NCLAT INKS AND AFFIRMS INCOME TAX AND SALES TAX DEPT. AS ‘OPERATIONAL CREDITOR’ UNDER BANKRUPTCY CODE

  • Blog|Insolvency and Bankruptcy Code|
  • 528 Views
  • |
  • 4 Min Read
  • By Taxmann
  • |
  • Last Updated on 9 April, 2021
In a landmark judgment in the matter of Principal Director General of Income Tax Vs Synergies Dooray Automotive Ltd [2019] 103 taxmann.com 361 (NCL-AT) (Company appeal no: 205 of 2017 and other appeals) on 20th March, 2019, the National Company Law Appellate Tribunal (NCLAT) disposed of various appeals through a common judgment dated 20th March, 2019 and declared that the statutory dues come under the definition of operational debt and they can be treated as operational creditors of the company.

There were only to questions before NCLAT which were common in all the appeals:- 

 
i. Whether the ‘Income Tax‘, ‘Value Added Tax’ or other statutory dues, such as ‘Municipal Tax’, ‘Excise Duty’, etc. come within the meaning of ‘Operational Debt’ or not?
 
ii. Whether the Central Government, the State Government or the legal authority having statutory claim, come within the meaning of ‘Operational Creditors’?
 
In order to answer the question whether the statutory dues including the “Income Tax” and the “Sales Tax” come within the meaning of I&B Code, one has to carefully interpret the Section 5(20) read with Section 5(21) of the I&B Code, which is given below:-
 
Section 5(20) “operational creditor” means 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) “operational debt” means 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;”
 

Points argued against categorising Income Tax & Sales Tax as Operational Creditor:

  • ‘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 ‘Operational Debt’.
 
  • That the word ‘or’ before the sentence ‘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’ should be read as ‘and’ and it should be related to either supply of goods or for rendering services to the ‘Corporate Debtor’.
 
  • Tax is not related to ‘supply of goods’ or services rendered to the ‘Corporate Debtor’, and hence they cannot be treated to be the ‘Operational Debt.

Findings of NCLAT:

NCLAT after interpreting the definitions under I&B Code opined that The word ‘or’ has been used at three places in Section 5 (21) viz., a claim in respect of 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. In interpreting the above, one has to look into the intention of the Legislature and also to see whether the said ‘or’ has been used with ambiguity or it is unambiguous. It was observed by the Supreme Court in the matter of Life Insurance Corporation of India Vs DJ Bahadur & ors [1981] 1 SCC 315 that in case of ambiguity, the Court would choose that interpretation which would conform to the constitutionality of the provision. It was held in this matter that “It is no doubt true that the word ‘or’ may be interpreted as ‘and’ in certain extraordinary circumstances such as in a situation where its use as a disjunctive could obviously not have been intended. Where no compelling reason for the adoption of such a course is, however, available, the word ‘or’ must be given its ordinary meaning, that is, as a disjunctive”. It was further held “The ordinary rule of construction is that a provision of a statute must be construed in accordance with the language used therein unless there are compelling reasons, such as where a literal construction would reduce the provision to absurdity or prevent the manifest intention of the legislature from being carried out. There is no reason why the word ‘or’ should be construed otherwise than in its ordinary meaning.”     After interpreting the definition NCLAT arrived at the conclusion that there is no ambiguity and the word ‘and’ has not been used anywhere but the Legislature 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 and State Government or any local Authority. Further, the ‘operational debt’ in normal course means a debt arising during the operation of the company (Corporate Debtor) and also includes debts arising under any law payable to the Central Government & the State Government and come squarely under the meaning of Section 5(20) read with Section 5(21) of the I&B Code. If the company is operational 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 and other statutory dues arising out of the existing law, arises when the company is operational, the NCLAT held such statutory dues has direct nexus with operation of the company. Thus, all the statutory dues including Income Tax, Value Added Tax come within the meaning of ‘Operational Debt’. In view of the above said reason, the NCLAT held that Income Tax Department of the Central Government and the Sales Tax Departments of the State Government and any Local Authority, who are entitled for dues arising out of the existing law are ‘Operational Creditor’ within the meaning of Section 5(20) of the I&B Code.  
Author: T.V.Ganesan, Head Legal-Airport Sector, GMR Group

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

Comments are closed.

Everything on Tax and Corporate Laws of India

To subscribe to our weekly newsletter please log in/register on Taxmann.com

Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied