INTEREST AND PENALTY NOT IMPOSABLE ON SICK COMPANIES WITH BIFR

[Mr. M. GOVINDARAJAN]

Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 ('SICA') deals with the suspension of legal proceedings, contracts etc., on sick companies.  Sec. 22(1) of the SICA provides that where in respect of any industrial company, an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 or any other law or the memorandum of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advances granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate authority.

Sec. 22(3) of the SICA provides where an inquiry under Section 16 is pending or any scheme referred to in Section 17 is under preparation or during the period of consideration of any scheme under Section 18 or where any such scheme is sanctioned there under, for due implementation of the scheme, the Board may by order declare with respect to the sick industrial company concerned that the operation of all or any of the contracts, assurances of property, agreements, settlements, awards, standing orders or other instruments in force, to which such sick industrial company is a party or which may be applicable to such sick industrial company immediately before the date of such order, shall remain suspended or that or any of the rights, privileges, obligations and liabilities accruing or arising there under before the said date, shall remain suspended or shall be enforceable with such adaptations and in such manner as may be specified by the Board.   Such declaration shall not be made for a period exceeding two years which may be extended by one year at a time so, however, that the total period shall not exceed seven years in the aggregate.

Sec. 22(4) of the SICA provides that any declaration with respect to a sick industrial company shall have effect notwithstanding anything contained the Companies Act or any other law, the memorandum and articles of association of the company or any instrument having effect under the said Act or other law or any agreement or any decree or order of a court, Tribunal, officer or other authority or of an submission, settlement or standing order and accordingly:

§         any remedy for the enforcement of any right, privilege, obligation and liability suspended or modified by such declaration, and all proceedings relating thereto pending before any Court, Tribunal, Officer or authority shall remain stayed or be continued subject to such declaration; and

§         on the declaration ceasing to have effect-

Ø      any right, privilege, obligation or liability so remaining suspended or modified, shall become revived and enforceable as if the declaration had never been made; and

Ø      any proceedings so remaining stayed shall be proceeded with subject to the provisions of any law which may then be in force, from the stage which had been reached when the proceedings became stayed.

It could be seen from the provisions of Sec. 22(3) that the implementation of the scheme which is under preparation or any scheme under this Act, any dues either from any party or from any agencies shall remain suspended and all or any rights, privileges, obligations and liabilities accruing or arising there under shall be enforceable with adaptations and in such manner as may be specified by the Board.   It is also seen from the provisions of Sec. 22(4) that the declaration made by the Board with respect to sick industrial company shall have overriding effect anything contained in any other law.  The plain reading of  Sec. 22 indicates that once a board has made a declaration  and prepared a scheme in respect of sick industrial companies, then that scheme will have overriding effect over any other law for the time being in force, in respect of any dues from the said sick industrial company.

The issue to be discussed in this article is whether the Central Excise Department can recover interest and penalty when BIFR made declaration under Sec. 22(3) of the SICA and prepared scheme with reference to decided case law.

In 'Andhra Cements Ltd., V. Commissioner of Central Excise, Customs & Service Tax, Guntur' - 2009 -TMI - 34300 - CESTAT, BANGALORE  the appellant company has been declared as a sick industrial company and the scheme of revival package is drawn by the Board for the Industrial and Financial Reconstruction vide its order dated 25.7.2008.  In clause 9.4.C. the following are mentioned in respect of Central Excise, Customs and Service tax authorities-

§         to waive entire interest and penalty levied or leviable on Excise Duty and Service Tax arrears and to accept payment of excise duty/service tax outstanding as on the cut-off date over a period of seven years without any interest/penal interest/penalty. The company vide their letter dated 8.5.07 has accepted the outstanding dues of the Department  as Rs.6,29,62,666/- and repayment of their dues on five annual installments;

§         to exempt the appellant company/its directors/officers from the penal provisions of the Excise, Cenvat, Customs and Service Tax Act and rules made there under;

§         to exempt the appellant company from the penal provisions of the Customs Act relating to the pre-takeover defaults.

The appellant had defaulted in two occasions in discharging the duty payment to revenue under the provisions of Rule 8 of the Central Excise Rules, 2002 read with Rule 3 of the Cenvat Credit Rules, 2002/2004. Consequent to the said default, the appellant was directed to may the payments of the duty liability of the clearances made by them through PLA, but the appellant made the payments through Cenvat credit eligible to them. Show cause notices for two periods were issued and Adjudicating Authority in both cases confirmed the demand of service tax, interest and penalty.

The appellant before the Tribunal submitted the following:

§         the appellant is declared a sick industrial company and the BIFR approved of a scheme of revival of the company;

§         under the said scheme/declaration the statutory liabilities would have to be discharged by the appellants within a period of seven years and all penal interest, interest, damages, penalties charged or chargeable shall be waived;

§         the duty has already been discharged by the appellants through RG-23A Part-II/Cenvat Credit from their books of accounts;

§         interest and penalty imposed should be set aside.

The Department submitted the following:

§         in one case the appellant deposited the cheques and the said cheques were dishonored, despite that, they took credit in the PLA and showed the debits;

§         this is nothing but fraud on the government;

§         the duty is already debited through RG-23A Part-II even though they are not supposed to do so;

After considering the arguments of both sides the tribunal analyzed the provisions of Sec. 22 of the SICA. The Tribunal held that it is very clear that the appellant's liabilities towards penal interest and penalty are waived by the Board.  In view of the overwhelming provisions of Sec.22 of the SICA the Tribunal held that the appellant is not liable to pay any interest or penalty and since the appellant has already been declared as a sick industrial company, the amount debited by them in Cenvat credit towards the duty liability should be considered as discharge of all duty liability of the appellant and that portion of the impugned orders directing the appellant to pay the duty confirmed in PLA and subsequently take credit in Cenvat register is liable to set aside.