Income tax return, tax audit due date & Other dates extended

Income tax return, tax audit due date & Other dates extended: The due date of furnishing of Return of Income for.... Read More

Recent Amendments in GST Law

 

AMENDMENTS IN CENTRAL GOODS AND SERVICE TAX ACT, INTEGTRATED GOODS AND SERVICE TAX ACT AND AND CENTRAL SALES TAX  ACT BY THE FINANCE ACT 2021.

By Vinay Sonpal LL.M.

Advocate High Court

 

The Finance Act 2021 has been passed by both the houses of parliament and the President has given assent on 29.3.2021.

The Finance Act 2021 has amended the CGST Act and IGST Act as also Central Sales Tax Act 1956.

Key Features are narrated herein after in short:

1.       Section 7 is amended to insert clause (aa) in sub-section (1) so to provide that  the activities or transactions, by a person, other than an individual, to its members or constituents or vice versa, for cash, deferred payment or other valuable consideration shall be included in the scope of supply. It has inserted an Explanation that  for the purposes of this clause, it is   clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of   activities or transactions inter se shall be deemed to take place from one such person to another. Thus argument of mutuality is now not available at all.

2.       In section 16, in sub-section (2), after clause (a),  clause (aa) has  been  inserted to effect that   the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37. This is an additional condition for claiming ITC.

3.       Provision for audit of annual accounts has been omitted. Hence now onwards taxable person shall not be required to get his books of accounts by a chartered accountant or a cost accountant irrespective of turnover.

4.       The annual return u/s 44 is not now required to filed with audited accounts in view of provision for audit being omitted. Self Certification of  Reconciliation statement  has to be done by the taxable person only. As earlier, this provision is not applicable to   an Input Service Distributor, a person paying tax under section 51 or section 52, a casual taxable person and a non-resident taxable person.

5.       Section 50, proviso is substituted to give effect to liability of interest on the amount paid in cash and the whole of tax.

6.       The Explanation (1) (ii) of Section 74 provided for conclusion of all proceedings for penalties u/s122,125,129 and 130 on conclusion of proceedings  u/s 73 or74.By amendment proceedings u/s 125 and 129 have been excluded from being deemed to have been concluded .Thus proceedings u/s 125 and 129 will continue.

7.       In section 75  Explanation has been  inserted that the expression "self-assessed tax" shall include the tax payable in respect of details of outward supplies furnished under section 37, but not included in the return furnished under section 39. Earlier only when tax as per Return u/s 39 was considered for recovery. Now even outward supply included in statement u/s 37 but omitted in Return u/s 39 shall be considered as self assessed tax.

8.        The  section 83 has been amendment to give wider scope for provisional attachment  cover all proceedings under  Chapter XII, Chapter XIV or Chapter XV. It provided that the Commissioner may if he is of the opinion that for the purpose of protecting the interest of the Government revenue   attach provisionally, any property, including bank account . Earlier only some sections in those chapter were provided for provisional attachment.

9.       The Amendment of section 107 provides  that no appeal shall be filed against an order under sub-section (3) of section 129, unless a sum equal to twenty-five per cent of the penalty has been paid by the appellant. Earlier the payment of tax and penalty was ten percent and now tax pre deposit is retained at 10% but penalty pre deposit is enhanced to 25%.

10.      The amendment in section 129 and 130 have been designed to ensure strict compliance of E way Bill.  

(i)Now , instead of tax and 100 % penalty now straight penalty of 200 % of tax  is provided and the same shall not be appropriated towards tax as used to happen in past. This is where the owner of goods comes forward for payment of penalty .

(ii)  In case if the owner does not come forward for payment of penalty , it will be equal to 50 % of value of goods or two hundred per cent. of the tax payable on such goods, whichever is higher .

(iii)Sub-section (2) has been  omitted since the provisions of section 129(1)(c) were overlapping.

(iv)The proper officer detaining or seizing goods or conveyance shall issue a notice within seven days of such detention or seizure, specifying the penalty payable, and thereafter, pass an order within a period of seven days from the date of service of such notice, for payment of  . The action of issuing notice has been made to be within seven days and order to be passed has been provided to be passed within seven days.

(v)In section 129(4) for levying tax , interest and penalty , hearing of the person concerned .Now no hearing is required for levying tax and interest and hearing on only penalty is provided.

(vi)  Sub-section (6), has been  substituted providing that  where the person transporting any goods or the owner of such goods fails to pay the amount of penalty   within fifteen days from the date of receipt of the copy of the order passed  , the goods or conveyance so detained or seized shall be liable to be sold or disposed of otherwise , to recover the penalty payable  .

(vii) It now  provides that the conveyance shall be released on payment by the transporter of penalty  or one lakh rupees, whichever is less. Only conveyance sought to be released not goods. Earlier the failure to pay tax and penalty resulted in proceedings to be initiated u/s 130.

(viii) Under section 130(2) provided the limit of fine and penalty to be not exceeding market value of goods but gave rebate of penalty u/s 129(1) which has been increased to 200% Therefore now rebate shall be restricted to only 100% of tax.

(ix) Section 130(3) has been omitted there by meaning that the person shall not be liable for payment of tax , penalty and charges payable in respect of such goods once he has paid any fine in lieu of confiscation.

11.   The  Amendment to Schedule II by omitting item 7 is consequent upon amendment of section 7.

12.   In the Integrated Goods and Services Tax Act, 2017, in section 16,   the  authorised operations is SEZ Unit or to developers is also provided for eligibility of zero rated supply.

13.   In the Integrated Goods and Services Tax Act, 2017, facility to clear the goods on payment of IGST and thereafter claim of refund of IGST payment has been withdrawn and only notified persons or goods shall be eligible. Now all exports have to follow clearance under Bond or LUT.

14.  The Central Sales Tax Act 1956 has been amended by amending Section 8(3)(b) to permit purchase of goods at concessional rate for goods covered by definition of goods u/s 2(d). This has done away with the goods used for generation or distribution of electricity or mining or telecommunication out of the purview of purchase at concessional rate on C Form. This amendment not nullifies High Court judgments and Supreme Court judgment (Commissioner of Commercial Taxes & Anr. Vs Ramco Cements Ltd.Etc. the Supreme Court of India In Appeal Number   Special Leave to Appeal (C) No(s). 15785-15788/2020 held by an Order dt 24/03/2021) holding that the concessional rate is also applicable for purchase of other goods that what is described in section 2(d).  approving the decision of Madras High Court that the Respondent herein and Petitioner there in are entitled to obtain C form for the purchase of goods other than those mentioned in S 2(d) of CST Act and dismissed SLP. Now controversy has been set at rest and even the generation or distribution of power or telecommunication or mining will not get benefit of the purchase of natural gas

 

This is summary of amendments and requires critical analysis from legal point of view.

Now C forms for only six goods as per section 2(d).

 In Commissioner of Commercial Taxes & Anr. Vs Ramco Cements Ltd.Etc. the Supreme Court of India

In Appeal Number : Special Leave to Appeal (C) No(s). 15785-15788/2020 held by an Order dt 24/03/2021 approving the decision of Madras High Court that the Respondent herein and Petitioner there in are entitled to obtain C form for the purchase of goods other than those mentioned in S 2(d) of CST Act and dismissed SLP.However, the Fianace Act 2021 has amended section 8(3)(b) as under:

 

Sustituted section 8(3)(b)“(b) are goods of the class or classes specified in the certificate of registration of the registered dealer purchasing the goods as being intended for re-sale by him or subject to any rules made by the Central Government in this behalf, for use by him in the manufacture or processing for sale of goods specified under clause (d) of section 2;”

 

Now controversy has been set at rest and even the genereation or distribution of power or telecommunication or mining will not get benefit of the purchase of natural gas

Priority of Banks Secured Creditors Overe Government Dues

 https://youtu.be/CrpfXLyb3P8

Priority of Secured Creditors over Government Tax Dues

 

PRIOTITY OF SECURED CREDITORS OVER GOVERNMENT DUES

By Vinay Sonpal LL.M

 Advocate  

 

Till 31.08.2016 and with effect from 1.9.2016, the Government dues have lost priority of its tax dues against the banks or financial institutions secured creditors (hereinafter referred to as “secured creditors”)since the   Recovery of Debts and Bankruptcy Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 were amended by inserting sections 31B and section 26E in respective Acts on 1^st September 2016.The section 31B of the Debts and Bankruptcy Act, 1993 came in force from 1^st September 2016 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 came in force from 24^th January 2020.

Several High Courts, except Rajasthan High Court in GMG Engineers & Contractor Pvt. Ltd., VS State of Rajasthan  S.B. Civil Writ Petition No.6872/2017 dt 5^th  July, 2017, have taken  view interpreting the said amendments to have effect of priority of   secured creditors over Government dues in respect of taxes such as Income Tax Act 1961, Customs Act 1962, Central Excise Act 1944, Finance  Tax Act 1994, and other State Tax Laws which provided for first charge for their respective dues under their laws.

The details of the cases in which the High Courts have held priority of banks or financial secured creditors are as follows:

1	Full Bench decision of the Madras High Court in Assistant Commissioner Vs.           Indian Overseas Bank & Ors. AIR 2017 Madras 67 dt 10th Nov.2016;
2	Axis Bank Limited  vs State of Maharashtra Writ Petition No  1796 of 2015 dt 7th  March, 2017; 2017 (3) AIR(Bom) R 305
3	Bank of Baroda Vs.   Commissioner of Sales Tax, M.P., Indore & Anr. and by the High Court of Madhya Pradesh (2018) 55 GSTR210 (MP )dt  31st Jan,2018;
4	Bank Of Baroda Through Its ... vs State Of Gujarat R/SPECIAL CIVIL APPLICATION NO. 12995 of 2018 dt 16th  September, 2019;
5	Kalupur Commercial Co-Operative ... vs State Of Gujarat R/SPECIAL CIVIL APPLICATION NO. 17891 of 2018 dt 23rd  September, 2019;
6	ASREC (India) Limited vs State of Maharashtra Writ Petition No.    1039           of 2017 dt 13th Dec 2019; 2020 (2) BCR 243
7	Cosmos Co-operative Bank Vs. State of Maharashtra and others, 2019 SCC OnLine Bom 9527
8	Medineutrina Pvt. Ltd. (Company) Through its Director - Dilipkumar Versus District Industries Centre (D.I.C.), Udyog Bhavan, Nagpur & Others Writ Petition No. 7971 of 2019 18th Feb 2021 ;

 

In GMG Engineers & Contractor Pvt. Ltd., VS State of Rajasthan  S.B. Civil Writ Petition No.6872/2017 in judgment dt 5^th  July, 2017, the Rajasthan High Court took a view that  Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 gives priority to the secured creditor but it  cannot be construed to nullify the statutory first charge.

 

Similar view is taken by Bombay High Court , Nagpur Bench, in Medineutrina Pvt. Ltd. (Company) Through its Director - Dilipkumar Versus District Industries Centre (D.I.C.), Udyog Bhavan, Nagpur & Others Writ Petition No. 7971 of 2019 18^th Feb 2021,   concurring with the earlier decisions of the Courts that secured creditors have priority over Government dues , however it  held that :

Ø  The dues of the Bank as a secured creditor, in light of the language of Section 26-E of the SARFAESI Act  will have priority,   but that does not have the effect of wiping out the dues payable under any Central/State/Local Act, where, for the recovery of such dues, a first charge has been created   When a statutory charge is created on the property, the same would go with the property and would follow the property, in whosoever's hands the property goes. 

Ø  The notice of such a statutory charge on the property, is always presumed in law, to one and all and none can claim ignorance of the same.  A successful auction purchaser, thus would hold the property, upon which a statutory charge has been created, subject to such charge and the property would thus continue to be liable for any statutory charges created upon it 

Ø  The priority given in Section 26-E of the SARFAESI Act, to the Banks, which is a secured creditor, would only mean that it is first in queue for recovery of its debts by sale of the property,  the other creditors being relegated to second place and so on in the order of their preferences, as per law and contract, if any, as the case may be.

Ø  The dues under Section 37(1) of the MVAT Act, 2002  would also be recoverable by sale of the property, and that puts a liability upon the auction purchaser, who, in case he wants an encumbrance free title, will have to clear such dues. Thus the purchase of the property   holds it with all its rights, obligations and liabilities, whatsoever they may be, which would include, all dues, impositions, restrictions as may have been imposed upon the same and consequent to acquiring title to the property.

Ø  It   duty of the auction purchaser, before bidding for the same, to make inquiries about the impositions upon the property, so that he can have it free of any encumbrances. After acquiring title to the property, the auction purchaser cannot be heard to say that he will have the rights associated with the property and not the liabilities.  

Ø  The obligation   to make reasonable enquiries about the encumbrances and liabilities and to include such liabilities in the notice inviting the bids, is on secured creditor or if that is not done, to include the tax liabilities in the reserve price, fixed for sale of the security interest, so that the encumbrances can be taken care of.

Ø  The bank is bound to disclose such encumbrances in advertisement inviting bids. The secured creditor is also bound to make enquires about any encumbrances attached to the property under sale and disclose to prospective buyer.

Hence, as on today, though the secured creditor being bank can appropriate sale proceeds first in priority, the obligation to discharge tax dues under respective Acts shall survive and it will for the auction purchaser or secured creditors who will be responsible for such discharge of tax dues.

However, the decision in Medineutrina Pvt. Ltd.(supra) is under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 , the question is whether the ratio will be applicable to the recovery under the  Recovery of Debts and Bankruptcy Act, 1993, since the wordings of section 31B and section 26E are different.

One more clarification is needed that the priority is given to secured creditors under respective Acts , shall always mean any bank or financial institution or any consortium or group of banks or financial institutions as secured creditors and not any private parties which has advanced any funds against security since the definition of the secured creditors has referred to secured creditors as banks and such parties on behalf of banks.

History:

Statutory Charge:

The concept of priority of Crown debts over secured was considered in  Dena Bank vs Bhikhabhai Prabhudas Parekh & Co[ 2000 (5) SCC 694]  and Apex Court held that if statute provides for priority of its dues , it shall prevail. Otherwise, crown debts have priority only over unsecured  creditors and not over secured creditors

 

In State Of Bank Bikaner & Jaipur Vs.   National Iron & Steel Rolling Corporation And Others  1995 Scc (2) 19 Apex Court held that   the Section 11- AAAA of the Rajasthan Sales Tax Act creates a first charge on the property, thus clearly giving priority to the statutory charge over all other charges on the property including a mortgage. 

 

 

When and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 came in force , several banks contended that banks will have priority over the states’ first charge because of non obstante clause contained in the Act.

 

The controversy was set at rest in favour of States in the judgment of the Apex Court in Central Bank Of India vs State Of Kerala & Ors 2009 (4) SCC 94, holding that the DRT Act and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002  does not provide for first charge in respect of secured debts due to Banks and hence the provisions of State Sales Tax Laws creating first charge will prevail over the dues recoverable from debtors.

It is settled position in law that under Income Tax Act 1961, there is no provision in the Act which provide for priority of Income Dues over debts due to secured creditors.

[ Tax Recovery Officer vs Bank of India and 2 Ors,High Court Of Gujarat At Ahmadabad  Special Civil Application No. 13196 Of 2008 And Special Civil Application No. 888 Of 2009, | Karnataka State Industrial Investment Development Corporation Ltd., Versus Commissioner of Income-Tax, Mangalore & Another 2013 AIR(Kar) 104 and, Stock Exchange, Bombay vs. V.S.Kandalgaonkar, in CIVIL APPEAL NO.4354 of 2003 Supreme Court]

 

Under the Central Excise Act 1944 Section 11E.   provides for  first charge for any amount of duty, penalty, interest, or any other sum payable subject to Section 529A of Companies Act, Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993) and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002, (54 of 2002).

 

            Under the Customs Act 1962 section 142A, and under Service Tax Law (Finance Act 1994)  section  88 , provides for    first charge similar to one in under Section 11E of Central Excise Act 1944.

               After the amendments in the  Recovery of Debts and Bankruptcy Act, 1993 and Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002, the provisions of aforesaid tax statutes providing for first charges is effectively nullified and banks as secured creditors will have priority over Government dues in respect of taxes.

 

Hence, to sum up the legal position as emerges from statutory provisions and judicial pronouncements is that the Secured Creditors being banks shall have priority over Government tax dues, however , in respect of recovery of dues under Securitisation and Reconstruction of Financial Assets and Enforcement of   Security Interest Act, 2002 but  tax liability   to be discharged by auction purchaser. Under, the Recovery of Debts and Bankruptcy Act, 1993 there is judgment that  decided that statutory charge continues   and till then issue remains open.

 

INSOLVENCY AND BANKRUPTCY CODE 2016 READ WITH COMPANIES ACT 2013

Under the  IBC, in case of default by debtors when Resolution Professional (RP) is appointed by Tribunal, claims are invited from creditors, financial and operational creditors. The statutory dues are classifiable as operational creditors.The Revenue authorities are obliged to file its claims before the RP. The bids will be invited from Resolution Applicant and rival Applicants file their plans. If a plan is approved by Committee of Creditors , the same shall be put before the Tribunal and on approval of the plan , the creditors will be paid as per the plan approved. Not infrequently, statutory dues is provided negligible amounts and revenue has no recourse , except appeal, to accept the amount provided in the Resolution Plan,As per judgment of Apex Court dt 13.04.2021, in the case of Ghanshyam Mishra all liabilities not provided in the Resolution Plan shall get extinguished in view of amendment in section 31 to the effect that it shall be binding , inter alia, on the Government. Hence, no further recovery beyond what is provided in Resolution Plan can be pursued.

However, when the Resolution Plan fails for what ever reason or such plan is found to be not viable, the Debtor will be liquidated and the priority of the Revenue is almost at bottom of all creditors and above unsecured creditors.

Section 53(1) of the Code lays down the following order of priority in which the proceeds from the sale of the liquidation assets shall be distributed:

1. IRP costs and liquidation costs

2. Workmen’s due for the period of twenty-four months preceding the liquidation

commencement date and debts owed to a Secured Creditor

3. Wages and any unpaid dues owed to employees other than workmen

4. Financial debts owed to unsecured creditors

5. Any amount due to the Central Government and the State Government including the

amount to be received on account of the Consolidated Fund of India and the

Consolidated Fund of a State, if any, in respect of the whole or any part of the period of

two years preceding the liquidation commencement date

6. Any remaining debts and dues

7. Preference shareholders, if any

8. Equity shareholders or partners, as the case may be.

                             ***********************************************

 

Priority of State dues over Secured Creditors

 

PRIOTITY OF GOVERNMENT DUES OVER DEBTS DUE TO SECURED CREDITORS.

The concept of priority of Crown debts over secured was considered in  Dena Bank vs Bhikhabhai Prabhudas Parekh & Co[ 2000 (5) SCC 694]  and Apex Court observed:

“The principle of priority of Government debts is founded on the rule of necessity and of public policy. The basic justification for the claim for priority of state debts rests on the well recognized principle that the State is entitled to raise money by taxation because unless adequate revenue is received by the State, it would not be able to function as a sovereign government at all. It is essential that as a sovereign, the State should be able to discharge its primary governmental functions and in order to be able to discharge such functions efficiently, it must be in possession of necessary funds and this consideration emphasizes the necessity and the wisdom of conceding to the State, the right to claim priority in respect of its tax dues. (See M/s. Builders Supply Corporation, Supra). In the same case the Constitution Bench has noticed a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts and that this rule of common law amounts to law in force in the territory of British India at the relevant time within the meaning of article 372 (1) of the Constitution of India and therefore continues to be in force thereafter. On the very principle on which the rule is founded, the priority would be available only to such debts as are incurred by the subjects of the Crown by reference to the States sovereign power of compulsory exaction and would not extend to charges for commercial services or obligation incurred by the subjects to the State pursuant to commercial transactions. Having reviewed the available judicial pronouncements

Their Lordships have summed up the law as under :-

1. There is a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts.

2. The common law doctrine about priority of crown debts which was recognised by Indian High Courts prior to 1950 constitutes law in force within the meaning of Article 372 (1) and continues tobe in force.

3. The basic justification for the claim for priority of State debts is the rule of necessity and the wisdom of conceding to the State the right to claim priority in respect of its tax dues.

4. The doctrine may not apply in respect of debts due to the State if they are contracted by citizens in relation to commercial activities which may be undertaken by the State for achieving socio-economic good. In other words, where welfare State enters into commercial fields which cannot be regarded as an essential and integral part of the basic government functions of the State and seeks to recover debts from its debtors arising out of such commercial activities the applicability of the doctrine of priority shall be open for consideration.”

 

In State Of Bank Bikaner & Jaipur Vs.   National Iron & Steel Rolling Corporation And Others  1995 Scc (2) 19 Apex Court held that   the Section 11- AAAA of the Rajasthan Sales Tax Act creates a first charge on the property, thus clearly giving priority to the statutory charge over all other charges on the property including a mortgage.  

 

It was thus settled position that if a statute creates first charge, it will operate against the contractual charge created such as mortgage, hypothecation etc.

 

When and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 came in force , several banks contended that banks will have priority over the states first charge because of non obstante clause contained in the Act.

 

The controversy was set at rest in favour of States in the judgment of the Apex Court in Central Bank Of India vs State Of Kerala & Ors 2009 (4) SCC 94, holding that the DRT Act and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002  does not provide for first charge in respect of secured debts due to Banks and hence the provisions of State Sales Tax Laws creating first charge will prevail over the dues recoverable from debtors.

Income Tax Act 1961

As held by the Tax Recovery Officerv.Bank of India and 2 Ors,High Court Of Gujarat At Ahmadabad  Special Civil Application No. 13196 Of 2008 And Special Civil Application No. 888 Of 2009 | 06-09-2011   that  :

“But, in the present case, such issues are not required to be determined in absence of any provision creating first charge over the property under the Income Tax Act. There is no such provision laid down under the Income Tax Act, under which, the Income Tax Department can claim priority over the secured creditor.”.Income Tax does not provide for priority of dues under the Act to have priority of dues over contractual charge.

Section 226 & 227 of the Income Tax Act, read with Rule 93 of the Second Schedule, is claimed by Revenue  to create first charge upon any asset for recovery of unpaid tax. Further, it is claimed that Section 281 goes to the extent of declaring transfer of assets as void if done during pendency of a proceeding under some circumstances.

 

 II  Schedule of Income Tax Act….

 

Rule 93. Nothing in this Schedule shall affect any provision of this Act whereunder the tax is a first charge upon any asset.

 

In Karnataka State Industrial Investment Development Corporation Ltd., Versus Commissioner of Income-Tax, Mangalore & Another 2013 AIR(Kar) 104 it is held :

 

“14. Regard being had to the provisions of the State Financial Corporations Act, it is clear that a first charge on the property is created clearly giving priority to the dues of the said statutory authority over all other charges on the property, on the basis of the mortgage, since the income tax act, 1961 does not provide for a priority to the statutory charge over all other charges including mortgage under the ‘SFC Act’.

15. Although, learned counsel for the respondent points to rule 93 of the second schedule of the income tax act, 1961, which contemplates that nothing in the said Schedule shall affect any provision of the Act whereunder tax is a first charge upon any asset, is unable to refer to any provision of income tax act, whereunder income-tax due can be treated as a first charge on the assets of the assesses. So also, reference made to Section 281 of the Act too is not in the direction of establishing creation of a prior charge in favour of the Income Tax department over the assets of the assessee. Since what is contemplated under the Section is in relation to certain transactions of transfer being void during the pendency of an assessment proceeding.

16. Learned counsel for the petitioner is correct in his submission that in similar though not identical circumstances, the Division Bench of the High Court of Punjab and Haryana in Axis Bank Ltd. Vs. Commissioner of Income-tax, Ludhiana, (2012) 17 taxmann.com 139 (Punj.& Har.) declined to accept the plea of the Revenue that rule 93 of the second schedule of the income tax act, 1961 creates a prior charge over the assets of the assessee even though there is a provisional attachment order issued under Section 281B of the Act.”

 

Stock Exchange, Bombay vs. V.S.Kandalgaonkar, in CIVIL APPEAL NO.4354 of 2003 Supreme Court held on 25.09.2014  that :

 

 “24. The first thing to be noticed is that the Income Tax Act does not provide for any paramountcy of dues by way of income tax. This is why the Court in Dena Bank’s case (supra) held that Government dues only have priority over unsecured debts and in so holding the Court referred to a judgment in Giles vs. Grover (1832) (131) English Reports 563 in which it has been held that the Crown has no precedence over a pledgee of goods. In the present case, the common law of England qua Crown debts became applicable by virtue of Article 372 of the Constitution which states that all laws in force in the territory of India immediately before the commencement of the Constitution shall continue in force until altered or repealed by a competent legislature or other competent authority. In fact, in Collector of Aurangabad and Anr. vs. Central Bank of India and Anr. 1967 (3) SCR 855 after referring to various authorities held that the claim of the Government to priority for arrears of income tax dues stems from the English common law doctrine of priority of Crown debts and has been given judicial recognition in British India prior to 1950 and was therefore “law in force” in the territory of India before the Constitution and was continued by Article 372 of the Constitution (at page 861, 862).”

 

                                                                   Central Indirect Taxes

 

Prior to the amendment of Central Excise Act 1962,Customs Act 1944 and Finance Act 1994, Apex Court had held that Government has no priority over secured creditors in absence any specific provision in the respective statutes about first charge in respect of dues under those statutes. Now by Finance Act 2011 all the three Act have been amended as follows establishing supremacy of dues under respective enactments.

 

In Tata Metaliks Limited, A Company ... vs The Union Of India (Uoi) And Ors. ... on 20 February, 2008  : 2008 (126) ECC 183, 2008 (152) ECR 183 (Bom),Bombay High Court held that there is no provision in the Central Excise Act 1944 And Customs Act 1962 making the dues under the respective Act has priority over secured creditors. Krishna Lifestyle Technologies Ltd. decided on Feb. 05, 2008 in Writ Petition No. 4171 of 2007 relied upon..

 

 

 

Thereafter, the Finance Act 2011,amended Central Indirect Taxes Law as under:

 

CENTAL EXCISE ACT 1944

 

Section 11E. Liability under Act to be first charge.

 

Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of duty, penalty, interest, or any other sum payable by an assessee or any other person under this Act or the rules made thereunder shall, save as otherwise provided in section 529A of the Companies Act, 1956, (1 of 1956) the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993) and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002, (54 of 2002) be the first charge on the property of the assessee or the person, as the case may be. –( Ins. by Act 8 of 2011, s. 51 (w.e.f. 8-4-2011)

 

CUSTOMS ACT 1962

 

142A.  Liability under Act to be first charge .- Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of duty, penalty, interest or any other sum payable by an assessee or any other person under this Act, shall, save as otherwise provided in section 529A of the Companies Act, 1956, the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002,  be the first charge on the property of the assessee or the person, as the case may be Ins. by Act 8 of 2011, s. 51 (w.e.f. 8-4-2011)

SERVICE TAX LAW (FINANCE ACT 1994)

 

88. Liability under Act to be first charge.—Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of ²[tax], penalty, interest, or any other sum payable by an assessee or any other person under this Chapter, shall, save as otherwise provided in section 529A of the Companies Act, 1956 (1 of 1956) and the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993) and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 (54 of 2002), be the first charge on the property of the assessee or the person as the case may be.

 

                                                             LEGAL STATUS

 Dues under statutes mainly airse under Customs Act, Excice Act , Income Tax Act, State Tax Laws such as Sales Tax Acts , Profession Tax Acts, other Acts under Article 366(29A) of Constitution of India.

  Income Tax Act does not provide for priority of dues under   enactments. However, the State Tax laws in most of the States and Excise, Customs and Service Tax law  provide for priority of its dues under those enactments.

These enactments survive so long as the Central Legislation do not provide priority to certain creditors  under any enactment.This because it is settled position that in case of conflict between the Central Legislation and State Legislation, provisions of Central Legislation will prevail.

In UCO Bank & Another Versus Dipak Debbarma & Others[2017 (2) SCC 585] Apex Court observed:

In interpreting Article 246 regard must be had to the constitutional scheme which visualises a federal structure giving full autonomy to the Union Parliament as well as to the State legislatures in their respective/demarcated fields of legislation. The problem may, however, become a little more complex than what may seemingly appear as the two legislations may very well be within the respective domains of the concerned legislatures and, yet, there may be intrusion into areas that fall beyond the assigned fields of legislation. In such a situation it will be plain duty of the Constitutional Court to see if the conflict can be resolved by acknowledging the mutual existence of the two legislations. If that is not possible, then by virtue of the provisions of Article 246(1), the Parliamentary legislation would prevail and the State legislation will have to give way notwithstanding the fact that the State legislation is within the demarcated field (List II). This is the principle of federal supremacy which Article 246 of the Constitution embodies.

Banking is field of legislation under Item 45 of List I  of VII th Schedule to the Constitution of India. Section 31 B and Section 26E of The Recovery of Debts and Bankruptcy Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 respectively has purported to create priority of recovery of Secured Creditors over Government dues. Though the State tax law provide for priority in view of Article 246, the Act of Parliament will prevail. Consequently ,it is held by several High Courts that the Secured Creditor being a bank can recover the sale proceeds out of sale of secured assets in prioriy over Government dues.

The Recovery of Debts and Bankruptcy Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

By amendment of the  Recovery of Debts and Bankruptcy Act, 1993, section 31B was inserted. It came in force with effect from 1.9.2016 as Notified by Government.

"31B Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority.

 

Explanation.- For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code."

 

 

 By amendment to Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 , section 26E was inserted which came in force with effect from 24.01.2020.

"26-E. Priority to secured creditors.- Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.

  Explanation.- For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code."

 

These amendments were differently worded in The Recovery of Debts and Bankruptcy Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 though the same were inserted by one amending Act. Different High Courts have taken consistent view to the effect that secured creditors shall have priority in realizing its secured debts over Government dues notwithstanding any thing contained in any other law for the time being in force. It has been interpreted that secured creditors will have priority despite the respective legislation have created first charge on assets of the assessee because of non obstante clause.

List of important  judgments considering the amended provisions are as follows:

1.       Full Bench Decision of the Madras High Court in Assistant Commissioner Vs. Indian Overseas Bank & Ors. AIR 2017 Madras 67 dt 10^th Nov.2016;

2.       Axis Bank Limited  vs State of Maharashtra Writ Petition No  1796 of 2015 dt 7^th  March, 2017; 2017 (3) AIR(Bom) R 305

3.       Bank of Baroda Vs.   Commissioner of Sales Tax, M.P., Indore & Anr. and by the High Court of Madhya Pradesh (2018) 55 GSTR210 (MP )dt  31^st Jan,2018;

4.       Bank Of Baroda Through Its ... vs State Of Gujarat R/SPECIAL CIVIL APPLICATION NO. 12995 of 2018 dt 16^th  September, 2019;

5.       Kalupur Commercial Co-Operative ... vs State Of Gujarat R/SPECIAL CIVIL APPLICATION NO. 17891 of 2018 dt 23^rd  September, 2019;

6.       ASREC (India) Limited vs State of Maharashtra Writ Petition No.    1039           of 2017 dt 13^th Dec 2019; 2020 (2) BCR 243

7.       Cosmos Co-operative Bank Vs. State of Maharashtra and others, 2019 SCC OnLine Bom 9527

8.       Medineutrina Pvt. Ltd. (Company) Through its Director - Dilipkumar Versus District Industries Centre (D.I.C.), Udyog Bhavan, Nagpur & Others Writ Petition No. 7971 of 2019 18^th Feb 2021 ;

 

All abovestated judgments have taken similar view to the effect that the State’s dues will have to yield to the dues of the secured creditors because of non obstante clause  in the amended provisions.

 

9.       However , in GMG Engineers & Contractor Pvt. Ltd., VS State of Rajasthan  S.B. Civil Writ Petition No.6872/2017 dt 5^th  July, 2017, the Rajasthan High Court took a view that :

“Learned Senior Counsel appearing for the petitioner- company submits that Section 26E of the amended Act gives priority to the secured creditor against all other debts and Government dues. In view of the above, effect of first charge gets nullified. I have considered the aforesaid argument also and find that Section 26E of the Act of 2002 gives priority to the secured creditor. It cannot be construed to nullify the statutory first charge. If the intention of Parliament would have been to nullify statutory first charge then language of the amended provision would have been as providedin Workmens' Compensation Act, Employees' Provident Fund Act, etc. The State dues may be without a provision of first charge and in that situation, the secured creditors would have priority over the State dues and, accordingly, amended provision is to be given interpretation. It cannot, however, nullify a provision for first charge on the property. The first charge on the property creates   right even as per the Act of 1882. It has already been observed that if intention of the Central Government was to nullify first charge,the language of amended provision would have been in the manner indicated by the Apex Court in the case of Central Bank of India(supra). It is otherwise a case where attachment of the property in pursuance of first charge of the State Government is much prior to the amended Act of 2002 and 1993 thus those amendments would not apply even if subsequently auction of the property was made. It is nothing but auction of the property already attached by the Government, that too, after initiation of proceedings under th Act of 1956.”

10.   Now recently, in Medineutrina Pvt. Ltd. (Company) Through its Director - Dilipkumar Versus District Industries Centre (D.I.C.), Udyog Bhavan, Nagpur & Others Writ Petition No. 7971 of 2019 18^th Feb 2021, Honourable Bombay High Court concurring with the earlier decisions of the Court , observed thus:

“28. The language of Section 37(1) of the MVAT Act 2002, has to be viewed in that contextual background. Section 37(1) of the MVAT Act, 2002, creates a 'First Charge on the property of the dealer', or as the case may be, person, for any amount of tax, penalty, interest, sum forfeited, fine or any other sum payable under the MVAT Act 2002. Though the dues of the Bank as a secured creditor, in light of the language of Section 26-E of the SARFAESI Act, which has now been brought into force w.e.f. 1/9/2016, will have priority, that does not have the effect of wiping out the dues payable under any Central/State/Local Act, where, for the recovery of such dues, a first charge has been created on the property by such statute, which in the case of the MVAT Act, 2002, has been so created. It goes without saying that when a statutory charge is created on the property, the same would go with the property and would follow the property, in whosoever's hands the property goes.

29. Thus the notice of such a statutory charge on the property, is always presumed in law, to one and all and none can claim ignorance of the same. In AI Champandy Industries Limited (supra) itself the Hon'ble Apex Court has made a distinction between an encumbrance as it is understood in the general parlance and an encumbrance which is a charge on the property and runs with the property and has held that if by reason of the statute no such burden on the title which diminishes the value of the land is created, it shall not constitute any encumbrance.

30. As Section 37(1) of the MVAT Act, 2002, creates a charge on the property, a successful auction purchaser, thus would hold the property, upon which a statutory charge has been created, subject to such charge and the property would thus continue to be liable for any statutory charges created upon it, even in the hands of such auction purchaser, though for non disclosure of such charge by the secured creditor, the auction purchaser may sue the secured creditor and have such redress, as may be permissible in law. This is moreso for the reason that the priority given in Section 26-E of the SARFAESI Act, to the Banks, which is a secured creditor, would only mean that it is first in que for recovery of its debts by sale of the property, which is a security interest, the other creditors being relegated to second place and so on, in the order of their preference as per law and contract, if any, as the case may be. Thus the dues under Section 37(1) of the MVAT Act, 2002, being a statutory charge on the property, would also be recoverable by sale of the property, and that puts a liability upon the auction purchaser, who, in case he wants an encumbrance free title, will have to clear such dues.”

“36. Thus the purchase of the property on 'as is where is and what is there is ' basis, would mean that the property was being had by the auction purchaser, with all its rights, obligations and liabilities, whatsoever they may be, which would include, all dues, impositions, restrictions as may have been imposed upon the same and consequent to acquiring title to the property, cannot be permitted to quibble out of it, on the alleged plea of not being noticed about any such liability/imposition. In case the auction purchaser, did not want to have the property, with its liabilities, he ought to have insisted on having the same free of all encumbrances, altogether, before bidding for the same. That apart, it is equally a duty of the auction purchaser, before bidding for the same, to make inquiries about the impositions upon the property, so that he can have it free of any encumbrances. After acquiring title to the property, the auction purchaser cannot be heard to say that he will have the rights associated with the property and not the liabilities. He takes it lock, stock and barrel, with everything”

“37…………….. Thus the obligation to deliver the property to the auction purchaser free from encumbrances known to the secured creditor includes the responsibility to make reasonable enquiries about the encumbrances and liabilities and to include such liabilities in the notice inviting the bids, or if that is not done, in the reserve price, fixed for sale of the security interest, so that the encumbrances can be taken care of. This is also spelt out from Rule 9(7) and (8) of the Security Interest (Enforcement) Rules, 2002”

“38…………….Thus, information and details regarding any encumbrances upon the property which is the security interest, which are easily obtainable from the statutory authorities, ought to be so obtained by the secured creditor as well as the authorised officer, which then needs to be entered in the notice of sale under Rule 8 (7) (a) of the SI (E), Rules, 2002, which would result in bringing the information about any encumbrance to the knowledge of the prospective bidders. In absence of any such information, an auction purchaser may in the facts of the given case, raise a claim that the purchase by him was without notice of any such encumbrance and any charge found subsequent to the confirmation of the auction, shall on that count, be not enforceable against the auction purchaser, which may lead to litigation”

“40……….. When the property is sold on 'as is where is' and 'as is what is' basis, though it would also be for the bidder, to make reasonable enquiries about the encumbrances/dues upon the property put to auction, including the status as to availability of vacant possession, however, the mere mention of 'as is where is' and 'as is what is', basis or any such phrase, should not absolve the secured creditor of its obligation to make proper enquiries about other dues/encumbrances upon the property, to obtain information about which, the secured creditor has the means and wherewithal and to disclose in the auction notice about such dues and also the situation about the possession of the property, so that the bidder is consciously made aware of all the pros and cons about the property, including the encumbrances/dues/possessory status and thereafter cannot be heard to raise a plea of not having been informed, afterwards…………..”.

“44. Thus even in the present case, the dues as claimed by the respondent no.2, being a charge on the property, under Section 37(1) of MVAT Act, 2002, and the property having stood attached by the respondent no.2, before the auction, the petitioner, would be liable to pay the same to the respondent no.2, in order to obtain a clear and marketable title to the property, having purchased the same on 'As is where is and whatever there is basis'. In case the petitioner discharges the aforesaid dues of the respondent no.2, it would then be entitled to a no dues certificate from the respondent no.2.”

After holding as above the Court gave following directions:

“The secured creditor under the SARFAESI Act, therefore must in all cases ensure :

(a) that the property offered as a security interest is free from any encumbrance whatsoever, at the time when it is so offered initially, to avail financial credit by the owner/s;

(b) in all such cases, a title verification certificate, by a lawyer, at the penalty of cancellation of his license to practice, in case such certificate is found to be false, should be a must, which certificate should also contain a statement that the lawyer has also verified the suits filing register of the Court, within whose jurisdiction, the property is situated to ascertain, whether the same is the subject matter of any litigation and an affidavit from the borrowers that it is not so;

(c) in all such cases, a valuation certificate, by a government approved, at the penalty of cancellation of his licence, in case such certificate is found to be false, should be a must;

(d) immediately upon creation of security interest in its favour for payment of its dues, the bank must inform all the Central/State/Local Authorities regarding creation of such security interest, including the Sub-Registrar of documents and City Survey office concerned;

(e) the bank/secured creditor, should before any property is attached and auctioned :

(i) enquire with the Central/State/Local authorities regarding any dues on the property sought to be auctioned and in case such dues are found, to mention the same in the public notice to be published inviting bids, so that the bidder, is made aware of the liability and encumbrance, which the property carries with it.

(ii) where the secured creditor, has taken symbolic possession and is not in physical possession of the property, the public notice must indicate the nature of such possession and if the Secured creditor is unable to secure actual possession, the reason for not getting such possession (whether there is a tenant/licensee/family member/encroacher etc in occupation of the property, so that the bidder, is consciously made aware of the situation in which the property is and makes a conscious offer/bid.

(iii) Where the secured creditor, is aware of Statutory dues the payment of which is a charge upon the property, the same could be included in the reserve price, for sale of the property or got deposited from the bidder separately, so that the encumbrance could be cleared, by the secured creditor.”

(iv) where the secured creditor is aware of encumbrance, the value for discharging such encumbrance, either can be included in the reserve price or got deposited from the bidder, so that the encumbrance could be cleared, by the secured creditor.


It is thus clear that though the sections 31 B and 26E creates priority in respect of receipt of  sale proceeds on sale of secured assets, the obligation to discharge State’s dues survives and auction purchaser is liable to discharge the outstanding tax dues.

 

INSOLVENCY AND BANKRUPTCY CODE 2016 READ WITH COMPANIES ACT 2013

Under the  IBC, in case of default by debtors when Resolution Professional (RP) is appointed by Tribunal, claims are invited from creditors, financial and operational creditors. The statutory dues are classifiable as operational creditors.The Revenue authorities are obliged to file its claims before the RP. The bids will be invited from Resolution Applicant and rival Applicants file their plans. If a plan is approved by Committee of Creditors , the same shall be put before the Tribunal and on approval of the plan , the creditors will be paid as per the plan approved. Not infrequently, statutory dues is provided negligible amounts and revenue has no recourse , except appeal, to accept the amount provided in the Resolution Plan,As per judgment of Apex Court dt 13.04.2021, in the case of Ghanshyam Mishra all liabilities not provided in the Resolution Plan shall get extinguished in view of amendment in section 31 to the effect that it shall be binding , inter alia, on the Government. Hence, no further recovery beyond what is provided in Resolution Plan can be pursued.

However, when the Resolution Plan fails for what ever reason or such plan is found to be not viable, the Debtor will be liquidated and the priority of the Revenue is almost at bottom of all creditors and above unsecured creditors.

Section 53(1) of the Code lays down the following order of priority in which the proceeds from the sale of the liquidation assets shall be distributed:

1. IRP costs and liquidation costs

2. Workmen’s due for the period of twenty-four months preceding the liquidation

commencement date and debts owed to a Secured Creditor

3. Wages and any unpaid dues owed to employees other than workmen

4. Financial debts owed to unsecured creditors

5. Any amount due to the Central Government and the State Government including the

amount to be received on account of the Consolidated Fund of India and the

Consolidated Fund of a State, if any, in respect of the whole or any part of the period of

two years preceding the liquidation commencement date

6. Any remaining debts and dues

7. Preference shareholders, if any

8. Equity shareholders or partners, as the case may be.

                             ***********************************************