IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE S.S.SATHEESACHANDRAN MONDAY, THE 24TH AUGUST 2009 / 2ND BHADRA 1931 WP(C).No. 6701 of 2008(W) ------------------------------------- CMA.57/2005 of VI ADDL.DISTRICT COURT, ERNAKULAM IP.1 OF 2005 of SUB COURT, KOCHI. .................... PETITIONER(S): --------------------- P.A. SHAHABUDEEN, S/O.P.A.ABDUL MAJEED, NEAR MADHYAMAM PRESS,VELLIMADUKKUNNU, CALICUT, AT PRESENT RESIDING AT 'NOOR MAHAL',13/1157, RAMESWARAM LANE,KOCHI-5. BY ADV. MR.K.I.MAYANKUTTY MATHER SMT.S.LAKSHMY RESPONDENT(S): ------------------------ 1. THE DISTRICT COLLECTOR,ERNAKULAM, KAKKANAD,KOCHI-30. 2. THE ADDITIONAL SALES TAX OFFICER, IVTH CIRCLE,ERNAKULAM,KOCHI-682 013. 3. THE TAHSILDAR (REVENUE RECOVERY) FORT KOCHI,KOCHI-1. R1 TO R3 BY SPL.GOVERNMENT PLEADER (TAXES) MR.K.P. PRADEEP THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 10/08/2009, ALONG WITH WPC NO. 19710 OF 2008, THE COURT ON 24/08/2009 DELIVERED THE FOLLOWING: WP(C) NO. 6701/2008-W APPENDIX PETITIONER'S EXHIBITS: EXT.P1: COPY OF THE I.P. 1 OF 2005 FILED BY THE PETITIONER BEFORE THE SUB COURT, KOCHI. EXT.P2: COPY OF THE I.A. NO.155 OF 2005 IN I.P. 1 OF 2005, SUB COURT, KOCHI. EXT.P3: COPY OF THE ORDER IN I.A.155 OF 2005 IN I.P. NO.1 OF 2005, SUB COURT, KOCHI. EXT.P4: COPY OF THE ORDER OF THE DISTRICT COURT ERNKULAM IN CMA. NO.57 OF 2005. RESPONDENT'S EXHIBITS: NIL //TRUE COPY// P.S. TO JUDGE rs. S.S. SATHEESACHANDRAN, J. - - - - - - - - - - - - - - - - - - - - - - - - - W.P.(C) Nos.6701 & 19710 of 2008 - - - - - - - - - - - - - - - - - - - - - - - - - Dated: 24th August, 2009 JUDGMENT These two Writ Petitions are filed by two brothers separately, who were erstwhile partners of a firm by name 'Shabago Marketing', impeaching the correctness, propriety and legality of the judgments passed by the VI Additional District Judge, Ernakulam in the respective civil miscellaneous appeals preferred by them against the orders passed by the insolvency court in their respective applications declining protection order against proceeding for realisation of sales tax arrears due from them in respect of their business concern. 2. Initially both the petitioners together had filed a petition as I.P.No.1 of 2003 for declaring them as insolvents. But, later realising that a joint petition by them for the relief claimed is not entertainable, that petition was withdrawn with liberty to file fresh application. Petitioner in W.P.C.No.6701 of 2008, thereafter, filed I.P.No.1 of 2005 and the petitioner in W.P.C.No.19710 of 2008 filed I.P.No.2 of 2005, both before the Sub Court, Kochi to declare them as insolvent. The gist of the allegations raised in both petitions were common alleging that the Sales Tax Intelligence Wing carried out an inspection over their business concern and pursuant to verifications of W.P.C.Nos.6701 & 19710/08 - 2 - the stocks, registers and accounts on reaching a conclusion that the dealer had suppressed the sales turn over with intention to evade tax imposed a penalty of Rs.29,43,980/- under Section 45A of the K.G.S.T.Act. Both the petitioners stating that they are unable to pay and discharge the liability imposed towards penalty filed the above insolvency petitions to declare them as insolvent. Separate petitions were also filed for orders of protection against coercive step by issuing warrant and detention to realise the penalty towards sales tax arrears. The respondents resisted the application contending that recovery proceedings are in progress and the petitioners who are defaulters are not entitled to get any protection from arrest and detention from the court. 3. The learned Sub Judge, after considering the petitions for protection with reference to the objections raised by the respondents and hearing the counsel on both sides, finding that in the respective insolvency petitions other than the claim of the State and the sales tax officials in respect of the penalty imposed as sales tax arrears the particulars of the claims of the other respondents impleaded as respondents 4 to 13, and also the particulars of the property of the petitioners and its value have not been mentioned, that the W.P.C.Nos.6701 & 19710/08 - 3 - petitioners had substantial bank deposits during the period of the assessments involved, and that there was suppression of turn over of huge amount as to their business, concluded that no sufficient cause was made out for grant of orders of protection under Section 31 of the Insolvency Act. Petitioners, both of them, preferred separate appeals challenging the orders of the learned Sub Judge before the District Court, Ernakulam. The learned Additional District Judge dismissed the appeals by separate judgments concurring with the views formed by the learned Sub Judge. The learned Additional District Judge while dismissing the appeals had expressed the view that sales tax arrear is not a personal debt of the dealer and the amount demanded by the State towards sales tax arrears from the dealer is the sum which had been collected by the dealer from his customers as the trustee or agent of the Government. Forming such a view sales tax arrear is not a debt, it was held that the appellants/petitioners are not entitled to get protection under the Insolvency Act. Both the petitioners preferring separate Writ Petitions against the respective judgments rendered by the learned Additional District Judge in their civil miscellaneous appeal challenge the correctness of those judgments invoking the supervisory jurisdiction W.P.C.Nos.6701 & 19710/08 - 4 - vested with this court under Article 227 of the Constitution of India. 4. I heard the learned counsel for the petitioners and also the learned Government Pleader. 5. On the factual aspects involved in the petitions, there is no dispute at all. Petitioners are defaulters to sales tax and against them coercive steps are being proceeded by the State under the provisions of General Sales Tax Act and Revenue Recovery Act, for realisation of the sales tax arrears. The short question that emerges for consideration is whether the petitioners are entitled to protection under Section 31 of the Insolvency Act as sought for by them in their respective insolvency petitions filed to declare them as insolvents. Learned counsel for the petitioners inviting my attention to the definition under Section 2(1)(b) of the Insolvency Act submitted that the liability due from a defaulter towards sales tax arrears to the Government also falls within the ambit of 'debt'. Learned District Judge was not correct in holding that the liability of the defaulter to sales tax arrears is not a debt and he holds such sum collected from his customers as a trustee on behalf of the Government, submits the counsel. Inviting my attention to State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation and others [(1995) W.P.C.Nos.6701 & 19710/08 - 5 - 96 STC 612] it is contended that sales tax arrears is a state debt due from the defaulter and as such the petitioners, both of them, the defaulters of sales tax arrears to State are entitled to get an order of protection from arrest and detention till their insolvency petitions are disposed on merits after trial. Reliance is also placed on Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. [ (2000) 5 S.C.C. 694] by the learned counsel for the petitioners to contend that sales tax arrears is a debt due to the State and as such proceedings under the Insolvency Act to declare the petitioners as insolvents are entertainable. 6. On the other hand, the learned Government Pleader submitted that there is no merit in the petitions and the insolvency petitions moved by them, as pointed out by the learned District Judge are not maintainable. Irrespective of the question whether the reasoning of the learned District Judge that the sales tax arrears is a State debt or not, in the given facts of the case, according to the learned Government Pleader, the petitioners who had collected large sums from the customers towards sales tax arrears but not paid such amount to the Government are not entitled to the protection order. 7. State debt or crown debt is not excluded and no exemption is W.P.C.Nos.6701 & 19710/08 - 6 - provided to such a debt under the Insolvency Act is not open to doubt. Specific exemption under Section 8 of the Insolvency Act against proceedings thereunder is provided only “against any corporation or against any association or company registered under any enactment for the time being in force.” True, Section 45 of the Insolvency Act makes it clear that an order of discharge of a debtor who has been previously declared as an insolvent under the provisions of the Act will not release him from any debt due to the Government. But seeking a discharge after being declared as an insolvent is entirely different from the right to a declaration as an insolvent, and a protection order from arrest and detention under the provisions of the Insolvency Act to escape from the proceedings arising from the debt due, whether it be from an individual creditor or the State. View taken by the learned District Judge in the impugned judgment that sales tax is collected by the trader from the customers for the purpose of remittance to the Government and so much so, the trader collecting that amount as the trustee or agent of the Government and the amount due to the Government thereof will not have the character of a 'debt' is not correct. Trader is collecting the tax prescribed by the statute for the sale transactions over the W.P.C.Nos.6701 & 19710/08 - 7 - commodities from the customers. He is not collecting such amount from the customers as a trustee or as an agent of the Government. Amount collected by him is due to the Government by way of tax does not postulate that the trader is a trustee and the Government beneficiary. If the trader fails to pay the amount collected by way of tax he is liable to be proceeded as covered by the Sales Tax Act which may give rise to penal consequences as well. The amount due from the trader to the Government collected as tax falls within a state debt due which in turn comes within the definition of debt under the Insolvency Act. The decisions relied by the counsel for the petitioners do not directly deal with the question. In State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation and others [(1995) 96 STC 612] though the question considered was precedence of the State debt over the claim of a secured creditor it is indicative that sales tax arrears due from a dealer comes under State debt. In State of Kerala v. R.V.S.Mani (1995(2) KLT 568) it has been held by a Division Bench of this court that the orders passed in insolvency proceedings are binding on the State in respect of debt due to the State as sales tax arrears. In the above decision, it was held that steps taken by the State to realise arrears of sales tax as public W.P.C.Nos.6701 & 19710/08 - 8 - revenue due on land by resorting to the Revenue Recovery Act will not create a charge over the land and State thereby does not become a secured creditor when insolvency proceedings are initiated. Challenge raised in the above case related to a judgment dated 21.1.1985 rendered in a suit challenging the sale effected by the Official Liquidator in an insolvency proceedings earlier as null and void and not binding on the plaintiff in the suit. But in view of the amendment brought into the Kerala General Sales Tax Act incorporating a new provision under Section 26B of that Act by Act 23 of 1999 which has come into effect from 1.4.1999 onwards sales tax arrears due payable by a dealer shall be the first charge on his property. Section 26B of the K.G.S.T.Act reads thus: “Tax payable to be first charge on the property:- Notwithstanding anything to the contrary contained in any other law for the time being in force, any amount of tax, penalty, interest and any other amount, if any, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer, or such person.” So much so, the decision rendered in State of Kerala v. W.P.C.Nos.6701 & 19710/08 - 9 - R.V.S.Mani (1995(2) KLT 568) relating to sales tax arrears will not get priority or precedence over and above a secured creditor in an insolvency proceeding after introduction of Section 26B in the Sales Tax Act cannot continue to have any force after the above amendment. But it has to be concluded that the sales tax arrears due from a dealer or any other person is a state debt in respect of which a proceeding under the Insolvency Act is maintainable at the instance of a person who is proceeded against for the recovery of such debt. 8. The larger question, however, remains whether the petitioners are entitled to get protection order from their arrest and detention pursuant to proceedings initiated against them by the State for realisation of sales tax arrears. Sales tax arrears due from them is a state debt will not by itself enable the petitioners to claim any such protection under Section 32 of the Insolvency Act. Admittedly, in an inspection conducted by the intelligence wing of the sales tax department at the premises of the business concern, the firm in which these petitioners were partners, suppression of sale turnover and evading of large amount due as sales tax was detected and pursuant thereto recovery proceedings were launched to realise debts totaling a sum of Rs.35,86,852/-. The counter affidavit filed in the W.P.C.Nos.6701 & 19710/08 - 10 - Writ Petitions by the second respondent disclose in the raid conducted over the premises suppression of sales were detected and hence the Intelligence Officer imposed penalty under Section 45A of the K.G.S.T.Act to the tune of Rs.29,43,980/-. In this context it has to be noted that Section 45A of the K.G.S.T.Act contemplate imposition of penalty in respect of the amount due as sales tax or such other amount evaded or sought to be evaded. Section 46 of the K.G.S.T.Act further provides that any dealer or person knowingly submits an untrue return or fails to keep true and complete accounts are liable to be prosecuted and on conviction by a Magistrate be liable to fine which may extend to twenty five thousand rupees. So, on the facts presented in the case where suppression of sales turnover and evasion of tax is detected by the Intelligence Wing of the sales tax department in the business concern of the firm wherein the petitioners at that time were the partners the acts or omissions committed by them amount to offence and it is open to the department to prosecute them for such offence, in which case they are liable to pay the fine, if found guilty and convicted. When that be the case, the question emerges for consideration whether the petitioners can get a protection order under Section 32 of the W.P.C.Nos.6701 & 19710/08 - 11 - Insolvency Act from arrest and detention. So far as protection order envisaged under Section 31 of the Insolvency Act it covers only arrest by civil court and detention in civil prison, and no protection from criminal proceedings in respect of offences under penal law can be granted by the insolvency court. So, on that solitary ground itself the protection order claimed by the petitioners in their respective insolvency petitions cannot be granted. Even if such a protection order is granted under Section 31 of the Insolvency Act, petitioners will not get any advantage from criminal proceedings as covered by Section 46 of the K.G.S.T.Act. In Shyama Charan v. Anguri Devi (AIR 1938 Allahabad 253) it has been held that the term 'arrest or detention' used in Section 31 of the Provincial Insolvency Act cannot include arrest in execution of a criminal court process or detention under a sentence of imprisonment passed by a criminal court. That was a case where the husband who was directed to pay maintenance to the wife, on his default, was sentenced to imprisonment by the criminal court, sought his release by applying to the insolvency court for a protection order. Reference to the nature of the debt and the procedures provided by law for its realisation are also to be taken into account when a person liable for the debt seeks a protection order W.P.C.Nos.6701 & 19710/08 - 12 - under Section 32 of the Insolvency Act. 9. In the present case, in examining the entitlement of the petitioners to claim protection orders under Section 32 of the Insolvency Act to avoid arrest and detention arising from proceedings for recovery of a debt relating to sales tax arrears, the interdiction placed under Section 49 of the Kerala General Sales Tax Act cannot also be lightly ignored. Section 49 of the K.G.S.T.Act reads thus: “Courts not to set aside or modify assessments except as provided in this Act:- No suit or other proceeding shall except as expressly provided in this Act, be instituted in any Court to set aside or modify any assessment made under this Act or any proceeding under this Act for the recovery of any tax or other amount due under this Act or to stay any such proceedings or recovery.” (underlining supplied). Of course, in an insolvency proceedings setting aside or modifying any assessment under the General Sales Tax Act is not contemplated nor permissible. Still stay of any proceedings or recovery under the Act by invoking Section 32 of the Insolvency Act and protection order thereunder deserve to be examined with reference to the interdiction W.P.C.Nos.6701 & 19710/08 - 13 - as aforementioned, covered by Section 49 of the K.G.S.T.Act. May be, jurisdiction of the insolvency court as such to pass a protection order under Section 32 of the Insolvency Act in relation to debt due by sales tax arrears is not strictly barred by the interdiction under Section 49 of the K.G.S.T.Act but the interdiction placed under the K.G.S.T.Act imposing a restriction on the courts from staying any proceedings for recovery necessarily has to be taken into consideration in examining the entitlement of the petitioners seeking protection order from arrest and detention. Both the courts below have found that though several others have been shown as respondents in the petitions moved by the petitioners as their creditors, particulars of the debt due to them have not been mentioned. It has been observed by both courts that the petitioners have not furnished particulars of the property owned by them in the petitions while seeking protection orders. Both the petitioners in their respective affidavits filed in support of the petitions under Section 32 of the Insolvency Act has averred thus: “ The business has been closed down now and I am not doing any business to generate any income. I have no assets, except my apparel which I am wearing.” W.P.C.Nos.6701 & 19710/08 - 14 - The assertions so made by the petitioners without furnishing any data on the assets possessed by the petitioners was found unacceptable to both the courts below which cannot be found fault with especially where the petitioners have not produced any materials to show that the firm in which as partners they carried out business has ceased to be in existence and also no particulars towards the debt due to the other respondents impleaded as 4 to 13 in their petitions. There is not even a whisper in their petitions as to what is the debt or liability due from the petitioners to those respondents. The petitioners have filed identical Insolvency Petitions as 1 of 2005 and 2 of 2005 and in paragraphs 7 and 8 of the respective petitions it has been stated thus: “The petitioner has supplied goods on credit to various people and amounts are due from those people. The details of amounts the petitioner is liable to pay to respondents 3 to 10 are shown in Schedule-A annexed to the petition. The petitioner solemnly declared (sic) that he is always willing to place all their assets and properties at the disposal of this Hon'ble Court, which is shown as schedule-B.” W.P.C.Nos.6701 & 19710/08 - 15 - Petition copy produced in the respective Writ Petitions not disclosing any schedule as stated above the records of the cases were called for from the Sub Court and perused. It is seen that the petitioners have not furnished any schedule (Schedule A or Schedule B) with the respective petitions filed by them. Orders passed by the court below, though not for the reasons stated thereunder, but for the reasons stated in this judgment deserve only to be upheld. 10. In the given facts of the case, I find no interference with the orders passed by the courts below that the petitioners are not entitled to the protection order under Section 32 of the Insolvency Act is called for. Writ Petitions lack merit, and both of them are dismissed. srd S.S. SATHEESACHANDRAN, JUDGE