State is a secured creditor for tax purpose under Gujarat VAT Act: SC

Case Details: State tax officer v. Rainbow Papers Ltd. - [2022] 142 taxmann.com 157 (SC)

Judiciary and Counsel Details

• • Indira Banerjee & A.S. Bopanna, JJ.

Facts of the Case

The National Company Law Appellate Tribunal (NCLAT) held that the Government can’t claim first charge over the property of the Corporate Debtor. The NCLAT also held that Section 48 of the Gujarat Value Added Tax (GVAT), 2003, which provides for first charge on the property of a dealer in respect of any amount payable by the dealer on account of tax, interest, penalty etc. under the GVAT Act, 2003 can’t prevail over Section 53 of the IBC.

The State Tax Officer (appellant) filed appeal before the Supreme Court and the question before the Apex Court was –

“Whether the provisions of the IBC and, in particular, Section 53 thereof, overrides Section 48 of the GVAT Act?”

Supreme Court Held

The Honorable Supreme Court observed that as per the Section 48 of the GVAT Act, the claim of the Tax Department of the State, squarely falls within the definition of “Security Interest” under Section 3(31) of the IBC and the State becomes a secured creditor under Section 3(30) of the Code.

If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan; the Apex Court concluded. The Court further held that the NCLAT clearly erred in its observation that Section 53 of the IBC over-rides Section 48 of the GVAT Act. The Committee of Creditors, which might include financial institutions and other financial creditors, can’t secure their own dues at the cost of statutory dues owed to any Government.

Therefore, the resolution plan and the impugned orders were liable to be set aside and the appeal was allowed.