M/S Emc Limited vs. State Of Rajasthan
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The Petitioner, M/s EMC Limited, challenged show cause notices dated 07.02.2020 and consequential orders dated 22.04.2020 passed by the Deputy Commissioner, State Tax, Anti-Evasion, Bhilwara. These notices sought to reverse Input Tax Credit (ITC) claimed by the petitioner for Financial Years 2017-18 and 2018-19. The petitioner contended that it had become a sick unit and underwent Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). The National Company Law Tribunal (NCLT), Kolkata Bench, accepted a resolution plan on 21.10.2019, which, according to the petitioner, extinguished all tax dues for the period prior to the effective date. The impugned demands amounted to Rs. 3,55,90,450/- for FY 2017-18 and Rs. 10,21,35,117/- for FY 2018-19.
Held
The Court held that the impugned show cause notices and demand orders are invalid and quashed. The reasoning was based on the binding nature of the Resolution Plan approved by the NCLT under Section 31 of the IBC, which, as per Section 238 of the IBC, prevails over other laws in case of inconsistency. The Court noted that the Supreme Court in Committee of Creditors of Essar Steel India Ltd. and this Court in Ultra Tech Nathdwara Cement Ltd. have consistently held that all statutory dues stand extinguished upon the approval of a Resolution Plan by the NCLT for the period prior to the effective date. The Court found that the Deputy Commissioner acted with a "sheerly perfunctory, arbitrary and laconic manner" and with "gross defiance" of the settled legal position, ignoring the petitioner's reply despite incorporating it via cut-copy-paste. The Court rejected the respondents' submission for remand, deeming the Deputy Commissioner's conduct to be deprecated. The operative direction was to quash the impugned orders and notices. The Court also directed a copy of the order to be placed before the Commissioner, State Goods and Service Tax, Jaipur, for information and appropriate action. No issue was expressly left undecided.
Key Issues
1. Whether the demands raised by the State GST Department for Financial Years 2017-18 and 2018-19 are valid and executable in light of the approved Resolution Plan under the Insolvency and Bankruptcy Code, 2016, which became effective from 21.10.2019? Petitioner's Arguments: The petitioner argued that the NCLT's order approving the resolution plan, under Section 31(1) of the IBC, binds all stakeholders, including State Governments, and extinguishes all tax dues pertaining to the period prior to the effective date. They relied on the judgment of this Court in Ultra Tech Nathdwara Cement Ltd. Vs. Union of India & Ors. and the Supreme Court's decision in Committee of Creditors of Essar Steel India Ltd. Vs. Satish Kumar Gupta & Ors., asserting that the Deputy Commissioner acted arbitrarily by ignoring the reply and the settled legal position. Respondents' Arguments: The respondents, through their counsel, conceded that the demands did not stand scrutiny post-approval of the resolution plan. However, they submitted that the matters should be remanded to the Deputy Commissioner for fresh consideration.
Sections Cited
Section 31, Section 238
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Cause title — parties, addresses and appearances
Order 18/01/2023 These two writ petitions involve identical questions of facts and law and hence, are being decided by this common order. Learned counsel Shri Sunil Bhandari has put in appearance on behalf of the respondents, but reply to both the (2 of 7) [CW-6048/2020] writ petitions has not been filed. Today, when the matters were taken up, Shri Bhandari submitted that the arguments can be heard without waiting for reply because purely legal issues are involved in both writ petitions. Show cause notices dated 07.02.2020 and consequential orders dated 22.04.2020 passed by the respondent Deputy Commissioner, State Tax, Anti-Evasion, Bhilwara, whereby the petitioner has been called upon to explain as to why the ITC claimed by it for the Financial Years 2017-18 and 2018-19 may not be reversed are assailed in these writ petitions. Replies to the show cause notices were filed by the authorized representative of the petitioner, wherein it was pertinently mentioned that the petitioner company became sick. Accordingly, Corporate Insolvency Resolution Process (CIRP) was initiated under the Insolvency and Bankruptcy Code, 2016. The National Company Law Tribunal (NCLT), Kolkata Bench, Kolkata passed a final order dated 21.10.2019 under Section 31(1) of the IBC accepting the resolution plan, duly approved by the Committee of Creditors (CoC). The order of NCLT mandates that the CIRP shall be binding on the Corporate Debtors, EMC Limited, its employees, members, creditors, guarantors including the Central Government, any State Government or any local authority to whom a debt in respect of payment of dues arising under any law for the time being in force, such authorities to whom statutory dues are owed and other stakeholders involved in the Resolution Plan. It was emphasized in the reply to the show cause notices that approval of the Resolution Plan by the NCLT with effect from 21.10.2019 waived and/or extinguished and/or settled
(3 of 7) [CW-6048/2020] all tax dues of whatever nature of Central, State and local authorities pertaining to the period prior to the effective date. It was contended that the notices pertained to the Financial Years 2017-18 and 2018-2019, all liabilities of the petitioner which became a sick unit and went for CIRP stood extinguished on account of the acceptance of the Resolution Plan w.e.f. 21.10.2019 (date of order passed by NCLT). As a consequence, the respondent State GST Department had no juri iction whatsoever to initiate proceedings for recovery of any nature for the period prior to acceptance of the Resolution Plan. Learned counsel Shri Vinay Kothari placed reliance on the Division Bench judgment of this court in the case of Ultra Tech Nathdwara Cement Ltd. Vs. Union of India & Ors. [MANU/RH/0283/2020] and urged that the said judgment was cited in the reply filed by the petitioner, but in gross defiance thereof, the Deputy Commissioner, proceeded to pass the order dated 22.04.2020 imposing upon the petitioner, consolidated demands by way of tax, interest and penalty to the tune of Rs.3,55,90,450/- for the Financial Year 2017-18 and Rs.10,21,35,117/- for the Financial Year 2018-19. He urged that all claims of the Corporate Creditors and Statutory Creditors stood extinguished upon approval of the Resolution Plan by the NCLT. Despite that, the Deputy Commissioner, exercised powers in a sheerly perfunctory, arbitrary and laconic manner, while ignoring the detailed reply filed by the petitioner and issued the grossly arbitrary demand orders as above. He, thus, urged that the impugned notices and orders deserve to be quashed and the writ petitions be allowed with exemplary cost.
(4 of 7) [CW-6048/2020] Shri Sunil Bhandari, learned counsel appearing for the respondents, was not in a position to dispute the fact that pursuant to approval of the Resolution Plan by the NCLT, all demands of the Department for the period prior to the effective date stood extinguished. It is also not in dispute that the petitioner company became sick and applied for Corporate Insolvency Resolution Plan (CIRP), which attained finality after receiving the seal of approval from the NCLT, Kolkata vide order dated 21.10.2019. It is also an admitted position that the demands raised by effect of the impugned orders pertain to the Financial Years 2017-18 and 2018-19, which are much earlier to the date of approval of the Resolution Plan by the NCLT. As per Sections 31 and 238 of the IBC, the approved Resolution Plan has been made binding on the Corporate Debtors, EMC Ltd., its employees, members, creditors, guarantors including the Central Government, any State Government or any local authority and other stakeholders involved in the Resolution Plan, to whom a debt in respect of payment of dues arising under any law for the time being in force, is owed. Section 238 of the IBC provides that the Code will prevail in case of inconsistency between two laws. This proposition of law has been crystallized by Hon'ble Supreme Court in the case of Committee of Creditors of Essar Steel India Ltd. Through Authorised Signatory Vs. Satish Kumar Gupta & Ors. [2019 (16) SCALE 319]. This court also examined similar controversy in the case of Ultra Tech Nathdwara Cement Ltd. (supra) and held that any demands made by the Statutory Creditor, i.e. Commercial Taxes Department, for the period prior to the effective date stand extinguished with the approval of the Resolution Plan by the NCLT.
(5 of 7) [CW-6048/2020] Pursuant to receiving the notices dated 17.02.2020, the petitioner, through its representative submitted detailed reply, wherein the fact regarding passing of the approved Resolution Plan by the NCLT is categorically mentioned. The judgment in the case of Ultra Tech Nathdwara Cement Ltd. (supra) is also cited in the reply. The respondent No.2 Deputy Commissioner, while raising the demands vide orders dated 22.04.2020 got the scanned copy of the reply of the petitioner superimposed in the orders by the mechanism of cut-copy-paste, but in the final conclusion, the contents of the reply were ignored in totality and the demand orders were issued. Law is well-settled that with the finalization of insolvency resolution plan and the approval thereof by the NCLT, all dues of creditors, Corporate, Statutory and others stand extinguished and no demand can be raised for the period prior to the specified date. The impugned show cause notices and the demand orders came to be passed in reference to the Financial Years 2017-18 and 2018-19, which are much prior to the date of finalization of the Resolution Plan, i.e. 12.10.2019. The Deputy Commissioner, State GST Department exercises quasi judicial functions while acting under the provisions of the GST Act and thus, it is expected from such officer to act judiciously, consider the reply of the party, apply mind to the facts and law and pass a reasoned order. However, a bare perusal of the impugned orders dated 22.04.2020 is sufficient to satisfy us that the officer acted in gross defiance of the settled legal position as expounded by Hon'ble Supreme Court in the case of Committee of Creditors of Essar Steel India Ltd. (supra) and (6 of 7) [CW-6048/2020] this Court in the case of Ultra Tech Nathdwara Cement Ltd. (supra). Such laconic approach of the authority exercising quasi judicial powers reflects sheer incompetency and pedantic approach and adds to the evergrowing dockets of cases in the courts. The reply of the petitioner was incorporated in the order dated 22.04.2020 by using the procedure of cut-copy-paste but without making the slightest consideration of the averments made therein, the demand orders were issued in a sheerly perfunctory manner. We have no doubt that the proceedings were required to be dropped by the authority in light of the reply. While arguing the matter on behalf of the respondents, Shri Sunil Bhandari, Advocate, candidly conceded that the impugned demand notices do not stand to scrutiny. However, his submission was that the orders should be quashed and the matters should be remanded to the Deputy Commissioner for fresh consideration. However, we are not in the least impressed by this submission of Shri Bhandari. While passing the impugned orders, the Deputy Commissioner failed to consider the replies of the party and acted with sheer non-application of mind. His conduct deserves to be deprecated. The impugned orders dated 22.04.2020 (Annex.5) and demand notices dated 23.04.2020 (Annex.6) do not stand to test of law, i.e. mandate of Section 31 read with Section 238 of the IBC and the interpretation thereof as made by Hon'ble the Supreme Court in the case of Committee of Creditors of Essar Steel India Ltd. (supra). Hence, the same are declared to be invalid and quashed.
(7 of 7) [CW-6048/2020] A copy of this order shall be placed before the Commissioner, State Goods and Service Tax, Kar Bhawan, Jaipur for information and appropriate action. The writ petitions are allowed, accordingly. No order as to costs. (RAJENDRA PRAKASH SONI),J (SANDEEP MEHTA),J 42-Pramod/-
Reproduced from the public record of the Rajasthan High Court. Verify against the court's own copy before relying on it. Income tax judgments are on bharattax.net.