STATUTORY DUES AMOUNT TO ‘OPERATIONAL DEBT’

[Mr. M. GOVINDARAJAN]

In the earlier periods, the statutory dues are not given preferential treatment in case of winding up of companies etc.,  Later the Government brought amendments to the respective tax Acts giving the liability under the tax laws to be the first charge.  For example section 37 of the Maharashtra Value Added Tax, 2002 provides that notwithstanding anything contained in any contract to the contrary but subject to any provision regarding creation of the first charge in any Central Act for the time being in force, any amount of tax, penalty, interest, sum forfeited, fine or any other sum payable by a dealer or any other person under this Act, shall be first charge on the property of the dealer or, as the case may be.  The first charge shall be deemed to have been created on expiry of the period specified in section 32(4) of the Act for the payment of tax, penalty, interest, sum forfeited, fine or any other amount.

In ‘Central Bank of India v. State of Kerala’ – 2009 (2) TMI 451 - SUPREME COURT  the bank had taken possession of the mortgaged assets on 15.02.2005  and sold the same.  On 11.07.2005, the officers of the Commercial Tax Department informed the Bank about outstanding dues of sales tax amounting to ₹ 3.62 crores.  The Supreme Court relied on one case in which the Assistant Commissioner issued notice under section 39 of the Bombay Act for recovery of ₹ 48.48 lakhs.  The High Court negatives the bank’s claim of priority and held that section 35 of the Securitization Act does not have overriding effect over section 38C of the Bombay Act.  The Supreme Court held that the bank cannot claim priority over the dues of sales tax because statutory first charge had been created in favor of the State by section 26B which was inserted in Kerala Act with effect from 01.04.1999 and the courts below did not commit any error by refusing to decree the suit for injunction filed by the bank.

In ‘Principal Director General of Income Tax (Admn. & TPS) v. Synergies Dooray Automotive Limited and others’ – 2019 (3) TMI 1238 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI four appeals were dealt with by the Supreme Court together as detailed below-

• First appeal is filed by the Principal Director General of Income Tax (Admn.&TPS)  against the order passed by the Adjudicating Authority dated 02.08.2017, Hyderabad Bench,  approving the resolution plan of Synergies Dooray Automotive Limited.  The grievance of the appellant is that the Adjudicating Authority has granted huge income tax benefit to the respondent without impleading the appellant as a respondent to the said proceedings.
• The second appeal has been filed by the Principal Commissioner of Income Tax (Central)-3, Mumbai against the order dated 19.04.2018 of Adjudicating Authority, Mumbai Bench, approving the resolution plan in the corporate insolvency resolution process initiated against Raj Oil Mills Limited.  In this case the income tax demand in respect of the corporate debtor amounting to ₹ 338 crores was settled for 1% o the crystallized demand to a maximum of ₹ 2.589 crore.
• The third appeal has been filed by the Sales Tax Department, State of Maharashtra, against the order dated 19.04.2018 passed by Adjudicating Authority, Mumbai Bench approving resolution plan.  The resolution professional had not intimated during the corporate insolvency resolution process to attend the meeting of the committee of creditors and the plan has been approved against the prejudicial to the rights of the appellant.  The Adjudicating Authority further held that the Sales tax and VAT do not come within the meaning of ‘operational debt’.
• The fourth appeal has been filed by the Sales Tax Department, State of Maharashtra against the order dated 13.07.2018 of Adjudicating Authority, Mumbai bench, in the corporate insolvency resolution process initiated against Yashraaj Ethanoll Processing Limited.  In this case the Adjudicating Authority held that the Sales Tax Department is not an operational creditor.

The Appellate Tribunal considered the following issues to be decided in the present appeal-

• Whether the income tax, VAT or other statutory dues such as municipal tax, excise duty, etc., come within the meaning of operational debt or not? And
• Whether the Central Government, the State Government or the legal authority having statutory claim, come within the meaning of operational creditors.

The Income Tax Department contended that a bare perusal of the definition of ‘operational debt’ would reveal that the income tax cannot be in the nature of operational debt as operation debt refers to the claim in respect of goods or services including employment or a debt in respect of repayment of dues of the Central Government, State Government or local authorities.  Income tax is the statutory liability of every person who is bound to pay income tax on its total income.  This is required to be discharged by every person including a resolution applicant.   The resolution plan approved by the Adjudicating Authority is in contravention of section 220 read with section 156 of the Income Tax Act.

The Sales Tax department has taken similar view of the Income Tax Department.  The resolution applicant suggested that the statutory liabilities including the income tax and the sales tax come within the meaning of section 5(20) read with section 5(21) of the Insolvency and Bankruptcy Code, 2016.

The Appellate Tribunal asked two senior Advocates to assist the Tribunal to act as amicus curiae.  According to them the income tax or value added tax are not required for operation of the corporate debtor and therefore they do not come within the meaning of the operational debt.

The Appellate Tribunal, for determination of the issues analyzed the provisions of section 5(20) and section 5(21) of the Insolvency and Bankruptcy Code, 2016 which defines the term ‘operational creditor’ and ‘operational debt’ respectively. 

Section 5(20) of the Code defines  the expression ‘operational creditor’ as a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

Section 5(21) of the Code defines the expression ‘operational debt’ as a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

The Appellate Tribunal observed that the word ‘or’ has been used at three places in Section 5(21) of the Code.  The Appellate Tribunal found that there is no ambiguity in the said provision and the Legislature has not used the word ‘and’ but chose the word ‘or’ between ‘goods or services’ including employment and before ‘a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government any State Government or any local authority.

The operational debt in normal course means a debt arising during the operator of the company.  The ‘goods’ and ‘services’ including employment is required to keep the company operational as a going concern.  If the company is operation and remains a going concern, only in such case, the statutory liability, such as payment of income tax, value added tax etc., will arise.  As the income tax, VAT and other statutory dues arising out the existing law arises when the company is operational, the Appellate Tribunal held such statutory dues has direct nexus with the operation of the company.  The Appellate Tribunal further held that all statutory dues including income tax, VAT etc., come within the meaning of operational debt.

The Appellate Tribunal held that the income tax department of the Central Government and the Sales Tax Departments of the State Government and local authority who are entitled for dues arising out of the existing law are operational creditors within the meaning of section 5(20) of the Code.