COMA/266/2008 1/51 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY APPLICATION No. 266 of 2008 WITH COMPANY APPLICATION No. 83 of 2008 IN OFFICIAL LIQUDATOR REPORT No. 117 of 2006 WITH COMPANY APPLICATION No. 199 of 2008 IN COMPANY APPLICATION No. 273 of 2007 WITH OFFICIAL LIQUDATOR REPORT No. 48 of 2008 IN COMPANY APPLICATION No. 554 of 2007 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ Sd/- ==================================== 1. Whether Reporters of Local Papers may be allowed to see the judgment ? YES 2. To be referred to the Reporter or not ? YES 3. Whether their Lordships wish to see the fair copy of the judgment ? NO 4. Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? NO 5. Whether it is to be circulated to the civil judge ? NO COMA/266/2008 2/51 JUDGMENT ==================================== THE STATE OF GUJARAT - Applicant Versus O.L. OF KENGOLD (INDIA) LTD. (IN LIQN.) & 1 - Respondents ==================================== Appearance : 1. Company Application No. 266 of 2008 MR SUNIT SHAH, GOVERNMENT PLEADER with MR U R BHATT, Assistant Government Pleader for Applicant. MR JS YADAV for Official Liquidator. MR PM THAKKAR, SENIOR ADVOCATE WITH MR NK PAHWA for Respondent No. 2. 2. Company Application No. 83 of 2008 MR NK PAHWA for Applicant. MR JS YADAV for Official Liquidator. MR SUNIT SHAH, GOVERNMENT PLEADER with MR U R BHATT, Assistant Government Pleader for Respondent Nos. 2 & 3. 3. Company Application No. 199 of 2008 MR SHALIN MEHTA with MR HEMANG M SHAH for Applicant. MR JS YADAV for Official Liquidator. MR SUNIT SHAH, GOVERNMENT PLEADER with MR U R BHATT, Assistant Government Pleader for Respondent No. 2. 4. Official Liquidator's Report No. 48 of 2008 MR JS YADAV for Official Liquidator. MR NK PAHWA for Respondent No.1. MR SUNIT SHAH, GOVERNMENT PLEADER with MR U R BHATT, Assistant Government Pleader for Respondent No. 2. ==================================== CORAM : HONOURABLE MR.JUSTICE K.A.PUJ COMA/266/2008 3/51 JUDGMENT Date : 15/05/2008 COMMON ORAL JUDGMENT 1. Since common issue is involved in all these Company Applications as well as Official Liquidator's report and since all these matters are heard together, the same are being disposed of by this common judgment and order. 2. Company Application No. 266 of 2008 is filed by State of Gujarat through Commissioner of Commercial Tax, Ahmedabad praying for review of the order dated 18.01.2008 passed by this Court in Company Application No.554 of 2007 along with Company Application No.555 of 2007 in Company Petition No.261 of 2004 and for reviewing the said order after giving an opportunity of hearing to the Commissioner of Commercial Tax and further praying to hold that the tax dues payable to the Commissioner of Commercial Tax (earlier Sales Tax) have priority over all other dues in view of the said dues being crown dues which would have priority over all creditors including Secured and COMA/266/2008 4/51 JUDGMENT Unsecured Creditors under the Companies Act, 1956. 3. Company Application No.83 of 2008 is filed by Triveni Builders, the auction purchaser seeking direction to the respondent Nos.2 & 3 i.e. officials of the Commercial Tax Department, State of Gujarat, Ahmedabad, to forthwith remove their attachment from the Property Card in respect of land being open plot situated at 375, Survey No. 78 at Marol Naka, Opp. Mital Industrial estate, Andheri (East), Mumbai, in the interest of justice. The applicant has also prayed for the direction to the respondent Nos.2 & 3 to submit report before this Court for not taking steps pursuant to the order dated 15.12.2006 passed by this Court in OLR No. 117 of 2006. 4. In Company Application No. 199 of 2008, the applicant, namely, M ONE Infrastructure Limited, has prayed for the direction to the respondents to incorporate the following clauses, as mutually agreed upon, in the Sale Deed of the immovable property described under the Schedule : COMA/266/2008 5/51 JUDGMENT “15. The purchaser shall be liable to pay all statutory dues, if any, due and payable on the properties of the subject company for the period after the date of winding up order. The payment of pre- liquidation period shall be settled as per the provisions of the Companies Act, 1956. However, dues, taxes, cess, if any applicable on the sale of assets shall be paid by the purchaser. 22. The purchaser shall be liable to pay and shall pay full amount of taxes of all kinds, whatsoever which may have to be paid in respect of the sale of the assets or any taxes to be paid in this connection.” The applicant has also prayed for the direction to the Official Liquidator to execute the Sale Deed after incorporating the aforesaid two Clauses in favour of the applicant forthwith. The applicant has also prayed for the direction to the opponents to remove encumbrances upon immovable properties prescribed under the Schedule and referred to the encumbrances in prayer Clause (3) of the Judge's Summons. The applicant has further prayed for the direction to the Official Liquidator as well as the Land Acquisition Department to take all necessary steps to inform the COMA/266/2008 6/51 JUDGMENT applicant the dues on the concerned land on and from the date of passing of the order of winding up and with further direction that on payment of all dues from the date of passing of the winding up order, all entries and charges in the land revenue records on the concerned land be removed enabling the applicant to deal with and/or use the concerned land for setting up a project free from encumbrances. The applicant has also prayed for the direction to the Official Liquidator to give clear, free and marketable title of the said immovable properties and to award exemplary cost of Rs.50,000/- in favour of the applicant for the delay occasioned in executing the Sale Deed and in the encumbrances upon the scheduled property. 5. In OLR No. 48 of 2008, the Official Liquidator has prayed for the direction to the respondent No.1 i.e. M/s. Keventer Agro Limited to take possession of the assets of the Company from the Official Liquidator and to bear the security expenses being incurred by the Official Liquidator from 15.02.2008 onwards till the date of actual possession by the respondent No.1. The COMA/266/2008 7/51 JUDGMENT Official Liquidator has also prayed for the direction to the Sales Tax Department to remove attachments from the property card of the land of the Company in liquidation. The Official Liquidator has further prayed for the direction to the Commercial Tax department (Sales Tax Department) to lodge its claim in the office of the Official Liquidator, which will be dealt with in accordance with the Companies Act, 1956. 6. In Company Application No.266 of 2008, an affidavit is filed by Shri Chandresh R. Mehta, the Commercial Tax Officer (I), Unit 5, Ahmedabad, in support of the Judge's Summons on 05.04.2008. The said Shri Chandresh R. Mehta has filed further affidavit on 25.04.2008. An affidavit-in-reply is filed by Mr. Satish Trivedi, an Authorised Officer of the respondent No.2 Company who is the auction purchaser and in whose favour the order under review was passed by this Court on 18.01.2008. 7. Mr. Sunit Shah, learned Government Pleader appears for State of Gujarat. He has submitted that the tax COMA/266/2008 8/51 JUDGMENT dues of the Company in liquidation are to the tune of Rs.10,20,71,815/- as on 29.02.2008. Out of the said dues, the Company in liquidation was supposed to pay sales tax dues of Rs.4,66,90,640/- and the rest of the dues being Rs.5,53,81,175/- being the dues of Growmore Solvent Limited which was merged with the Company in liquidation by an order dated 23.12.1999 passed by this Court. He has further submitted that apart from the payment of further interest of Rs.10,20,00,000/-, further interest is also payable till the date of payment. The dues of the Company in liquidation relate to assessment year 1996 – 97 to 2001 – 02 and the dues of the amalgamated Company Growmore Solvent Limited to assessment year 1996 – 97 to 2000 – 01. He has further submitted that this Court, vide order dated 18.01.2008 passed in Company Applications No.554 & 555 of 2007 allowed the said Company Applications and ordered that the Official Liquidator shall hand over the possession of the property in question free from all encumbrances and execute the Sale Deed accordingly. In the said Company Applications, the Sales Tax Department (now COMA/266/2008 9/51 JUDGMENT Commercial Tax Department) was not joined as party to the proceedings and its rights were decided without hearing the said department. The property in question was put for sale by the Official Liquidator on AS IS WHERE IS AND WHATEVER THERE IS BASIS, meaning thereby that the property should not be free from any charge or encumbrances. He has further submitted that it is the State which has an exclusive power of taxation which is given to the appropriate Government. The said power of taxation is sovereign power which has been exercised by the State. Thus, the function of the assessing and recovery of tax being sovereign function is well within the eminent domain of the State and will have overriding effect on any other party, person, entity including workers, secured creditors and other private parties including contracts entered into subsequent to the adjudication of tax dues including the proceedings initiated and going on for the purpose of recovery of the tax, inter alia, by way of attachment etc. Thus, the State will have a paramount right to recover this tax irrespective of and notwithstanding contained in any other Legislation COMA/266/2008 10/51 JUDGMENT including the Companies Act, 1956. The taxes were either to be direct or indirect. In every case, the requirement to pay by way of taxable event takes much earlier. In the present case, Sales Tax is an indirect tax and the Sales Tax is leviable on the sale of goods etc. A person / entity / registered or registered Dealer collects tax from the party producing goods from the seller. In other words, the selling party recovers tax from the purchasing party on behalf of the State and as per the provisions, Rules and Regulations, it has to deposit the said tax so collected with the revenue department. Thus, the respondent Company has already collected tax from public at large and it is only to be further transmitted to the State Government. The money collected by way of tax is on behalf of the State Government and it is held by the concerned seller as a Trustee for and on behalf of the appropriate taxing authority. Obviously, such tax so collected invariably will have to be deposited with the State Government. If such money so collected is not deposited with the exchequer, then it would, inter alia, tantamount to not only unjust enrichment but also COMA/266/2008 11/51 JUDGMENT legal enrichment and will, inter alia, be criminal breach of trust. He has, therefore, submitted that the dues of the Sales Tax department are something more than a debt payable whether secured and unsecured and they are on very different footing. Thus, by not paying the tax with interest and/or penalty, the said action would tantamount to interference with the sovereign powers and duties of the State. 8. Mr. Shah has further submitted that the taxes as per the Sales Tax Act are recoverable as arrears of land revenue. Thus, invariably, the State has the paramount right to recover the dues by way of priority over all dues. The Official Liquidator or any other party for that matter cannot urge that the Sales Tax Department will be paid its dues not in priority as stated by him. If the contention of the State is not upheld, it would mean that the payment to the workers as well as to secured creditors would be made out of the tax dues which would be payable to the State instead of making payment from the funds of the Company itself. COMA/266/2008 12/51 JUDGMENT 9. Mr. Shah has further submitted that all these issues which are raised in the present application were not considered by the Court while passing the impugned order and even the judgment of the Hon'ble Supreme Court in the case of Dena Bank V/s. Bhikhabhai Prabhudas Parekh & Co. & others, (2000) 5 SCC 694 was not properly considered and the ratio laid down therein has been misconstrued by this Court. He has, therefore, submitted that this is a fit case to recall the order passed by this Court in Company Application Nos.554 & 555 of 2007 and the dues of the Sales Tax department must be paid out of the sale proceeds realized on sale of the assets of the Company in liquidation, in priority to all other creditors and workers. 10.In support of his submissions, Mr. Shah has relied on the judgments of (1) Dinshaw and Co., (Bankers) Limited V/s. Mst. Krishna Piary, (1941) 11 Company Cases 138, (2) New Bank of India Limited V/s. Pearey Lal, (1962) 32 Company Cases 90, (3) Baroda Spinning & Weaving Mills COMA/266/2008 13/51 JUDGMENT Company Limited (In Liquidation) V/s. Baroda Spinning & Weaving Mills Co-operative Credit Society Limited and another, (1976) 46 Company Cases 1 (Gujarat), (4) Rajratna Naranbhai Mills Company Limited V/s. Sales Tax Officer, Petlad, (1991) 3 Supreme Court Cases 283, (5) Central Bank of India V/s. Recovery Mamlatdar and others, (1996) 87 Company Cases 284, (6) Sahakari Khand Udyog Mandal Limited V/s. Commissioner of Central Excise and Customs, (2005) 3 SCC 738, and (7) Dena Bank V/s. Bhikhabhai Prabhudas Parekh & Co. & others, (2000) 5 SCC 694. 11.Mr. P.M. Thakkar, learned Senior advocate appearing with Mr. N. K. Pahwa for respondent No.2 Company has submitted that the application moved by the State Government is not maintainable and is liable to be summarily rejected. There are no legal grounds made out by the applicant warranting any interference from this Court in the order dated 18.01.2008 passed by this Court in Company Applications No.554 of 2007 and COMA/266/2008 14/51 JUDGMENT 555 of 2007. He has further submitted that the Company in liquidation is already ordered to be wound up by this Court and it is, therefore, not correct to state that the applicant has any right to recover any dues from the sale proceeds of the assets of the Company in liquidation, subject to and in accordance with the provisions of the Companies Act, 1956. No documentary evidence is produced by the applicant in support of the claims made by it in the present application. As the Company against which the applicant claims certain dues, the applicant may register / lodge its claim in accordance with the provisions of Sections 529, 529-A & 530 of the Companies Act, 1956 and the Official Liquidator is obliged to settle the claims in accordance with the said provisions. The order passed by this Court on 18.01.2008 is in accordance with settled legal principles laid down in various decisions rendered by this Court and also in accordance with the provisions of Sections 529, 529-A & 530 of the Companies Act, 1956. It is further submitted that the order dated 18.01.2008 is merely declaring the law of the land COMA/266/2008 15/51 JUDGMENT which is binding on the applicant State and hence, the applicant State not being party to the proceedings to Company Applications No.554 of 2007 & 555 of 2007 would have caused no prejudice to the applicant. He has further submitted that the clause contained in the tender document, namely, “AS IS WHEREIS AND WHATEVER THERE IS BASIS” could not apply to the issues raised by the applicant State or the issue decided by this Court in the order dated 18.01.2008. As regards the averments with respect to sovereign functions of the State and the exclusive jurisdiction to recover the dues with respect to tax are concerned, the same are not applicable to the Company in liquidation. So far as dues against the Company in liquidation are concerned, the same are to be recovered only in accordance with the priority set out in the provisions contained in Sections 529, 529-A and 530 of the Companies Act, 1956. If a reference is made to the provisions of Section 529-A of the Companies Act, 1956, which starts with non-obstante clause, it is clear that this provision forming part of the Central Statute as also a special statute would have COMA/266/2008 16/51 JUDGMENT overriding effect. The dues of the workmen and secured creditors are required to be settled by the Official Liquidator in priority to all other dues. A reference to Section 530 of the Act would clarify that the claims in respect of the revenue, taxes etc. to the Central Government or State Government which have been due and payable within 23 months next before the relevant date are to be settled by the Official Liquidator after the workmen dues and the dues of the Secured Creditors are paid as per the provisions of Section 529-A of the Act. The claim of the applicant State in respect of Sales Tax dues squarely fall under Section 530 (1) (a) of the Companies Act, 1956 which is to be settled by the Official Liquidator after the dues of the workmen and the secured creditors are settled in accordance with the provisions of Section 529-A of the Act. The averments made by the applicant State in the affidavit filed in support of the Judge's Summons is totally misconceived in law. This Court in its order dated 18.01.2008 has considered this aspect and has also referred to various decisions of this Court while holding that attachment of Sales Tax department is COMA/266/2008 17/51 JUDGMENT illegal in as much as the Sales Tax department can only lodge its claim with the Official Liquidator who in turn is required to settle the same in accordance with the provisions of Section 529-A read with Section 530 of the Companies Act. 12.Mr. Thakkar has made an alternative submission to the effect that as far as respondent No.2 is concerned, the respondent No.2 is the bonafide purchaser of the subject properties in the auction held before this Court and its relationship of the respondent No.2 i.e. the Official Liquidator, the vendor of the property is governed by the terms and conditions of the sale as approved by this Court. As per Clause 15 of the terms and conditions of sale, the respondent No.2 is not liable to pay any pre-liquidation dues of the Company in liquidation and the same are required to be settled as per the provisions of the Companies Act, 1956. In view of the said Clause 15, it is clear that in so far as respondent No.2 is concerned, the respondent No.2 is not at all liable towards any claim on account of sales tax as claimed by the applicant State. This Court in its COMA/266/2008 18/51 JUDGMENT order dated 18.01.2008 has rightly held that in view of Clause 15 of the terms and conditions covering sale, the respondent No.2 is entitled to possession and enjoyment of the subject land free from any charge or encumbrance and the dues / claims of the applicant State with respect to arrears of Sales Tax are required to be settled by the Official Liquidator in accordance with the provisions of the Companies Act, 1956. Mr. Thakkar has also invited the Court's attention to the letter dated 15.11.2007 as well as the reply dated 12.11.2007 given by the Official Liquidator wherein also the position was made absolutely clear. 13.Mr. Thakkar has further submitted that so far as the Company in liquidation is concerned, the applicant is required to lodge its claim in accordance with the provisions of the Companies Act, 1956, more particularly, subject to the provisions of Section 529-A of the Companies Act, 1956 and the Official Liquidator is obliged to settle the claims of the applicant State under the said provision. There is no substance in the submission that the dues of the Sales Tax Department COMA/266/2008 19/51 JUDGMENT are something more than debts payable whether secured or unsecured and that not paying the tax dues would tantamount to interference with the sovereign powers and duties of the State. There is also no substance in the submission that the provisions of the Companies Act are intended to infringe upon any of the powers of the State. Even if it were so, the applicant State cannot maintain the present application on the ground that statutory provisions do not permit settlement of claims of the applicant State in a particular manner desired by the applicant. It is also not correct to canvass before this Court that the Sales Tax dues are recoverable as arrears of land revenue even if the Company goes into liquidation. Once the Company is in liquidation, the recovery of Sales Tax dues can be undertaken only in accordance with the provisions of Section 529-A read with Section 530 of the Companies Act, 1956. Therefore, interpretation sought to be canvassed by the applicant is not correct and the provisions of the Act are not in any way derogatory to the sovereign powers of the State. The applicant State, therefore, cannot claim COMA/266/2008 20/51 JUDGMENT any priority for the taxation dues. He has, therefore, submitted that there is no scope for any review of the order passed by this Court on 18.01.2008 and the present application summarily deserves to be rejected. 14.In support of his submissions, Mr. Thakkar relied on the decisions of (1) Regional Director, E.S.I. Corporation V/s. Official Liquidator of Prasad Mills Limited, [2005 (3)] 46 (3) GLR 2019, (2) Kerala State Financial Enterprises Limited V/s. Official Liquidator of Kerala High Court, (2006) 10 SCC 709, and (3) UTI Bank Limited V/s. The Deputy Commissioner of Central Excise, Chennai & another, AIR 2007 MADRAS 118. 15.In Company Application No.83 of 2008, an affidavit is filed by Shri Hasmukh Ratan Shah, Authorized Officer of the applicant auction purchaser in support of the Judge's Summons. Mr. N. K. Pahwa, learned advocate appears for the applicant and he has more or less reiterated the same submissions except the factual data which are given in the affidavit filed in support of COMA/266/2008 21/51 JUDGMENT the Judge's Summons. On behalf of State of Gujarat, affidavit-in-reply is filed by Shri Rameshkumar Shankerlal Parmar, Assistant Commissioner of Commercial Tax, Ahmedabad. Mr. Sunit Shah, learned Government Pleader has also reiterated and relied on the same submissions made by him in Company Application No.266 of 2008. Affidavit further reveals that the issue has far reaching consequences regarding the dues of the State Government. Under the provisions of the Gujarat Sales Tax Act, 1969 read with Section 137 of the Code, the Sales Tax dues have priority over both the secured and unsecured debts. The restriction on priority would not apply to Sales Tax dues being regarded as arrears of land revenue. Since the applicant has purchased the property on AS IS WHERE IS AND WHATEVER THERE IS BASIS, the amount of Sales tax dues is required to be directed to be paid over to the sales tax department. The affidavit further reveals that the assessment orders have been duly passed and demand notices have been issued relating to assessment years 1974 – 75, 1983 – 84 and 1990 – 91 and 1991 – 92. The sales tax department COMA/266/2008 22/51 JUDGMENT had requested the City Survey Officer having jurisdiction over the subject property to take the said property on the attachment for recovery of sales tax dues to the tune of Rs.10,17,39,284/- including interest calculated upto 31.03.1997 vide letter dated 08.03.2000. Pursuant to the said letter, the Competent Authority issued Revenue Recovery Certificate on 10.03.2000 on the basis of the statements regarding sales tax dues and forwarded the same to the department vide letter dated 13.03.2000. The subject property was placed under attachment by the Competent Authority by recording the same in the Property Card on 16.05.2000. The amount