RAID CONDUCTED BY GST DEPARTMENT ON CORPORATE DEBTOR DURING MORATORIUM

[Mr. M. GOVINDARAJAN]

In K. EASWARA PILLAI – RESOLUTION PROFESSIONAL MANGOMEADOWS AGRICULTURAL PLEASURE LAND PRIVATE LIMITED VERSUS GOODS AND SERVICES TAX DEPARTMENT AND KOSAMATTAM FINANCE LIMITED VERSUS MANGOMEADOWS AGRICULTURAL PLEASURE LAND PRIVATE LIMITED - 2023 (8) TMI 176 - NATIONAL COMPANY LAW TRIBUNAL , KOCHI BENCH Kosamattam Finance Limited, financial creditor, initiated corporate insolvency resolution process under the Insolvency and Bankruptcy Board of India (‘Code’ for short) against Mangaomeadows Agricultural Pleasure Land Private Limited, Corporate Debtor.  The Adjudicating Authority admitted the application on 05.01.2023.  The applicant was appointed as Interim Resolution Professional and declared moratorium under Section 14 which came into effect on 25.01.2023.

The applicant made a public announcement on 28.01.2023 inviting claims from the creditors.  The GST Department filed a claim before the applicant to the tune of Rs.37 lakhs on 06.03.2023.  The Corporate Debtor is a going concern.  All of a sudden the Department on 10.03.2023 raided the premises of the corporate debtor.  The search was made after issuing a notice to the suspended Managing Director. The Authorities obtained the statement of the Managing Director and also seized all books of account.  The Authorities also sent a notice to the applicant to appear before the Authorities for an inquiry on 20.03.2023.  Since the search was in violation of the provisions of the Code the applicant filed the present petition before the Adjudicating Authority. 

The applicant contended that the search and seizure done by the Authorities on 10.03.2023 are against the moratorium order.

The GST Department submitted the following before the Adjudicating Authority-

• The corporate debtor is engaged in the business of amusement park and registered with the GST Department.
• On receipt of specific intelligence information of tax evasion by the corporate debtor search was conducted by the Authorities under Section 67(2) of the Central Goods and Services Tax Act, 2017 (‘Act’ for short).
• During search tax evasion was found out and seized seven registers.
• Summons was issued to the applicant to produce the books of account and to record statement.
• But the applicant did not appear before the Authorities; instead he filed the present application before the Adjudicating Authority.
• The search was conducted to gather evidences for determination of tax under section 74 of the Act.
• The tax determination and assessment are not covered under moratorium.
• The recovery of tax alone is prohibited by virtue of moratorium passed under the Code.
• Since the corporate debtor is under the management of the applicant summons was issued to the applicant directing him to produce documents and to record statement for the determination of tax.
• The action taken by the Department is to arrest the leakage of revenue and therefore these actions are unavoidable and are not against the moratorium.

In support of their arguments, the Department relied on the following judgments-

• M/S EMBASSY PROPERTY DEVELOPMENTS PVT. LTD. VERSUS STATE OF KARNATAKA & OTHERS [2019 (12) TMI 188 - SUPREME COURT]
• SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD VERSUS CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS [2022 (8) TMI 1161 - SUPREME COURT].

The Adjudicating Authority heard the submissions made by both the parties.  The Adjudicating Authority, based on the facts of the case and pleadings and submissions of the parties to the application, raised the question to be decided in this case.  The question is - Whether the search and seizure of records of corporate debtor and issuance of summons to the applicant are violative of order passed under Section 14 of the Code?

The Adjudicating Authority analyzed the case laws relied on by the Department.  The Adjudicating Authority observed that in ‘Embassy Property Development Private Limited’ (supra) the Resolution Professional approached the Adjudicating Authority for the extension of lease agreement beyond the period of agreement.  The Adjudicating Authority held that it is not having jurisdiction to give directions to the Government to execute supplement lease deed.  The question of initiating proceedings against the corporate debtor during the moratorium period is not discussed in this case law and therefore the Adjudicating Authority that the case law relied on by the Department is not helpful to them.

In ‘Sundaresh Bhatt’ (supra) the Supreme Court held that the authorities can take steps only to determine the tax, interest, fines and penalty which are due.  But they cannot enforce a claim for recovery or levy interest on the tax during the period of moratorium.  However the authority cannot transgress such boundary and proceed to initiate recovery in violation of section 14 or 33(5) of the Code.

The Adjudicating Authority observed that the Department under the guise of assessing or determining the dues transgresses and invoked coercive provisions of law.  The Adjudicating Authority held that the Department initiated proceedings against the corporate debtor during the period of moratorium which is prohibited under Section 14(1)(a) of the Code.

The Adjudicating Authority relied on the judgment of Karnataka High Court in ASSOCIATE DECOR LIMITED VERSUS DEPUTY COMMISSIONER OF COMMERCIAL TAXES, BENGALURU - 2021 (12) TMI 1408 - KARNATAKA HIGH COURT in which the High Court held that the notice under section 65 of the Act read with Rule 101(4), informing the discrepancies found in the audit and asked the registered person to submit reply is hit by moratorium order passed under section 14 of the Code and stayed the proceedings pursuant to the impugned notice till the lifting of moratorium.

The Adjudicating Authority also relied on the circular issued by the Ministry of Finance vide No. 134/04/2020-GST clarifying that no coercive action shall be taken in respect of GST dues to corporate debtor under the corporate insolvency resolution process.  The Adjudicating Authority observed that the Department despite the guidance given by the Central Government has taken the coercive action.

The Adjudicating Authority further observed that the action of the Department undermined the authority of Resolution Professional and because of seizure of books of account of the corporate debtor causes much inconvenience and paralyzed the resolution process which shall to be completed in a time bound manner.

The Adjudicating Authority held that the search and seizure of records of the corporate debtor and issuance of summons to the Resolution Professional are violative of moratorium order passed under Section 14 of the Code.

The Adjudicating Authority held the following-

• The respondent is hereby directed to return all the documents seized from the premises of the corporate debtor to the applicant within a week from the date of order.
• The summon dated 13.03.2023 issued by the respondent to the corporate debtor is set aside.
• The respondent is directed to pay a compensatory cost Rs.50,000/- to the applicant towards the corporate insolvency resolution process cost; and
• Liberty is granted to the respondent, after making payment of the above compensation, to take steps to recover the same from the erring officers.