2009 (8) TMI 1101 - HC - VAT and Sales Tax

Realisation of sales tax arrears due - entitlement of the petitioners to claim protection orders under section 32 of the Insolvency Act - Held that - 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. As 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.

Issues Involved:
1. Legality of the judgments passed by the VI Additional District Judge, Ernakulam.
2. Entitlement to protection under Section 31 of the Insolvency Act.
3. Definition of "debt" under the Insolvency Act.
4. Priority of sales tax arrears as a State debt.
5. Applicability of protection orders under the Insolvency Act against arrest and detention.

Detailed Analysis:

1. Legality of the Judgments Passed by the VI Additional District Judge, Ernakulam:
The petitioners challenged the judgments of the VI Additional District Judge, Ernakulam, which dismissed their appeals against the insolvency court's orders. The insolvency court had declined to grant protection orders against proceedings for the realization of sales tax arrears. The District Judge concurred with the Sub-Judge's findings that the petitioners failed to provide particulars of other debts and properties, and that a substantial amount of bank deposits and suppression of turnover were involved.

2. Entitlement to Protection Under Section 31 of the Insolvency Act:
The petitioners argued that they were entitled to protection from arrest and detention under Section 31 of the Insolvency Act. The court noted that the protection under Section 31 covers only arrest by a civil court and detention in a civil prison, not criminal proceedings. Since the petitioners were involved in suppression of sales turnover and evasion of tax, which could lead to criminal prosecution, the protection under Section 31 was deemed inapplicable.

3. Definition of "Debt" Under the Insolvency Act:
The petitioners contended that sales tax arrears fall within the definition of "debt" under Section 2(1)(b) of the Insolvency Act. The court disagreed with the District Judge's view that sales tax arrears collected by the dealer as a trustee or agent of the Government do not constitute a debt. It was clarified that the amount collected by the trader as tax is a State debt and falls within the definition of "debt" under the Insolvency Act.

4. Priority of Sales Tax Arrears as a State Debt:
The court examined the precedence of sales tax arrears over other debts. It referenced Section 26B of the Kerala General Sales Tax Act, which states that sales tax arrears shall be the first charge on the property of the dealer. This provision overrides any other law and ensures that sales tax arrears have priority over other debts in insolvency proceedings.

5. Applicability of Protection Orders Under the Insolvency Act Against Arrest and Detention:
The court considered whether the petitioners could obtain protection orders under Section 32 of the Insolvency Act to avoid arrest and detention for sales tax arrears. It was noted that Section 49 of the Kerala General Sales Tax Act restricts courts from staying proceedings for the recovery of tax dues. The insolvency court's jurisdiction to grant protection orders was not strictly barred, but the interdiction under Section 49 had to be considered. The court found that the petitioners failed to provide sufficient details of their debts and assets, and their insolvency petitions lacked merit. Consequently, the petitions for protection orders were dismissed.

Conclusion:
The court upheld the judgments of the lower courts, concluding that the petitioners were not entitled to protection orders under Section 32 of the Insolvency Act. The writ petitions were dismissed for lack of merit.

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