2013 (12) TMI 1477 - HC - VAT and Sales Tax

Recovery of sales tax dues of the company in liquidation. - priority to be observed in the matter of payment of debts in the case of winding up - state act versus central act - Held that - When the law is one made with reference to entries in the concurrent list, where both Parliament and the State Legislature are sovereign powers in the matter of making laws, again in view of article 254 of the Constitution unless it be a law made by the State, which is reserved for the assent of the President and the assent is received, the State law, would otherwise if it is repugnant to the law made by Parliament, must make way whether the Parliamentary legislation is before or after the legislation made by the State. We are also not impressed by the contention of the appellant with reference to section 537 of the Companies Act. It is true that sub-section (2) of section 537 provides that nothing in that section applies to any proceedings for the recovery of any tax or impost or any dues payable to the Govern ment. It is true, under section 537(2), when the company is being wound up the embargo in sub-section (1) of section 537 is not made applicable for proceedings for recovery of tax payable to the Government. In the facts of this case, we must notice that there is no case for the appellants that recovery proceedings commenced by the State proceeded beyond the stage of attachment. The sale held by the company court is for the benefit of all the creditors. The manner in which sale proceeds is to be shared among the various creditors is indicated in the provisions contained in the Companies Act. They include sections 529A and 530 of the Act. The priority itself is to be decided by the company court under section 446(2)(d). If the State is allowed to proceed against the property, despite the sale held as free of encumbrances, the result would be that the sale would become vulnerable and it would also be against what had been held out to the auction purchaser under the aegis of the company court that the sale is being held free of encumbrances. Having regard to the provisions contained in sections 529A and 530, the intention is clear that the law of the land is that the claim of the State must with regard to the amounts due as taxes be subject to the amounts due to the secured creditors and workers. If the sale is held free of encumbrances and if the State is allowed to pursue its claim as against the property, it would naturally bring the sale under a cloud and there would be no end to the litigation which would in the ultimate analysis be not only against the interests of persons whose interests are sought to be secured by the Companies Act on the basis of priority, but against the scheme of the Companies Act. On this reasoning we find that the impugned order does not suffer from infirmity. - Decided against the revenue.

Issues Involved:
1. Challenge to the deletion of revenue recovery proceedings from Thandaper Account.
2. Applicability of Sections 529A and 530 of the Companies Act, 1956.
3. Interpretation of Section 26B of the Kerala General Sales Tax Act, 1963.
4. Conflict between State and Central legislation.
5. Priority of tax dues versus secured creditors and workmen dues.
6. Validity of the sale of company assets free of encumbrances.
7. Applicability of Section 537 of the Companies Act.

Detailed Analysis:

1. Challenge to the Deletion of Revenue Recovery Proceedings from Thandaper Account:
The appellants, including the Assistant Commissioner (Assessment) and other state officers, challenged the order directing the deletion of sales tax recovery entries from Thandaper Account No. 12262. The company in liquidation was ordered to be wound up on January 12, 2000, and its assets were sold free of encumbrances on November 9, 2004. The sale was confirmed on January 4, 2005, and the nominee of the auction purchaser was put in possession on November 16, 2006.

2. Applicability of Sections 529A and 530 of the Companies Act, 1956:
The court noted that as per Section 530 of the Companies Act, the distribution of assets in liquidation must adhere to the provisions of Section 529A, which prioritizes the dues of secured creditors and workmen over other debts, including tax dues. The judgment relied on the apex court's unreported decision in Civil Appeals Nos. 6257-6259 of 2004, which emphasized that the State must realize its dues in accordance with these provisions.

3. Interpretation of Section 26B of the Kerala General Sales Tax Act, 1963:
Section 26B, inserted on April 1, 1999, states that tax dues shall be the first charge on the property of the dealer. However, the court held that Section 26B cannot override the priority given under Section 529A of the Companies Act. The court emphasized that while the State Legislature can enact laws creating a first charge for tax dues, such provisions must yield to the overriding priority established by Section 529A in the context of company liquidation.

4. Conflict between State and Central Legislation:
The court discussed the constitutional framework under Article 246, which grants Parliament exclusive power to legislate on matters in List I (Union List) and the State Legislature power over matters in List II (State List). In cases of irreconcilable conflict between State and Central laws, the Central legislation prevails. The court cited precedents such as Sudhir Chandra Nawn v. WTO and Government of Andhra Pradesh v. J.B. Educational Society to support this principle.

5. Priority of Tax Dues versus Secured Creditors and Workmen Dues:
The court reiterated that Section 529A of the Companies Act grants overriding preferential payments to workmen's dues and debts due to secured creditors, which must be paid in priority to all other debts, including tax dues. This statutory scheme precludes the application of Section 26B of the Sales Tax Act in liquidation proceedings.

6. Validity of the Sale of Company Assets Free of Encumbrances:
The sale of the company's assets was conducted free of encumbrances for the benefit of all creditors. The court noted that allowing the State to proceed against the property despite the sale would undermine the auction process and the interests of creditors and workmen. The sale was not challenged by the State, and the court upheld the sale's validity.

7. Applicability of Section 537 of the Companies Act:
Section 537(2) of the Companies Act exempts tax recovery proceedings from the embargo on attachments during winding up. However, the court found that the State's recovery proceedings had not progressed beyond attachment, and the sale of the property was conducted under the company court's supervision. The court concluded that Section 537(2) did not support the State's claim in this context.

Conclusion:
The court dismissed the appeal, affirming the learned company judge's order to delete the revenue recovery entries from the Thandaper account. The judgment emphasized the primacy of Sections 529A and 530 of the Companies Act over Section 26B of the Sales Tax Act in liquidation proceedings, ensuring that the dues of secured creditors and workmen take precedence over tax dues. The sale of the company's assets free of encumbrances was upheld to protect the interests of all creditors and maintain the integrity of the auction process.

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