Income Tax/Sales Tax Department are Operational Creditor under IBC 2016 – NCLAT

Income Tax/Sales Tax Department and local authority are Operational Creditor under Insolvency and Bankruptcy Code, 2016 – NCLAT

ABCAUS Case Law Citation:
ABCAUS 2838 (2019) (03) IBBI

Important Case Laws Cited/relied upon by the parties
Central Bank of India vs. State of Kerala & Ors.─ (2009) 4 SCC 94
Life Insurance Corporation of India vs D. J. Bahadur & Ors.─ (1981) 1 SCC 315
Municipal Corpn. Of Delhi v. Tek Chand Bhatia─ (1980) 1 SCC 158
Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors.

In the instant case, various an appeal had been preferred before the National Company Law Appellate Tribunal (NCLAT) by the Income Tax Department against the order passed by the National Company Law Tribunal (NCLT) under Section 31 of the Insolvency and Bankruptcy Code, 2016 (I BCode) approving the ‘Resolution Plan’ of corporate debtors.

The grievance of the Income Tax Department Appellant was that the NCLT/Adjudicating Authority had granted huge Income Tax benefits (settling huge tax demand at a meagre percentage) to the corporate debtors by approving the ‘Resolution Plan’ in the ‘Corporate Insolvency Resolution Process’ without impleading the Appellant department as a Respondent to the said proceedings.

Similarly, in another appeal, the sales tax department had also challenged the order passed by the NCLT on the ground that the ‘Resolution Professional’ had not intimated during the ‘Corporate Insolvency Resolution Process’ to attend the meeting of the ‘Committee of Creditors’ and plan had been approved prejudicial to the rights of the Appellant. Further, it was the case of the sales tax department that the ‘Sales Tax’ and ‘Value Added Tax’ do not come within the meaning of ‘Operational Debt’ and thereby, it cannot be treated to be an ‘Operational Creditor’.

Thus the questions that arose for consideration before the NCLAT  was

(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? and

(ii) Whether the Central Government, the State Government or the legal authority having statutory claim, come within the meaning of ‘Operational Creditors’?

It was contended by these departments that the definition of ‘Operational Debt’ would not cover Income Tax /Sales tax as they are not in the nature of ‘Operational Debt’ as ‘Operational 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 the Local Authorities.

It was contended 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. Reliance has been placed on the decision of the Hon’ble Supreme Court.

Therefore, according to the appellant departments, 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’. It was submitted that as tax is not related to ‘supply of goods’ or services rendered to the ‘Corporate Debtor’, they cannot be treated to be the ‘Operational Debt’.

The NCLAT observed that as per the definition of ‘Operational Creditor’ and the ‘Operational Debt’ as defined in Section 5(20) and Section 5(21), the word ‘or’ has been used at three places in Section 5 (21) namely— 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.

Thus, the question was whether ‘or’ used in three places in Section 5(21) is disjunctive or should be given the meaning ‘and’ is one of the issue?

The NCLAT observed that the Hon’ble Supreme Court had observed that in a case of ambiguity, the Court would choose that interpretation which would conform to the constitutionality of the provision. It further held that the change of word does not change its meaning.

The Hon’ble Supreme Court had opined 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, however, where no compelling reason for the adoption of such a course is, available, the word “or” must be given its ordinary meaning, that is, as a disjunctive.

In another case, the Hon’ble Supreme Court had observed that the word ‘or’ is normally disjunctive and ‘and’ is normally conjunctive, but at times they are read as vice versa.

It was also noted that the Hon’ble Supreme Court while dealing with the different provisions of the ‘I&B Code’, including Section 5(20), observed that an ‘operational debt” would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local authority.

The NCLAT opined that from a plain reading of sub-section (21) of Section 5, 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, and State Government or any local authority’.

The NCLAT opined that ‘Operational Debt’ in normal course means a debt arising during the operation of the Company (‘Corporate Debtor’). The ‘goods’ and ‘services’ including employment are required to keep the Company (‘Corporate Debtor’) operational as a going concern. If the Company (‘Corporate Debtor’) 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’, ‘Value Added Tax’ and other statutory dues arising out of the existing law, arises when the Company is operational, we hold such statutory dues has direct nexus with operation of the Company. For the said reason also, we hold that all statutory dues including ‘Income Tax’, ‘Value Added Tax’ etc. come within the meaning of ‘Operational Debt’.

Accordingly, the NCLAT held that ‘Income Tax Department of the Central Government’ and the ‘Sales Tax Department(s) of the State Government’ and ‘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’.

All the appeals were disposed of accordingly

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