Rajratha
Naranbhai Mills. Co. Ltd. Vs. Sales Tax Officer, Petlad [1991] INSC 51 (19 February 1991)
Punchhi,
M.M. Punchhi, M.M. Saikia, K.N. (J)
CITATION:
1991 SCR (1) 527 1991 SCC (3) 283 JT 1991 (2) 117 1991 SCALE (1)244
ACT:
Companies
Act, 1956: S. 530(1)(a)-State's claim to priority in relation to sales tax dues
from a company in liquidation-Ambit of.
Expression
'having become due and payable within the twelve months next before the
relevant date'-Meaning and scope of.
HEAD NOTE:
The
appellant company was ordered to be wound up by Court's order dated 26.6.1967.
The liquidator invited creditors to prove their debts or claims and to
establish title, if any to determine priority under s.530(1)(a) of the
Companies Act, 1956. The Sales Tax Officer submitted a comprehensive claim of
sales tax plus penalty and claimed priority. The liquidator rejected the claim
for priority in its entirety but admitted a part of it payable as debt with
other unsecured creditors.
The
Revenue appealed to the High Court contending that the liquidator erred in law
in not granting priority to the claim to sales tax payable by the company for
the period from 1.4.1957 to 31.12.1965 under the Bombay Sales Tax Act, and for
period from 1.7.1957 to 31.12.1965 under the Central Sales Tax Act inasmuch as
notice of demand was issued and assessment order was made in respect thereof
within a period of 12 months before the relevant date.
The
Company Judge, interpreting s. 530(1)(a) of the Act, held that tax becomes due
when taxing event occurs and not when assessment orders passed; that even
though the amount for which priority was claimed was the amount of tax arrears
that became payable at the time of making assessment orders after giving credit
for what was paid alongwith return, yet it was due for a period much prior to
12 months next before the relevant date, and rejected the appeal on that score,
but allowed the claim to the extent of a small amount of penalty under the two
Sales Tax Acts upto the relevant date.
The
Revenue filed an intra court appeal, which along with another referred matter
was heard by a Division Bench.
The
Division Bench held that sales tax becomes due and payable when the tax has 528
been assessed and notice of demand for its payment is served. It allowed the
claim of priority to the sales tax due under the two Acts, assessment orders in
respect of which were passed within the period of 12 months immediately
preceding 26.6.1967. The balance amount was directed to rank as ordinary debts
since the relevant orders were passed after the date of winding up order. The
claim of recovery of penalty was negatived, because the demand was held to be
without application of mind as to whether there was reasonable cause for the
official liquidator for not paying the amount. Aggrieved, the company filed the
present appeal by certificate.
Allowing
the appeal, this Court,
HELD:
1. Section 530(1)(a) of the Companies Act, 1956 provides that State has a
priority over debts, liability and obligation of which was born within the time
frame of 12 months next before the relevant date and as such due and becoming
due and payable within those twelve months, ascertainable, if necessary, later
if not already ascertained. Thus the legal philosophy which permeats the
provision is that the debts due and payable, so as to claim priority must be
appropriated to the period within 12 months next before the relevant date and
their liability for payment must be founded during that period and no
other.[536G-H, 537 A-B]
2.1
The words 'having become due and payable within the twelve months next before
the relevant date' occurring in clause (a) of s. 530(1) of the Companies Act
need be understood to mean putting a restriction or cordoning off the amount
for which priority is claimable and not in respect of each and every debt on
account of taxes, rates and cesses, etc. which may be outstanding at that time
and payable. And that such priority is in respect only of debts those of which
became due and payable because the liability to those is rooted, founded and
belonging to that period of twelve months prior to the relevant date and none
other; both the conditions existing. [537C-E] Airedale Garage Co. In re:Anglo-South
American v. The Company, [1832] Vol. 2 Company Cases 570, referred to.
2.2
Both Benches of the High Court gave to the provision a very wide and varied
interpretation and that too on literality and gramaticals. The Single Judge was
not right in taking the view that the word 'due' in the first part of clause
(a) of s.530(1) of the Companies Act was to mean 'outstanding and payable at
the relevant date' and in the expression ' having become due' in the later part
of the clause meant that the 529 event which brought the debt into existence
occurred and also it became payable so as to be enforced against the company
within twelve months before the date of order of winding up. The Division Bench
erred in holding that the only meaning that could be assigned to the word 'due'
occurring in the section was 'it must be presently due' and the words 'due and payable'
meant that it must be presently payable. [536G, 531D-E & 532F-G] Sales Tax
Officer, Petlad v. Rajratha Naranbhai Mills Co. Ltd. and Another, [1974] Vol.
44, Company Cases 65 and Baroda Board & Paper Mills Ltd. (in liquidation)
v. Income Tax Officer etc, [1976] Vol. 46 Company cases 25, overruled.
3. The
liquidator was directed to re-examine the claim and to ascertain as to whether
the liability to sales tax belonged to and was founded within the period of 12
months next before 26
June, 1967, and as
such due and payable, but preserving the order of the Division Bench in
relation to its view on penalties. [537E-G]
CIVIL
APPELLATE JURISDICTION: Civil Appeal No. 2891 (NT) of 1977.
Appeal
by Certificate from the Judgment and Order dated 15.10.1975 of the Gujarat High
Court O.J. Appeal No. 2 of 1975.
B. Datta,
P.H. Parekh and J.P. Pathak for the Appellant.
Dushyant
Dave, Anip Sachthey and Ashish Verma for the Respondent.
The
Judgment of the Court was delivered by PUNCHHI, J. What is the ambit of the State's
claim to priority in relation to revenues, taxes, cesses and rates, due from a
company in liquidation, is the question which stands posed in this appeal by
certificate, granted by the High Court of Gujarat, in O.J. Appeal No. 2 of
1975. The question arises on the frame of section 530(1)(a) of the Companies
Act, 1956, as it stood at the relevant time, which is set out below:
"In
winding up, there shall be paid in priority to all other debts-all revenues,
taxes, cesses and rates due from the company to the Central or a State
Government to a local authority at the relevant date as defined in clause (c)
of 530 sub-section (8), and having become due and payable within the twelve
months next before that date.
And
sub-section (8)(c) of section 530 says:
"The
expression 'the relevant date' means-(i) in the case of a company ordered to be
wound up compulsorily, the date of appointment (or first appointment) of a
provisional liquidator, or if no such appointment was made the date of the
winding up order, unless in either case the company had commenced to be wound
up voluntarily before that date; and (ii) in any case where sub-clause (i) does
not apply, the date of the passing of the resolution for the voluntary winding
up of the company." The appellant-company was ordered to be wound up by an
order of Court made on June
26, 1967. The
liquidator after obtaining directions of the Court invited the creditors of the
company to prove their debts or claims and simultaneously to establish any
title they may have to priority under section 530. Pursuant to this invitation
the Sales Tax Officer, Petlad submitted a comprehensive claim in the sum of Rs.
70945.60 as the amount of sales tax plus penalty payable by the company and
claimed priority for the whole amount. The liquidator rejected the claim for
priority in its entirety, but admitted claim to the tune of Rs.42143.63 payable
as debt paripassu with other unsecured creditors of the company.
The
Sales Tax Officer took the matter in appeal before the Company Judge under Rule
164 of the Companies (Court) Rules, 1959 which was heard by D. A. Desai, J. (as
he was in the Gujarat High Court). It was urged on behalf of the Sales Tax
Officer that out of the admitted claim in the amount of Rs.42,143.83, the
liquidator was in error in not granting priority in payment of debt of
Rs.22,280.96 consisting of Rs.11,064.46 being sales tax payable by the company
for the period from April 1, 1957 to December 31, 1965, under the Bombay Sales
Tax Act and balance of Rs. 11,216.50 being the amount of sales tax payable
under the Central Sales Tax Act for the period from July 1, 1957 to December
31, 1965, because the assessment order was made in respect of the
aforementioned claim within a period of 12 months next before the relevant date
and the notice of demand which made the tax payable was also issued within a
period of 12 months next 531 before the relevant date. It was urged that apart
from any other consideration the petitioner is entitled to a priority in
payment for the amount of Rs.22,280.96 as the claim was of sales tax which was
due on the relevant date and which became due and payable within 12 months next
before the relevant date. It was conceded that balance of the admitted claim in
the amount of Rs. 19,862.87 being the amount of sales tax due and payable under
the Bombay Sales Tax Act for the period from January 1, 1966 to June
26, 1967, would not be
entitled to priority in payment. It was also conceded that the claim for an
amount of Rs. 196.42 had been rightly rejected. It would appeal that from the
claim admitted as payable by the liquidator to the extent of Rs. 42,143.83
priority in payment was claimed for the amount of Rs.22,280.96 on the
submission that the claim represented the claim for tax payable to the State
Government as it was due on the relevant date and had become due and payable
within 12 months next before the relevant date, and therefore, it was entitled
to a priority in payment as envisaged by section 530(1)(a) of the Companies
Act.
The
learned Judge on interpretation of section 530(1)(a) took the view that the
word 'due' implies or conveys meanings in juxtaposition in which it is used in
the two parts of the same clause. The word 'due' in the first part of the
clause must mean 'outstanding at the relevant date'. When it occurs in the
expression 'having become due' in the later part of the clause, it means that
the event which brought the debt into existence occurred and also it became
payable, meaning thereby that its payment could have been enforced against the
company within the twelve months before the relevant date, that is, the date of
the order of winding up. Three specific conditions are prescribed in the clause
and all the three must co-exist and be satisfied in respect of any particular
debt for which priority is claimed. The three conditions are:
(i)
Debt of the kind mentioned in the clause must be outstanding on the relevant
date;
(ii)
The debt must have become due, in the sense that it must have been incurred at
any time within the twelve months next before the relevant date; and
(iii)
The debt must have payable at any time within the twelve months next before the
relevant date.
To
conclude, the learned Judge observed that the tax becomes due 532 when taxing
event occurrs and not when assessment orders passed and that the claim for
priority was rightly negatived by the liquidator because even though amount for
which priority was claimed was the amount of tax arrears that became payable at
the time of making assessment orders after giving credit for what was paid
along with return, yet it was due for a period much prior to 12 months next
before the relevant date and even if it had become payable on the assessment
order being made and demand notice being issued, as both the conditions did not
co-exist and were not satisfied, claim for priority had been rightly nagatived
by the official liquidator requiring no interference in his order. The appeal
on that score was rejected but was allowed to the extent of a small amount of
Rs.1225.36 being the amount of penalty under the Bombay Sales Tax Act and the
Central Sales Tax Act upto the relevant date and the liquidator was directed to
admit the said claim over and above the claim admitted by him. The judgment of
the D.R. Desai, J. is reported as Sales Tax Officer, Petlad v. Rajratha Naranbhai
Mills Co. Ltd. & Another, [1974] Vol. 44, Company Cases 65.
An
intra Court Appeal was preferred by the Sales Tax Officer, Petlad in the High
Court. In the meantime in another case of Baroda Board & Paper Mills Ltd.,
a company in liquidation, the Income Tax Officer filed Company Application No.
2 of 1973 before the Company Judge claiming priority in respect of certain
dues. The Company Judge, B. K. Mehta, J. was engaged to determine the same
question.
His
attention was invited to the decision of D.A. Desai, J.
in the
instant case. D.K. Mehta, J. was unable to agree with the conclusion reached by
D.A. Desai, J. and hence the matter was referred to a Division Bench to have
the entire question decided along with O.J. Appeal No. 2 of 1975.
The
division bench of the High Court differed from the view of D.A. Desai, J. by
holding that the only meaning that could be assigned to the word 'due' occuring
in the section is 'it must be presently due' and the words 'due and payable'
mean the same thing, namely, that it must be presently payable. On this
understanding it was held that all revenues, taxes, cesses and rates due from
the company to the Central or State Government or to a local authority must be
presently payable, that is, that the liability could be enforced as at the
relevant date and, secondly, it must have so become presently payable within
twelve months immediately preceding the relevant date. Further regarding sales
tax it was held that it becomes due and payable when the tax has been assessed
and a notice of demand for payment of that tax is served 533 upon the assessee
or the dealer concerned and it is in this sense that the word has to be
interpreted. Taking that view the appeal of the Sales Tax Officer was allowed
inasmuch as the sales tax due under the Bombay Sales Tax Act and the Central
Sales Tax Act in respect of which the assessment orders were passed within the
period of twelve months immediately preceding June 26, 1967 were held to have priority. The balance amount as dues was
directed to rank as ordinary debts without any priority, since the relevant
orders were passed after the date of the winding up order.
The
claim of the Sales Tax Officer to the recovery of penalty in liquidation
proceedings was negatived because the demand was held to be without application
of mind as to whether there was reasonable cause for the official liquidator
for not paying the amount. O. J. Appeal No. 2 of 1975 was allowed to this
extent. The Judgment of the High Court is reported as Baroda Board & Paper
Mills Ltd. (in Liquidation) v. Income-Tax Officer etc., [1976] Vol. 46 Company
Cases 25. Clash of interpretation of section 530(1)(a) is the cause in this
appeal.
We
have gone through both the judgments afore-referred to very carefully and
minutely and have heard learned counsel on the conflicting decisions. There are
wide ranging discussions in the interpretative process relating to the word
'due' occuring in the earlier part of the provision and the words 'due and
payable' in the later part, and whether they are different expression meant to
convey differently or they mean the same thing. With due respect to the High
Court, we feel that relevant and important considerations and material though
available, which could go to interpret the section purposively was over looked,
and at this juncture we wish to put it to use.
Section
530 of the Companies Act, 1956 is the same as section 230 of the Indian
Companies Act, 1913. The old section 230(1)(a) of the Indian Companies Act,
1913 was analogous to Section 261 of the English Companies Act laying down that
there shall be priority on certain debts named therein. In Airedale Garage Co.
In re: Anglo-South American Bank v. The Company, [1932] Vol. 2 Company Cases
570 in the Court of Appeal, Lord Hanworth, Master of Rolls explained the
meaning of the provision at page 574 in the following words:
"Now
section 264 says that in the winding up of a company 'there shall be paid in
priority to all other debts' certain debts, namely, 'parochail or other local
rates .....assessed taxes ....property or income tax .....wages or salary of
any clerk or servant 'during four months next before the 534 relevant date
....not exceeding fifty pounds,'and others, and it is these debts which are to
be marshalled and paid in accordance with the priority given to them by section
264. With regard to local rates it is provided that priority shall be given to
'All parochial or other local rates due from the company at the relevant
date'-The relevant date being the date of the appointment of the receiver, in
this case, January 28, 1931-'and having become due and payable within twelve
months next before that date'. Those words are put in to restrict the amount
for which priority is given. It is not priority in respect of all the debts for
local rates which maybe outstanding at that time; the priority is in respect
only of such rates as became due and payable within twelve months before, in
this case, January 28, 1931." And further at pages 577-78 as follows:
"The
rate was made on April 1, 1930; at that time it became due and payable. The
alteration that has been made subsequently in September of the year 1931 is to
fit into the section to which I have referred, and by that section it is to be
deemed to have had effect as from the commencement of the period in respect of
which the rate was made. In those circumstances it seems quite plain that the
sum in contest in the present case must be appropriate to that period and that
period alone, and, although ascertained at a later date, it nonetheless belongs
to and is founded upon the liability to rates during that period and no other.
I find
myself, therefore, unable to give a limited meaning to the words, as Eve, J.,
has done. I think the words referred to in section 264 of the Companies Act,
'due and payable', meant to refer to a liability in respect of which there had
to be a solution-Solvendum in futuro-of that particular debt, and that
particular debt is now to be deemed to have accrued within the period of the
twelve months next before the relevant date." In A. Pamaiya's the
Companies Act, Eleventh Edition, 1988, it has been noticed at page 1320 that
Section 530 of the Companies Act, 1956 has been largely recast and amended in
the light of the following recommendations (exerpted) of the Company Law
Committee in paragraph 218 of their Report:
535
"Section 230 of the Act of 1913 deals with the important subject of
preferential payment. The principle underlying this section is that the debts
and liabilities enumerated in it should be treated as preferential debts as
compared with ordinary unsecured debts. The right of secured creditors other
than debenture-holders secured by a floating charge are not affected in any
way. They remain outside the scope of the winding-up proceedings and their
security remains unaffected by the provisions of this section. We have set out
in the Annexure to our Report the details of our recommendations, which broadly
follow the provisions of the English Companies Act. Briefly, the more important
of these recommendations are as follows:
(i) xxxxx
(ii) xxxxx (iii) xxxxx In this connection we should like to refer to a
memorandum that we received from the Central Board of Revenue, on the question
of a priority to be given to crown demands generally and, in particular, to
arrears of income-tax, super tax and corporation tax. It was suggested that
there should be no time-limit for the preferential payment of these crown debts
and that section 230 of the Indian Companies Act should be amended accordingly.
The practical difficulty of giving effect to the suggestion is that it would
place a great majority of the unsecured creditors of the company at the mercy
of the income-tax authorities, inasmuch as, whatever may be the nature of the
security on which they may have lent money to a company at the time of the
loan, the unforeseeable demands of the income-tax authorities on the company
without any time-limit would rank over the claims of such creditors. In these
circumstances, it may be extremely difficult for the company to raise capital
for its working. In this connection, we would draw attention to the provisions
of clause (a) of sub-section (1) of section 319 of the English Companies Act,
1948, under which arrears of land tax, income-tax, profits tax, excess profits
tax or other assessed taxes rank in priority over other debts of a company only
if they have been assessed on the company up to a particular date, namely, 5th
536 April or prior to the appointment of the liquidator or resolution for the
winding up of the company and do not exceed in amount the whole of one year's
assessment. It will be noticed that by comparison the provision of clause (a)
of sub-section (1) of section 230 of the Indian Companies Act, is much wider
and gives much more latitude to the income tax authorities for under these
provisions, arrears to taxes would rank in priority if they have become due and
payable within twelve months next before the date on which they are payable
irrespective of whether such taxes have been assessed on the company or not. We
are aware of the large arrears of income and other taxes which are due by many
companies, which are in liqudation, but we would venture to think that the
remedy for this unsatisfactory situation is not the conferment of preferential
rights without limit to the income-tax authorities under section 230 of the
Indian Companies Act, but the energetic completion of assessment proceedings
and vigorous measures for the collection of the assessed taxes." In
Pennington's Company Law, Fourth Edition, Chapter 26 titled 'Rules Common to
All Liquidations; occuring under the head "Preferential Claim and
Payments" at page 768 it is observed as follows:
"The
Inland Revenue may select the unpaid corporation or income tax for any one year
as its preferential claim, and is not restricted to claiming the tax for the
most recent year which ended on or before April 5 immediately preceding the
relevant date. Moreover, when there are two or more kinds of unpaid taxes, the
Crown may select different years for different taxes, but since advance
corporation tax is paid as an advance instalment of the company's liability for
corporation tax for the accounting period in which the advance corporation tax
falls due, it would seem that the Inland Revenue may claim preference for both
advance corporation tax and mainstream corporation tax only in respect of the
same year.
Both
benches of the High Court, with due respect, gave to the provision a very wide
and varied interpretation and that too on literality and grammaticals seemingly
overlooking the legal philosophy which permeats the provision, the same being
that the debts due and 537 payable, so as to claim priority, must be
appropriated to the period within 12 months next before the relevant date and
their liability for payment must be funded during that period and no other. To
put it in simpler words, the State has a priority over debts, liability and
obligation of which was born within the time frame of those twelve months and
as such due and becoming due and payable within those twelve months next before
the relevant date, ascertainable if necessary later, if not already
ascertained. We are in respectful agreement with the interpretation put by the
Court of Appeal to section 264 of the English Companies Act in Airedale Garage's
case (supra), analogous as it is to the provision in hand, warranting the same
interpretation; more so when any other interpretation would lead to the results
feared by the Company Law Committee extracted above. In such view of the
matter, we need not elaborately comment, discuss or demolish, sentence by
sentence, the reasoning given buy the single bench as also the division bench
of the High Court towards interpreting the provision. The words 'having become
due and payable within 12 months next before the relevant date' need be
understood to mean putting a restriction or cordoning off the amount for which
priority is claimable and not in respect of each and every debt on account of
taxes, rates and cesses etc. which may be outstanding at that time and payable.
And further that such priority is in respect only of debts those of which
become due and payable because the liability to those is rooted, founded and
belonging to that period of twelve months prior to the relevant date and none
other; both the conditions existing.
For
the view above taken, we allow the appeal of the Company in liquidation and
direct that liquidator to re- examine the claim for priority in accordance with
the interpretation of the provision put by us, that is to say, he must first
ascertain as to whether the liability to sales tax belongs to and is founded
within the period of 12 months next before 26 June, 1967, and as such due and
payable but preserving, however, the order of the division bench in relation to
the view it has taken about penalties. In the facts and circumstances of the
case, we order that there should be no order as to costs.
R.P.
Appeal allowed.
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