IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No 9027 of 2003 and SPECIAL CIVIL APPLICATION No 9028 of 2003 For Approval and Signature: HON'BLE MR.JUSTICE M.S.SHAH and HON'BLE MR.JUSTICE A.M.KAPADIA ============================================================ 1. Whether Reporters of Local Papers may be allowed : YES to see the judgements? 2. To be referred to the Reporter or not? : YES 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the concerned : NO Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals? -------------------------------------------------------------- CORE HEALTHCARE LIMITED Versus STATE OF GUJARAT -------------------------------------------------------------- Appearance: 1. Special Civil Application No. 9027 of 2003 MR SN SOPARKAR, Sr.Advocate with MR AMAR N BHATT for Petitioner No. 1 MR SIRAJ GORI, AGP for Respondent No. 1 2. Special Civil Application No. 9028 of 2003 MR SN SOPARKAR, Sr.Advocate with MR AMAR N BHATT for Petitioner No. 1 MR SIRAJ GORI, AGP for Respondent No. 1 -------------------------------------------------------------- CORAM : HON'BLE MR.JUSTICE M.S.SHAH and HON'BLE MR.JUSTICE A.M.KAPADIA Date of decision: 31/03/2004 COMMON CAV JUDGEMENT (Per : HON'BLE MR.JUSTICE M.S.SHAH) Both these petitions are filed by the same Company-Core Healthcare Limited which has set up - (i) four projects at village Sachana, Near Viramgam in Ahmedabad (Rural) District for manufacturing I.V. Fluids, healthcare products and pharmaceutical products in or about 1984; and (ii) a project at village Rajpur, Taluka Kadi in Mehsana District for manufacturing I.V. Fluids and pharmaceutical products in or about 1988. Special Civil Application No.9027 of 2003 pertains to sales-tax dues for the projects at village Sachana and Special Civil Application No.9028 of 2003 pertains to sales-tax dues for the project at village Rajpur. Both the petitions raise common questions of law and fact and are, therefore, heard together and are being disposed of by this common judgment. 2. Both the petitions raise a common question about powers of the State Government in the Sales-tax Department to recover sales-tax dues from the petitioner-Company on the products being sold by it. The petitioner claims immunity from any coercive recovery of sales-tax dues on the ground that the petitioner is registered as a sick industrial Company under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 ("the SICA" or "the Act" for short). The petitions involve two controversies - (i) whether any inquiry is pending under Section 16(1) so as to entitle the petitioner to protection under Section 22 of the SICA; and (ii) if yes, whether the petitioner is entitled to the protection under Section 22 of the SICA in respect of the current sales-tax dues which the petitioner is collecting from the purchasers for the period during pendency of the reference before the BIFR. 3. On the basis of its financial position as on 31.3.2000, the petitioner approached the BIFR and a reference was registered as Case No.149 of 2001 which is for the entire Company i.e. for all the projects at village Sachana in Ahmedabad (Rural) District and at village Rajpur in Mehsana District. However, by order dated 24.1.2002 the said reference was rejected by the BIFR on the ground that it was time barred. Aggrieved by the said order, the petitioner preferred Appeal No.74 of 2003 before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) under Section 25 of the SICA. The appeal was filed on 24.2.2003 and was listed for hearing on 16.6.2003. Thereafter the appeal was fixed for hearing on 19.9.2003. In the meantime, the petitioner has filed both these petitions on 1/2.7.2003 challenging the demand notices and orders for attachment of the bank accounts and also the subsequent notices issued by the sales-tax department for recovery of the sales-tax dues and for initiating criminal proceedings against the petitioner and/or its Directors for recovery of sales-tax. 4. The petitioner has also contended in Special Civil Application No.9027 of 2003 that out of the four projects at village Sachana in Ahmedabad (Rural) District, the petitioner was granted sales-tax exemption for three projects, namely KVP, MDD and NOVA. As far as the fourth project i.e. SVP is concerned, since the project was completed in August 1998 instead of February, 1998, the petitioner was not granted sales-tax exemption although the petitioner had made eligible investment worth Rs.75 lakhs. The State Government has pointed out that the application for sales-tax exemption was already rejected on 3.6.2003. 5. During pendency of these petitions, the first controversy about pendency of the reference/inquiry has assumed a different complexion, because the petitioner submitted applications to the BIFR for registration as a sick industrial Company even for the subsequent years (ending on 31st March 2001, 2002 and 2003 respectively) and as per the three BIFR communications dated 19th January 2004, the petitioner-Company has been registered as a sick industrial Company in Case Nos.30, 31 and 32 of 2004. 6. The stand of the respondents in the affidavits in reply is that since the BIFR had rejected the reference on 24.1.2002, there was no pending reference and, therefore, the protection under Section 22 of the SICA was not available to the petitioner. It is further contended that, in any view of the matter, the protection under Section 22 of the SICA would be available only in respect of those amounts of sales-tax which were due on the date of filing of the reference before the BIFR i.e. 18.6.2001. On that day, the following sales-tax amounts were payable by the petitioner to the State Government :- --------------------------------------------------------- Assessment SCA No.9027/03 SCA No.9028/03 Year in (Rs.) in (Rs.) --------------------------------------------------------- 1992-93 54,67,000 1993-94 21,54,394 1994-95 86,27,240 1998-99 74,33,331 1999-2000 1,27,04,666 2000-01 24,27,321 ----------- ----------- Total 2,25,65,318 1,62,48,634 ----------- ----------- Rounded off (2.26 Crores) (1.62 Crores) Total Rs.3.88 Crores --------------------------------------------------------- However, the current sales-tax dues which are payable after the date of registration before the BIFR are payable by the petitioner and that no protection is available to the petitioner for the current sales-tax dues as the petitioner is collecting sales-tax from the purchasers as a trustee of the State, and the petitioner has to pay over the sales-tax amounts collected from the purchasers. It is further submitted that even for the period prior to the date of registration before the BIFR, the petitioner is required to pay the sales-tax dues for which the petitioner had obtained the benefit of sales-tax deferment. The petitioner had collected the said tax from the purchasers and had retained the same pursuant to the sales-tax deferment scheme and the petitioner was permitted to retain the said amounts only for a specified period as stipulated in the scheme and after the period of the scheme is over, the sales-tax amounts collected by the petitioner from the general public and retained by it as a trustee of the State have to be paid over to the State Government. 7. At the hearing of these petitions, Mr SN Soparkar instructed by Mr Amar Bhatt, learned counsel for the petitioner has raised the following contentions :- 7.1 Even after the BIFR rejected the petitioner's reference on 24.1.2002, the petitioner's appeal under Section 25 of the SICA has been pending and, therefore, during pendency of the appeal also the petitioner is entitled to protection under Section 22 of the SICA. In any view of the matter, once the BIFR has granted the petitioner registration as a sick industrial Company as per communications dated 19.1.2004, there can be no manner of doubt that the inquiry under Section 16 is pending. In support of the said contention, strong reliance has been placed on the decision of the Apex Court in Real Value Appliances Ltd. vs. Canara Bank, (1998) 93 Comp.Cases 26 laying down that once the reference is registered, then an inquiry under Section 16(1) is deemed to have commenced and that Section 22 and the prohibitions contained therein shall immediately come into play. 7.2 In Tata Davy Ltd. vs. State of Orissa, (1998) 111 STC 462, the Apex Court has held that arrears of taxes and the like due from sick industrial Companies that satisfy the conditions set out in Section 22(1) of the SICA cannot be recovered by coercive process unless the BIFR gives its consent therefor. Reliance is also placed on the decision of the Punjab & Haryana High Court in Industrial Cables (I) Ltd. vs. State of Punjab, (2001) 105 Comp.Cases 541 and on the decision of the Kerala High Court in Modistone Ltd. vs. State of Kerala, (2001) 105 Comp.Cases 183. 8. On the other hand, Mr Siraj Gori, learned AGP for the respondent-Sales-tax authorities has made the following submissions :- 8.1 When the petitions were filed, only the petitioner's appeal before the Appellate Authority (AAIFR) was pending under Section 25 of the Act, but pendency of such appeal did not mean that inquiry under Section 16(1) of the Act was pending and, therefore, the petitioner was not entitled to suspension of the recovery proceedings under the Sales-tax Act. Strong reliance is placed on the decision of the Delhi High Court in IDBI vs. Surekha Coated Tubes & Sheets Ltd., (1996) 85 Comp.Cases 594. 8.2 Even otherwise, registration of the petitioner-Company as a sick industrial Company by itself does not mean commencement of inquiry under Section 16(1) because in the facts of the instant case, the BIFR has not called for any information or document while communicating the registration of the petitioner-Company as a sick industrial Company. The letters dated 19.1.2004 clearly indicate that no such information/documents is called for. Hence, the ratio of the decision in Real Value Appliances Ltd. will not apply unless any such information or document is called for, in which case alone it can be said that there was commencement of inquiry under Section 16(1) of the SICA for the purposes of Section 22(1) of the Act. 8.3 Assuming that any inquiry is pending under Section 16(1) of the Act, even then the petitioner is not entitled to claim any immunity from recovery of sales-tax dues because sales-tax is what the petitioner is required to collect as an agent of the State or as a trustee of the State and the amounts of sales-tax so collected never belong to the petitioner-Company. Therefore, they are never the properties of the Company and, therefore, Section 22 conferring protection on the properties of the Company cannot apply to recovery of sales-tax dues. 8.4 In the alternative, in any view of the matter, even if the past sales-tax dues recovered from the purchasers can be treated as a part of the property of the Company, the petitioner is not entitled to retain the sales tax collected after registration of the Company as a sick industrial Company and the State Government cannot be expected to wait for the entire period till the scheme for rehabilitation and revival of the sick Company may or may not be finalized and sanctioned by the BIFR which process ordinarily takes about two to three years. The State Government is being deprived of the sales-tax dues payable by the petitioner for the last ten years as per the following particulars: --------------------------------------------------------- Assessment SCA No.9027/03 SCA No.9028/03 Year --------------------------------------------------------- 1992-93 54,67,000 1993-94 21,54,394 1994-95 86,27,240 1995-96 90,29,928 1996-97 75,54,156 1997-98 6,62,152 1998-99 74,33,331 20,67,022 1999-2000 1,27,04,666 2000-01 24,27,321 2001-02 46,22,197 2002-03 1,04,85,002 1.4.03 to 2,74,67,119 31.12.2003 Last instal- ment of deferred pay- 8,33,334 ment due on 31.5.2001 ------------ ------------- 6,51,39,636 3,63,95,226 ------------ ------------- Rounded off Rs.6.51 Crores Rs.3.64 Crores ------------- -------------- Total Rs.10.15 Crores --------------------------------------------------------- Note 1 -Spl. CA No. 9027 of 2003 The petitioner's application for sales-tax exemption was already rejected on 3.6.2003. Note 2 -Spl. CA No. 9028 of 2003 The petitioner enjoyed the benefit of sales-tax deferment and paid five instalments, but defaulted in the sixth instalment of Rs.8,33,304/- which was due on 31.5.2001. 8.5 The Gujarat Electricity Board is not bound to supply electricity without demanding charges for current supply. Similarly, the State cannot be deprived of the amounts of sales-tax being collected by the petitioner either by separately collecting the same from the purchasers or by including sales-tax as a component of the sale price charged from its purchasers. 9. Before dealing with the rival submissions, it is necessary to make a brief reference to the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. There is no dispute about the definition of "sick industrial Company" as defined by Section 3(o) and various other expressions, Chapter III covers references, inquiries and schemes. Sub-section (1) of Section 15 requires the Board of Directors of a sick industrial Company to make a reference to the BIFR within two months from the date of finalization of the audited accounts of the Company for the financial year in which the Company has become a sick industrial Company. Sub-section (2) empowers the public authorities/financial institutions or scheduled banks to make such reference. Section 16 reads as under :- "16. Inquiry into working of sick industrial Companies.- (1) The Board may make such inquiry as it may deem fit for determining whether any industrial Company has become a sick industrial Company- (a) upon receipt of a reference with respect to such Company under Section 15; or (b) .... .... .... .... .... (2) The Board may, if it deems necessary or expedient so to do for the expeditious disposal of an inquiry under sub-section (1), require by order any operating agency to enquire into and make a report with respect to such matters as may be specified in the order. (3) The Board or, as the case may be, the operating agency shall complete its inquiry as expeditiously as possible and endeavour shall be made to complete the inquiry within sixty days from the commencement of the inquiry. Explanation - For the purposes of this sub-section, an inquiry shall be deemed to have commenced upon the receipt by the Board of any reference or information or upon its own knowledge reduced to writing by the Board. (4) ..... ..... .... .... .... Under Section 17, after completion of the inquiry whether it is practicable for the Company to make its net worth exceed the accumulated losses within a reasonable time, the Board shall give such Company time to make its net worth exceed the accumulated losses subject to appropriate restrictions and conditions. If the Board decides that it is not practicable for the Company to do so within a reasonable time and that it is necessary or expedient in the public interest to adopt all or any of the measures specified in Section 18, the Board may direct any operating agency to prepare a scheme providing for revival and rehabilitation of the Company. Section 18 provides for preparation and sanction of the scheme for revival and rehabilitation of the sick Company as expeditiously as possible and ordinarily within a period of ninety days providing for various measures including the financial reconstruction of the sick industrial Company, as may be appropriate. Section 19, which has a very important bearing on the controversy involved in the present petitions, reads as under :- "19. Rehabilitation by giving financial assistance.- (1) Where the scheme relates to preventive, ameliorative, remedial and other measures with respect to any sick industrial Company, the scheme may provide for financial assistance by way of loans, advances or guarantees or reliefs or concessions or sacrifices from the Central Government, a State Government, any scheduled bank or other bank, a public financial institution or State level institution or any institution or other authority (any Government, bank, institution or other authority required by a scheme to provide for such financial assistance being hereafter in this section referred to as the person required by the scheme to provide financial assistance) to the sick industrial Company. (2) Every scheme referred to in sub-section (1) shall be circulated to every person required by the scheme to provide financial assistance for his consent within a period of sixty days from the date of such circulation or within such further period, not exceeding sixty days, as may be allowed by the Board, and if no consent is received within such period or further period, it shall be deemed that consent has been given. (3) Where in respect of any scheme the consent referred to in sub-section (2) is given by every person required by the scheme to provide financial assistance, the Board may, as soon as may be, sanction the scheme and on and from the date of such sanction the scheme shall be binding on all concerned. (3A) On the sanction of the scheme under sub-section (3), the financial institutions and the banks required to provide financial assistance shall designate by mutual agreement a financial institution and a bank from amongst themselves which shall be responsible to disburse financial assistance by way of loans or advances or guarantees or reliefs or concessions or sacrifices agreed to be provided or granted under the scheme on behalf of all financial institutions and banks concerned. (3B) The financial institution and the bank designated under sub-section (3A) shall forthwith proceed to release the financial assistance to the sick industrial Company in fulfillment of the requirement in this regard. (4) Where in respect of any scheme consent under sub-section (2) is not given by any person required by the scheme to provide financial assistance, the Board may adopt such other measures, including the winding up of the sick industrial Company, as it may deem fit. (emphasis supplied) Section 19A provides that at any time before completion of the inquiry under Section 16, an interim arrangement may be made for continuing the operations of the sick industrial Company or for the financial reconstruction of the sick industrial Company. Section 20 provides that where the Board after making inquiry under Section 16 and after considering all the relevant facts and circumstances and after giving an opportunity of hearing to all concerned parties, is of opinion that the sick industrial Company is not likely to recover from sickness within a reasonable time and that the Company is not likely to become viable in future and that it is just and equitable that the Company should be would up, it may record and forward its opinion to the concerned High Court which may proceed with the winding up of the sick industrial Company in accordance with the provisions of the Companies Act. Sub-section (1) of Section 22 reads as under :- "22.(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 as 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." It is in light of the aforesaid statutory provisions that the controversies arising in these petitions are required to be examined. 10. We will first take up the preliminary contention raised by Mr Gori, learned AGP for the respondents that no inquiry under Section 16(1) of the Act is pending even now. As far as the pendency of the appeal before the Appellate Authority under Section 25 of the Act is concerned, Mr Gori has heavily relied on the decision of the Delhi High Court in IDBI vs. Surekha Coated Tubes and Sheets Ltd., (1996) 85 Comp.Cases 594 laying down that the protection under Section 22 is not available during pendency of the appeal against rejection of a reference by the BIFR. Mr Soparkar for the petitioner has submitted that the said decision does not lay down the correct law. It is, however, not necessary to go into this debate because during pendency of these petitions, the petitioner Company has already been registered as a sick industrial Company on 19.1.2004. 11. It is now necessary to examine the contention of the learned AGP that even the registration of the reference on 19.1.2004 does not necessarily confer protection of Section 22 on the petitioner because inquiry under Section 16(1) has not yet commenced. It is submitted that the principle laid down by the Apex Court in Real Value Appliances Ltd., (1998) 93 Comp.Cases 26 can come into play only after the BIFR calls for information or documents under Regulation 19(5) of the Board for Industrial and Financial Reconstruction Regulations, 1987. The letters dated 19.1.2004 of the BIFR read as under (similar for all three years except the year) :- "I am directed to refer to your reference dated 01.11.2003 (filed on the basis of audited accounts as on 31.3.2001) and to say that the reference received on 19.11.2003 stands registered as Case No.30/2004. You are hereby directed to send a copy of the Form - "A" alongwith its enclosures filed by you to the concerned State Government, Banks and financial Institutions immediately and report the compliance of the direction to the undersigned within 15 days of the receipt of this letter." Since no information or documents are called for by the BIFR, the learned AGP submits, the inquiry has not yet commenced. 12. It is true that in the Real Value Appliances case (Supra), the Apex Court has partly based its decision on the language of Regulation 19(5) which reads as under :- "Regln.19(5).- If on scrutiny, the reference is found to be in order, it shall be registered, assigned a serial number and submitted to the chairman or assigning it to a Bench. Simultaneously, remaining information/documents required, if any, shall be called for from the informant." (emphasis supplied) However, the following observations made by the Apex Court in the same case leave no room for doubt that registration of the reference itself amounts to commencement of inquiry under Section 16(1) for the purposes of Section 22 of the SICA :- "Relying on the use of the word "may" in section 16(1) of the Act it has been contended in some High Courts that the word "may" in that section shows that the BIFR has power to reject a reference summarily without going into the merits and that it is only when the BIFR takes up the reference for consideration on the merits under section 16(1) that it can be said that the "inquiry" as contemplated by the section has commenced. It is argued that if the reference before the BIFR is only at the stage of registration under section 15, then section 22 is not attracted. This contention, in our opinion, has no merit. In our view, when section 16(1) says that the BIFR can conduct the inquiry "in such manner as it may deem fit", the said words are intended only to convey that a wide discretion is vested in the BIFR in regard to the procedure it may follow for conducting an inquiry under section 16(1) and nothing more. In fact, once the reference is registered after scrutiny, it is, in our view, mandatory for the BIFR to conduct an inquiry. If one looks at the format of the reference as prescribed in the Regulations, it will be clear that it contains more than fifty columns regarding extensive financial details of the company's assets, liabilities, etc. Indeed, it will be practically impossible for the BIFR to reject a reference