Case: Dy. Commercial Tax Officer  Vs. Corromandal Pharmaceuticals

B. P. JEEVAN REDDY J. 1. I agree respectfully with the opinion prepared by my learned Brother K. S. Paripoornan, J. 2. Looking at the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (the Act), I was wondering how out of tune the Act has become with the economic policies being pursued now in this country. Since 1991-92, we are launched upon, what is being called, liberalisation of our economy. We have given up the policy of protecting our industries against foreign competition on the ground that it has given rise to an inefficient and outdated industrial system in our country. Our industries are suddenly being asked to compete with foreign companies, many of which being giant multinationals have vast resources at their disposal. They are merrily gobbling up our poor native companies. Many local industries, unable to stand the said competition are joining the foreign giants in one form of venture or other. Several hundreds of small-scale and medium-scale units in Telecom sector, for example, have suffered enormously because of our love for foreign companies and their capital. The state of several public sector companies is no better. I am not saying that we have totally embraced, what may be called Reaganism or Thatcherism. The fact, however, remains that it is no longer thought advisable to keep alive inefficient and uneconomic industries by injecting public funds or in the name of safeguarding the employment of the workers. And here is this Act, a product of the era of protectionism, seeking to keep alive sick companies by pumping in funds - mostly public funds - and by providing various concessions. In the process, nobody enquires why a particular industrial company has become sick, viz., whether it is an induced one or whether it is on account of factors beyond their control. The object of the Act is undoubtedly laudatory but it must also provide for appropriate measures against persons responsible where it is found that sickness is caused by factors other than circumstances beyond the control of the management. It is also a well-known fact that the proceedings before the Board of Industrial and Financial Reconstruction take a long time to conclude and all the while the protective umbrella of Section 22 is held over the company which has reported sick. We have come across cases where unfair advantage is sought to be taken of the provisions of Section 22 by certain industrial companies - and the wide language employed in the section is providing them a cover. We are sure Section 22 was not meant to breed dishonesty nor can it be so operated as to encourage unfair practices. The ultimate prejudice to public monies should not be overlooked in the process of promoting industrial progress. We are quite sure that the Government is fully alive to the situation and are equally certain that they must be thinking of necessary modifications in the Act. These few observations are meant merely to record the need for changes in the Act. PARIPOORNAN, J. (for Jeevan Reddy, J. and himself) - Special leave granted 3. Respondents 1 to 4 in Writ Petition No. 21973 of 1995 before the a High Court of Andhra Pradesh, representing the Commercial Tax Department, Andhra Pradesh, are the appellants in this appeal. The petitioner and Respondents 5 and 6 in the writ petition are Respondents I to 3 in this appeal. This appeal is filed against the judgment and order of the High Court of Andhra Pradesh dated 4-11-1995 4. The petitioner in the writ petition is M/s. Coromandel Pharmaceuticals Ltd. The said company manufactures and markets hulk drugs and formulations. It was declared as a sick industrial company under The Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as the Act) (Act No. 1 of 1986) by the Board for Industrial and Financial Reconstruction (shortly called BIFR). The Industrial Reconstruction Bank of India (shortly called IRBI) has been appointed as the operating agency. The BIFR sanctioned a scheme for the rehabilitation of the petitioner in Case No. 160 of 1988 in exercise of its powers under Section 18(4) read with Section 19(3) of the Act after obtaining the consent of the financial institutions concerned, on 19-11-1990. The said sanctioned scheme was brought into force with immediate effect. It was modified later on 29-12-1993. Shortly stated, the said sanctioned scheme for rehabilitation of the Company is under implementation 5. The petitioner-Company is an assessee to sales tax under the Andhra Pradesh General Sales Tax Act, 1957. It was assessed for the Assessment Year 1992-93 by Order dated 3-1-1994 and for the year 1993-94 by order passed in 1995. The Sales Tax Authorities initiated action under Section 17 of the Andhra Pradesh General Sales Tax Act for recovery of the said dues. It is seen that appeals were preferred from the assessment orders and the appellate authority granted a conditional order of stay to pay the tax assessed in instalments. Even then, there was default. For the aforesaid two years, the sales tax arrears due from the petitioner-Company, is stated to be Rs. 9, 53, 833. It is brought to our notice that there are sales tax arrears for the years 1986-87 to 1992-93, but those arrears are not in question in this appeal. We are concerned only with the collection of the balance of tax Rs. 9, 53, 833 due for the Assessment Years 1992-93 and 1993-94. As stated, the assessment orders for the said years were passed on 3-1-1994 and in 1995 - long after the scheme was sanctioned by the BIFR on 19-11-1990 6. The petitioner-Company assailed the recovery proceedings for the sales tax dues before the High Court. It prayed for the issue of a writ of mandamus directing the first and second respondents (Commercial Tax Authorities) not to proceed with the collection of balance sales tax amount of Rs. 9, 53, 833 without the permission of BIFR, as required under Section 22 of the Act (Act No. 1 of 1986), and for other reliefs. The plea of the petitioner was that the sanctioned scheme by BIFR for rehabilitation of the Company a is under implementation, and so, no proceedings for execution, distress or the like against the Company, shall lie except with the consent of the Board. According to the Revenue, the arrears of the sales tax in question relate to the period after the sanctioned scheme was brought under implementation and that the legal embargo/bar under Section 22 of the Act is inapplicable since Section 22 of the Act can apply only in respect of the sales tax dues included in the sanctioned scheme. Only those dues which were included in the package in the sanctioned scheme will be governed by the said bar. The High Court considered the rival pleas in the light of the relevant statutory provisions, a few decisions of this Court and of other High Courts, and held that there is no warrant to import the limitation as contended by the Revenue in applying Section 22 of the Act and that no coercive steps for the purpose of recovery of tax dues including action under Section 17 of the Andhra Pradesh General Sales Tax Act can be taken by the Revenue without obtaining the consent of BIFR. The writ petition filed by the first respondent herein - the Company, was allowed. It is thereafter, the Revenue moved this Court by way of SLP No. 10474 of 1996 and has come in appeal 7. We heard the counsel. For the purpose of resolving the controversy raised in this case, it will be useful to quote Sections 22(1) and 22(5) of the Act as also Board of Industrial and Financial Reconstruction Regulations, 1987, Regulations Nos. 29 and 30 22. Suspension of legal proceedings, contracts, etc. -(1) Where in respect of an industrial company, an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or as the case may be, the appellate authority (2)-(4) * * * (5) In computing the period of limitation for the enforcement of any right, privilege, obligation or liability, the period during which it or the remedy for the enforcement thereof remains suspended under this section shall be excluded. * Regulations Nos. 29 & 30 29. The Board shall publish or cause to be published short particulars concerning the draft scheme, by way of notification, in such a daily newspapers and periodicals, as it may consider necessary, inviting suggestions and objections regarding the draft scheme, within such time as may be mentioned in the notification, from the shareholders, creditors and employees of the sick industrial company, the transferee company as well as any other company concerned in the amalgamation30. The Board shall consider the suggestions and objections received from the sick industrial company, the operating agency or, as the case may be, from the transferee company and any other company concerned in the amalgamation and from any shareholder, creditor, or employee, of such industrial companies. It will be useful to understand the scheme of the Act (No. 1 of 1986); the Preamble to the Act states as follows : An Act to make, in the public interest, special provisions with a view to securing the timely detection of sick and potentially sick companies owning industrial undertakings, the speedy determination by a Board of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies and the expeditious enforcement of the measures so determined and for matters connected therewith or incidental thereto. * Sections 3(b), 3(i) and 3(o) may also be read 3. (b) Board means the Board for Industrial and Financial Reconstruction established under Section 4; (i) Operating agency means any public financial institution, State-level institution, scheduled bank or any other person as may be specified by general or special order as its agency by the Board; (o)sick industrial company means an industrial company (being a company registered for not less than five years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth Explanation. -For the removal of doubts, it is hereby declared that an industrial company existing immediately before the commencement of the Sick Industrial Companies (Special Provisions) Amendment Act, 1993, registered for not less than five years and having at the end of any financial year accumulated losses equal to or exceeding its entire net worth, shall be deemed to be a sick industrial company;Chapter III of the Act deals with References, inquiries and schemes. Section 15 thereof authorises the Board of Directors of the Company to make a reference to the Board (BIFR) for determination of the measures which shall be adopted with respect to the company. Section 16 authorises a the Board to make such inquiries as it may deem fit for determining whether any industrial company has become a sick industrial company. Where the Board is satisfied that a company has become a sick industrial company, it could give a reasonable time to the company to make its net worth positive [Section 17(2)]. Where it is not practicable for sick industrial company to make its net worth positive within a reasonable time, Section 17(3) steps in authorising the Board to direct any operating agency to prepare a scheme in relation to the company. The Board may specify the various measures to be considered by the operating agency. These measures are detailed out in Section 18. The operating agency has to prepare a scheme as per the order specified by the Board 8. Under Section 18(3) of the Act a scheme prepared by the operating agency shall be examined by the Board and a copy of the scheme with modification made by the Board shall be sent to the sick industrial company and the operating agency. The draft scheme shall be published in brief in daily newspapers, inviting suggestions and objections. (Regulations Nos. 29 and 30). It is open to the Board to make modifications as it considers necessary in the light of the suggestions and objections received. It is thereafter the scheme is sanctioned by the Board and it shall come into force on such date as the Board may specify in that behalf. Section 19 of the Act provides for rehabilitation by giving financial assistance. Section 22(1) deals with suspension of legal proceedings, contracts, etc 9. It is common ground that a sanctioned scheme for the rehabilitation of the petitioner-Company is under implementation. The scheme was sanctioned on 19-11-1990. It is also admitted before us that the sales tax arrears for which proceedings were initiated by the Revenue are for the Assessment Years 1992-93 and 1993-94. The assessment orders for these years were passed on 3-1-1994 and in 1995, long after the sanctioned scheme was brought into force. The main contention of the Revenue before the High Court and still in appeal before us is, that the arrears of sales tax in question for which proceedings are initiated against the petitioner-Company, relate to the period after the sanctioned scheme was brought under implementation and the legal bar or embargo under Section 22 of the Act can only be in respect of the sales tax dues included in a sanctioned scheme. According to the Revenue, the section should be reasonably construed and understood or read down in the above light. It was argued that apparently the embargo or bar envisaged by Section 22 of the Act is of wide import and covers a long period. This bar or embargo begins to operate the moment an inquiry is ordered or pending, and continues during the course of the inquiry, when a scheme is under preparation or consideration, and still later when the scheme is under implementation or even when an appeal under Section 25 of the Act relating to the company is pending. It was urged that the inquiry itself will take time and the pendency of the proceedings from the date of the inquiry till the scheme is implemented or an appeal is disposed of, envisage going through various formalities and will take a long time. If the bar or embargo envisaged by Section 22 of the Act is to cover the entire length of time, the situation may lead to very unreasonable or unintended state of affairs similar to the one in the present case; the suspension of proceedings a specified in Section 22 of the Act should be confined to matters included in pre-package state of affairs only, (in the sanctioned scheme) and not post-package matters like the instant one, which should be outside the pale or area of the sanctioned scheme. The counsel submitted that when the scheme was sanctioned on 19-11-1990, there was no assessment for the sales tax for the years 1992-93 and 1993-94. The petitioner (assessee) itself could have collected sales tax for the said years only after the scheme was sanctioned. The tax so collected really belongs to the State. But, the amount is not remitted to the State. If the bar or embargo under Section 22(1) of the Act is held to cover such amounts collected by the assessee, which really belong to the State, and enables it to retain the same, till the implementation is over or the appeal under Section 25 of the Act is disposed of, it will result in a state of affairs enabling the assessee to retain the amounts due to the State for no reason and indefinitely; the Revenue will have to obtain consent of the Board or as the appellate authority even for realising the legitimate amounts due to it and withheld by the assessee, unreasonably. There may be similar instances where the petitioner/assessee collects amounts due to the Revenue or others and is yet enabled to keep it back with itself unreasonably for a long time if the immunity under Section 22(1) of the Act operates absolutely. According to the Revenue the bar under Section 22(1) of the Act should not lead to such an undesirable state of affairs; and so the section should be understood or read down to act as a bar or embargo only for such of those pre-package dues reckoned or included in the scheme sanctioned. On the other hand, counsel for the first respondent (petitioner in the writ petition) Company asserted that the embargo under Section 22(1) of the Act is absolute and cannot be diluted or whittled down. All that is required by Section 22(1) of the Act is that in cases where an inquiry is pending or scheme is under preparation or consideration or a sanctioned scheme is under implementation or an appeal is pending, no proceedings, as stated in Section 22 of the Act for execution, distress or the like, shall be proceeded with except with the Consent of the Board or the appellate authority. What is contemplated by Section 22(1) of the Act is only a previous consent of the Board for the proceedings to be initiated against a sick company. It is not an absolute bar. The facts pointed out by the Revenue do not call for reading down the wide import of Section 22(1) of the Act 10. We considered the rival pleas urged before us. In Gram Panchayat v. Shree Vallabh Glass Works Ltd. the company concerned was declared a sick industrial company and steps were taken under Sections 16 and 17 of the Act by the Board. The question was whether the creditor (Panchayat) could recover the amount due to it from out of the property of the Company without the consent of the Board. This Court, stated the law at p. 443 (para 10), thus In the light of the steps taken by the Board under Sections 16 and a 17 of the Act, no proceedings for execution, distress or the like proceedings against any of the properties of the company shall lie or be proceeded further except with the consent of the Board. Indeed, there would be automatic suspension of such proceedings against the companys properties. As soon as the inquiry under Section 16 is ordered by the Board, the various proceedings set out under sub-section (1) of Section 22 would be deemed to have been suspended. * The above decision was followed by this Court in Maharashtra Tubes Ltd. v. State Industrial & Investment Corpn. of Maharashtra Ltd. The following portion of the headnote of the report at pages 144-145 sufficiently brings out the ratio relevant for the purpose of the present appeal Where an inquiry is pending under Sections 16/17 or an appeal is pending under Section 25 of the 1985 Act there should be cessation of the coercive activities of the type mentioned in Section 22(1) to permit the BIFR to consider what remedial measures it should take with respect to the sick industrial company The purpose and object of suspension of proceedings etc. under Section 22(1) of the 1985 Act is to await the outcome of the reference made to the BIFR for the revival and rehabilitation of the sick industrial company. The words or the like which follow the words execution and distress are clearly intended to convey that the properties of the sick industrial company shall not be made the subject-matter of coercive action of similar quality and characteristic till the BIFR finally disposes of the reference made under Section 15 of the 1985 Act. The legislature has advisedly used an omnibus expression the like as it could not have conceived of all possible coercive measures that may be taken against a sick undertaking.... * Our attention was also drawn to the following High Court decisions : Reliance Ispat Industries Ltd. v. CST ( (MP)); Himalaya Rubber Products Ltd. v. Board for Industrial and Financial Reconstruction ((Cal)); Vijay Mills Co. Ltd. v. State of Gujarat ((Guj)), etc 11. The Madhya Pradesh and Calcutta High Courts have followed the decision of this Court in Grain Panchayat v. Shree Vallabh Glass Works Ltd. 12. On a fair reading of the provisions contained in Chapter III of Act 1 of 1986 and in particular Sections 15 to 22, we are of the opinion that the plea put forward by the Revenue is reasonable and fair in all the a circumstances of the case. Under the statute, the BIFR is to consider in what way various preventive or remedial measures should be afforded to a sick industrial company. In that behalf, BIFR is enabled to frame an appropriate scheme. To enable the BIFR to do so, certain preliminaries are required to be followed. It starts with the reference to be made by the Board of Directors of the sick company. The BIFR is directed to make appropriate inquiry as provided in Sections 16 and 17 of the Act. At the conclusion of the inquiry, after notice and opportunity afforded to various persons including the creditors, the BIFR is to prepare a scheme which shall come into force on such date as it may specify in that behalf. It is in implementation of the scheme wherein various preventive, remedial or other measures are designed for the sick industrial company, steps by way of giving financial assistance etc. by Government, banks or other institutions, are contemplated. In other words, the scheme is implemented or given effect to, by affording financial assistance by way of loans, advances or guarantees or reliefs or concessions or sacrifices by Government, banks, public financial institutions and other authorities. In order to see that the scheme is successfully implemented and no impediment is caused for the successful carrying out of the scheme, the Board is enabled to have a say when the steps for recovery of the amounts or other coercive proceedings are taken against sick industrial company which, during the relevant time, acts under the guidance/control or supervision of the Board (BIFR). Any step for execution, distress or the like against the properties of the industrial company or other similar steps, should not be pursued which will cause delay or impediment in the implementation of the sanctioned scheme. In order to safeguard such state of affairs, an embargo or bar is placed under Section 22 of the Act against any step for execution, distress or the like or other similar proceedings against the company without the consent of the Board or, as the case may be, the appellate authority. The language of Section 22 of the Act is certainly wide. But, in the totality of the circumstances, the safeguard is only against the impediment, that is likely to be caused in the implementation of the scheme. If that be so, only the liability or amounts covered by the scheme will be taken in, by Section 22 of the Act. So, we are of the view that though the language of Section 22 of the Act is of wide import regarding suspension of legal proceedings from the moment an inquiry is started, till after the implementation of the scheme or the disposal of an appeal under Section 25 of the Act, it will be reasonable to hold that the bar or embargo envisaged in Section 22(1) of the Act can apply only to such of those dues reckoned or included in the sanctioned scheme. Such amounts like sales tax, etc., which the sick industrial company is enabled to collect after the date of the sanctioned scheme legitimately belonging to the Revenue, cannot be and could not have been intended to be covered within Section 22 of the Act. Any other construction will be unreasonable and unfair and will lead to a state of affairs enabling the sick industrial unit to collect amounts due to the Revenue and withhold it indefinitely and unreasonably. Such a construction which is unfair, unreasonable and against the spirit of the statute in a business sense, should a be avoided 13. The situation which has arisen in this case seems to be rather exceptional. The issue that has arisen in this appeal did not arise for consideration in the two cases decided by this Court in Gram Panchayat v. Shree Vallabh Glass Works Ltd. and Maharashtra Tubes Ltd. v. State Industrial & Investment Corpn. of Maharashtra Ltd. It does not appear from the above two decisions of this Court nor from the decisions of the various High Courts brought to our notice, that in any one of them, the liability of the sick company dealt with therein itself arose, for the first time after the date of sanctioned scheme. At any rate, in none of those cases, a situation arose whereby the sick industrial unit was enabled to collect tax due to the Revenue from the customers after the sanctioned scheme but the sick unit simply folded its hands and declined to pay it over to the Revenue, for which proceedings for recovery, had to be taken. The two decisions of this Court as also the decisions of High Courts brought to our notice are, therefore, distinguishable. They will not apply to a situation as has arisen in this case. We are, therefore, of the opinion that Section 22(1) should be read down or understood as contended by the Revenue. The decision to the contrary by the High Court is unreasonable and unsustainable. 14.

Decision:
1[ds]13. The situation which has arisen in this case seems to be rather exceptional. The issue that has arisen in this appeal did not arise for consideration in the two cases decided by this Court in Gram Panchayat v. Shree Vallabh Glass Works Ltd. and Maharashtra Tubes Ltd. v. State Industrial & Investment Corpn. of Maharashtra Ltd. It does not appear from the above two decisions of this Court nor from the decisions of the various High Courts brought to our notice, that in any one of them, the liability of the sick company dealt with therein itself arose, for the first time after the date of sanctioned scheme. At any rate, in none of those cases, a situation arose whereby the sick industrial unit was enabled to collect tax due to the Revenue from the customers after the sanctioned scheme but the sick unit simply folded its hands and declined to pay it over to the Revenue, for which proceedings for recovery, had to be taken. The two decisions of this Court as also the decisions of High Courts brought to our notice are, therefore, distinguishable. They will not apply to a situation as has arisen in this case. We are, therefore, of the opinion that Section 22(1) should be read down or understood as contended by the Revenue. The decision to the contrary by the High Court is unreasonable and unsustainable.