rs.3,22,55,000/ is required to be distributed between the unsecured creditors as per the ratio worked out by the Chartered Accountant in his report.
K. In the aforesaid facts, now the contentions and submissions canvassed by the learned advocates for the parties are required to be appreciated.
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O/OLR/12/2015 JUDGMENT
23. The main contention of learned Senior Counsel Mr. R.J.Oza appearing for the Central Excise Department is that the Chartered Accountant has not considered the objections raised by the department. Reliance was placed on Section 3 of the Central Excise Act of 1944 and Rules 7 and 9 of Central Excise Rules of 1944. The relevant part of Section 3 reads as under:
"3. DUTIES SPECIFIED IN THE [SCHEDULE TO THE CENTRAL EXCISE TARIFF ACT, 1985] TO BE LEVIED. (1) There shall be levied and collected in such manner as may be prescribed duties of excise on all excisable goods [which are produced or manufactured in India] as, and at the rates, set forth in the [Schedule to the Central Excise Tariff Act, 1985] [Provided that the duties of excise which shall be levied and collected on any [excisable goods which are produced or manufactured.
(i) in a free trade zone and brought to any other place in India; or
(ii) by a hundred percent exportoriented undertaking and allowed to be sold in India, shall be an amount equal to;] the aggregate of the duties of customs which would be leviable under Sec. 12 of the Customs Act, 1962 on like goods produced or manufactured outside India if imported into India, and where the said duties of customs are chargeable by reference to their value, the value of such excisable goods shall, notwithstanding anything contained in any other provisions of this Act, be determined in accordance with the Page 28 of 43 O/OLR/12/2015 JUDGMENT provisions of the Customs Act, 1962 and the Customs Tariff Act, 1975."
23.1. Rule 7 of the Central Excise Rules of 1944 reads as under:
"7.RECOVERY OF DUTY. Every person who produces, cures or manufactures any excisable goods,or who stores such goods in a warehouse, shall pay the duty or duties, leviable on such goods, at such time and place and to such persons as may be designated, in, or under the authority of these Rules, whether the payment of such duty or duties is secured by bond or otherwise.] [Provided that nothing contained in this rule shall apply to molasses produced in a Khandsari sugar factory.]"
23.2. Rule 9 of the Central Excise Rules of 1944 reads as under:
"9. TIME AND MANNER OF PAYMENT OF DUTY. (1) No excisable goods shall be removed from any place where they are produced, cured or manufactured of any premises appurtenant thereto, which may be specified by the [Commissioner] in this behalf whether for consumption, export, or manufacture of any other commodity in or outside such place, until the excise duty leviable thereon has been paid at such place and in such manner as is prescribed in these rules or as the [Commissioner] may require, and except on presentation of an application in the proper form and on obtaining the permission of the proper officer on the form:Page 29 of 43
O/OLR/12/2015 JUDGMENT Provided that such goods may be deposited without payment of duty in a storeroom or other place of a storage approved by the [Commissioner] under Rule 27 or Rule 47 or in a warehouse appointed or [registered] under Rule 140 or may be exported under bond as provided in rule 13.
[Provided further that the molasses produced in a khandsari sugar factory may be removed without payment of duty leviable thereon and the duty of excise leviable on such molasses shall be paid by the procurer, as if such molasses has been manufactured by such procurer on the date of receipt of such molasses in his factory.] [Provided further that such goods may be [removed without payment or on partpayment of duty] leviable thereon if the Central Government, by notification in the Official Gazette, allow the goods to be so removed under rule 49:] [***] [Provided also] that the [Commissioner] may, if he thinks fit instead of requiring payment of duty in respect of each separate consignment of goods removed from the place or premises specified in this behalf, or from a storeroom or warehouse duly approved, appointed or [registered] by him keep with any person dealing in such goods an account current of the duties payable thereon and such account shall be settled at intervals, not exceeding one month, and the account holder shall periodically make deposit therein sufficient in the opinion of the [Commissioner] to cover the duty due on the goods intended to be removed from the place of production, curing, manufacturer or storage.
[1A] Where a person keeping an account current under the third proviso to subrule (1) makes an application to the [Commissioner] Page 30 of 43 O/OLR/12/2015 JUDGMENT for withdrawing an amount from such account current, the [Commissioner] may, for reasons to be recorded in writing, permit such person to withdraw the amount in accordance with such procedure as the [Commissioner] may specify in this behalf.] (2) If any excisable goods are, in contravention of subrule (1), deposited in, or removed from, any place specified therein, the producer or manufacturer thereof shall pay the duty leviable on such goods upon written demand made [within the period specified in Sec. 11A] of the Act by the proper officer, whether such demand is delivered personally to him or is left at his dwelling house, and shall also be liable to penalty which may extend to two thousand rupees, and [such goods] shall be liable to confiscation.] [Explanation : For the purposes of this rule, excisable goods produced, cured or manufactured in any place and consumed or utilised
(i) as such or after subject to any process or processes; or
(ii) for the manufacture of any other commodity.
Whether in continuous process or otherwise, in such place or any premises appurtenant thereto, specified by the [Commissioner] under subrule(1), shall be deemed to have been removed from such place or premises immediately before such consumption or utilisation.]"
24. It is further the contention of learned Senior Counsel Mr. Oza that the excise duty was payable by the company in liquidation immediately after Page 31 of 43 O/OLR/12/2015 JUDGMENT manufacturing of the goods and before removal of the said goods from the registered factory premises. If the excise duty is not paid by the manufacturer, the Department issues the showcause notice and thereafter the adjudication takes place only with a view to give an opportunity to the assessee about its liability as well as for imposition of penalty and interest in case of default. Therefore, the liability cannot be said to have arisen on the date of adjudication or on the date on which the order in original is passed.
25. The aforesaid submission of learned counsel is prima facie attractive. However, so far as the provisions of Sections 529, 529A and 530 of the Companies Act are concerned, the said provisions are required to be applied at the time of winding up proceedings. The relevant provisions of Section 530 of the Companies Act, 1956 provides as under:
"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 subsection (8), and having become due and Page 32 of 43 O/OLR/12/2015 JUDGMENT payable within the twelve months next before that date;"
26. Thus, in view of the aforesaid provisions all revenue taxes, cesses and rates due from the company to the Government or the local authority at the relevant date as defined in subsection (8) of Section 530 which becomes due and payable within the twelve months next before that date shall be paid in priority to all other debts subject to provisions of Section 529A of the Companies Act.
27. As per clause (c) of subsection 8 of Section 530, the relevant date means:
"(c) the expression "the relevant date" means
(i) in the case of a company ordered to be wound up compulsorily the date of the appointment (or first appointment) of a provisional liquidator, or if no such appointment was made, the date of the winding up order, unless in either case the company had commenced to be wound up voluntarily before that date; and"
28. Thus, the words "due and payable" are relevant words which are required to be considered. In the present case, concerned Chartered Accountant has specifically stated that raising of demand by Excise Page 33 of 43 O/OLR/12/2015 JUDGMENT Department which is contested by the assessee cannot be treated as debt which has become due and payable. The excise duty becomes due and payable only when the adjudication order is passed in favour of the Department. The debt becomes due and payable on the date of the order. In the opinion of this Court the opinion given by the Chartered Account is correct. Thus, this Court is of the opinion that the debt becomes due and payable only on the day on which the officer passes an order in favour of the department. If such type of order is passed within the twelve months next before the relevant date then and then such type of debt of revenue taxes, etc. can be considered in priority to all other debt and that too subject to the provisions of Section 529A of the Companies Act. In the present case the winding up order was passed on 24.01.2001. Hence, any excise duty/debt which becomes due between 24.01.2000 to 23.01.2001 shall be considered and treated as preferential debt under the provisions of Section 530 of the Companies Act, 1956.
29. In the present case the objection raised by the Page 34 of 43 O/OLR/12/2015 JUDGMENT department was considered twice by the concerned Chartered Accountant and thereafter he was of the opinion that one order in original passed by the officer in favour of the department during the relevant period can be considered as the amount due under Section 530 of the Companies Act and therefore Rs.1,000/ is considered under the said head by the Chartered Accountant. The Chartered Accountant has not rejected the other claims of the Excise Department but other claims of the department i.e. total amount of dues of Rs.9,79,97,446/ is not considered under the provisions of Section 530 of the Companies Act and considered the Department as unsecured creditor for the said dues.
30. Another submission of learned Senior Counsel Mr. R.J.Oza is that as per Section 11E of the Central Excise Act, 1944, the department is having first charge on the property of the assessee and is having preference over all dues which might have prescribed in any Central Act or State Act except the sum payable as provided in Section 529A of the Companies Act, Recovery of Debts Due to Banks and the Financial Page 35 of 43 O/OLR/12/2015 JUDGMENT Institutions Act and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2003 and therefore the claim of bank cannot be treated to be preferential claim unless and until recovery of amount due is sought to be recovered under the aforesaid Acts.
31. Section 11E of the Central Excise Act, 1944 reads as under:
"11E. Liability under Act to be first charge. Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of duty, penalty, interest, or any other sum payable by an assessee or any other person under this Act or the rules made thereunder shall, save as otherwise provided in section 529A of the Companies Act, 1956 (1 of 1956), the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993) and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 (51 of 2002), be the first charge on the property of the assessee or the person, as the case may be."
32. As per Section 11E of the Central Excise Act, an amount of duty, penalty, interest, etc. payable by an assessee under the said Act and the Rules made thereunder shall be the first charge on the property Page 36 of 43 O/OLR/12/2015 JUDGMENT of the assessee or the person, as the case may be, but the same is subject to Section 529A of the Companies Act and under the provisions of other two Acts as mentioned in the said Section. Section 529A of the Companies Act provides that:
"529A. 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 subsection (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 subsection (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions."
33. Thus, under Section 529A of the Companies Act, dues of the workmen and debts due to secured creditors have priority over the claim of other persons or authorities. Subsection (1) of Section 529A of the Companies Act specifically provides that "notwithstanding anything contained in any other provisions of this Act or any other law for the time being in force, in the winding up of a company............" Page 37 of 43
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34. Thus, the dues of the secured creditors including the banks and the workers are having priority over all other debts including the claim of the Excise Department.
35. It is pertinent that Section 530 of the Companies Act prescribes order of priority means various categories of creditors and Section 529A of the Companies Act confers right of priority and preference in matter of payment in favour of secured creditors and workmen.
36. The Hon'ble Supreme Court in the case of KTC Tyres (India) Ltd. (Supra) has specifically held in para 4 that:
"4. Having regard to the clear language of the section, Mr.Rajeev Dutta, learned senior counsel appearing on behalf of the Union of India, submitted that the capital gains tax which was payable by the company to the Union of India must be treated as liquidation expenses and, therefore, must be paid first, even before the dues of the workmen and secured creditors are discharged. The submission must be rejected in view of the provisions of section 530 of the Companies Act which puts the matter beyond controversy. Section 530 of the Companies Act in clear terms provides that in a winding up, in priority to all other debts all revenues, Page 38 of 43 O/OLR/12/2015 JUDGMENT taxes, cesses, etc. shall be paid but this is made expressly subject to the provisions of section 529A. The Act, therefore, does not treat the revenue taxes as liquidation expenses. Reading sections 529A and 530 together, there is no escape from the conclusion that the liability towards workmen's dues and debts due to secured creditors as provided under clause (b) of section 529A(1), has to be paid in priority to all other debts, including tax dues to the Revenue. In view of the clear language of sections 529A and 530, there is no escape from this conclusion, and we must, therefore, hold that the High Court was right its its decision."
Thus, it is clear that Section 530 of the Companies Act, in clear terms, provides that in a winding up, in priority to all other debts all revenues taxes, cesses, etc. shall be paid but subject to provisions of Section 529A of the Companies Act. Thus, the Companies Act, 1956 does not treat the revenue taxes as liquidation expenses and from aforesaid two Sections it is clear that the liability towards workmen's dues and debts due to secured creditors as provided under Section 529A(1)(b) has to be paid in priority to all other debts including tax dues to the Revenue.
37. There is no dispute with regard to the ratio laid Page 39 of 43 O/OLR/12/2015 JUDGMENT down by the Hon'ble Supreme Court in the case of Shree Synthetics Ltd. (Supra) as well as in case of Wallace Flour Mills Company Ltd. (Supra). In the said cases, Hon'ble Supreme Court held that even though the taxable event is the manufacture or production of an excisable article, the duty can be levied and collected at a later stage for administrative convenience. However, the words "due and payable" as well as "relevant date" used in Section 530 of the Companies Act are relevant. Thus, as per the provisions of Section 530 of the Companies Act, date of winding up order is required to be seen and the period of twelve months next before that date is required to be seen and if the debt is due and payable within the said period then and then the same can be considered to be debt due and payable under Section 530 of the Companies Act. Hence, the aforesaid decisions are not helpful to the Excise Department in the facts and circumstances of the present case.
38. Thus, in view of the aforesaid no interference is required in the opinion given by the concerned Chartered Accountant with regard to the objections Page 40 of 43 O/OLR/12/2015 JUDGMENT raised by the Excise Department.
39. Now, the submissions of learned Mr. B.S.Bhagat appearing for IDBI Bank Ltd. is required to be considered in Company Application No.281 of 2014. Learned advocate submitted that the Official Liquidator be directed to disburse an amount of Rs.5.5 crores with interest in appropriate proportion between the secured creditors of the company. Learned advocate for the Official Liquidator has specifically pointed out in the Official Liquidator's Report No.12 of 2015 that Incometax Department has issued the notices as well as letters invoking various provisions of the Income Tax Act to the Official Liquidator and the Official Liquidator was called upon to file the returns and pay Incometax on realization of the sale of the assets of the company. Therefore, request is made by the Official Liquidator to set apart Rs.3,32,00,000/ towards the future expenses and Rs. 3,03,637/ towards misc. expenses (contingent) and out of total amount of Rs.6,57,58,637/, remaining amount of Rs.3,22,55,000/ may be permitted to disburse amongst the creditors under Section 530 of the Page 41 of 43 O/OLR/12/2015 JUDGMENT Companies Act and as per the prayer made in the Official Liquidator's Report. Learned advocate Mr. Yadav has further submitted that against the order dated 30.06.2014 passed by this Court in Company Application No.245 of 2012 and allied matters, the Income Tax Department has preferred SLP before the Hon'ble Supreme Court, which is pending and therefore also till the issue is decided by the Hon'ble Supreme Court, the amount towards the incometax liability of the company in liquidation/Official Liquidator may not be disbursed amongst the concerned creditors.
40. The submission canvassed by learned advocate Mr. Yadav for the Official Liquidator seems to be genuine. When the dispute is pending before the Hon'ble Supreme Court with regard to incometax liability, at this stage, amount of Rs.3,32,00,000/ towards the future expenses and Rs. 3,03,637/ towards misc. expenses (contingent) is required to be kept aside and the remaining amount of Rs. 3,22,55,000/ is required to be disbursed amongst the creditors under Section 530 of the Companies Act as per the report of the Chartered Accountant and as per the table given in Page 42 of 43 O/OLR/12/2015 JUDGMENT para 6 on internal page 16 of the report. The Official Liquidator is therefore permitted to disburse an amount of Rs. 3,22,55,000/ as per the ratio fixed by the Chartered Accountant subject to filing an undertaking by the concerned creditors (secured/unsecured) to the effect that if any demand raised by the Official Liquidator, the same shall be returned back by them to the Official Liquidator at prevailing rate of interest.
41. With these observations and directions O.L.R. No.12 of 2015 and Company Application No.281 of 2014 are disposed of accordingly.
42. Parties are at liberty to move an application/file report before this Court after disposal of S.L.P. before the Hon'ble Supreme Court.
(VIPUL M. PANCHOLI, J.) Ankit/Jani Page 43 of 43