NCLAT (20.03.2019) in Pr. Director General of Income Tax & Ors. Vs. Synergies Dooray Automotive Ltd. & Ors. [Company Appeal (AT) (Insolvency) No. 205 of 2017, No.309 of 2018, No. 559 of 2018, No. 671 of 2018 & No. 759 of 2018] held that;
# 25. . . . .in Babu Manmohan Das Shah v. Bishun Das [AIR 1967 SC 643 : (1967) 1 SCR 836] by Shelat, J.; . . . .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.”
# 28 . . .we find that 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’
# 30. For the said very reason, we also hold 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’.
Excerpts of the order;
# 14. The question arises for consideration in these appeals are:
(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’?
# 15. Learned counsel appearing on behalf of the ‘Pr. Commissioner of Income Tax (Central)-3, Mumbai’ in Company Appeal (AT) (Insolvency) No. 671 of 2018 submits that a bare perusal of the definition of ‘Operational Debt’ would reveal that Income Tax cannot be 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 re-payment of dues of the Central Government, State Government or the Local Authorities.
# 16. According to him, ‘Income Tax’ is the statutory liability of every person under Section 4 of the Income Tax Act, who are bound to pay Income Tax on its ‘Total Income’ (as defined under Section 5 of the Act). This is required to be discharged by every person including a ‘Resolution Applicant’. Placing reliance on Chapter XVII (Collection and recovery tax), particularly Sections 190 to Sections 234F of the Income Tax Act, 1961 it was submitted that the said provisions if contravened will become redundant. Further, according to learned counsel for the Appellant, the ‘Resolution Plan’ approved by the Adjudicating Authority is in contravention of provisions of Section 220 read with Section 156 of the Income Tax Act, which read as under: . . . . . . .
# 17. A similar plea has been taken by the ‘Sales Tax Department, State of Maharashtra’ by relying on Section 37(1) of the ‘Maharashtra Value Added Tax, 2002’, as noticed above.
# 18. According to counsel appearing on behalf of one of the ‘Successful Resolution Applicant’, the statutory dues including the ‘Income Tax’ and the ‘Sales Tax’ come within the meaning of Section 5(20) read with Section 5(21) of the ‘I&B Code’.
Reliance was placed on the provisions aforesaid to suggest that the ‘Operational Debt’ also included debts arising under any law payable to the Central Government and the State Government.
# 20. According to Mr. Rajiv Ranjan, Senior Advocate and Mr. Sugam Seth, learned Amicus Curiae, the ‘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’. Referring to the decision of the Hon’ble Supreme Court in “Life Insurance Corporation of India vs D. J. Bahadur & Ors.- (1981) 1 SCC 315”, 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 in “Life Insurance Corporation of India vs D. J. Bahadur & Ors. - (1981) 1 SCC 315”.
# 21. Therefore, according to them, 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’.
# 22. For determination of the issue, it is relevant to notice the definition of ‘Operational Creditor’ and the ‘Operational Debt’ as defined in Section 5(20) and Section 5(21), as quoted below:
“(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;
(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;”
# 23. 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.
# 24. Whether ‘or’ used in three places in Section 5(21) is disjunctive or should be given the meaning ‘and’ is one of the issue?
# 25. In “Life Insurance Corporation of India” (Supra), the Hon’ble Supreme Court 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 and held:
“148. In order to steer clear of the above interpretation of Section 11(2) learned counsel for the employees put forward the argument that the word “or” occurring in the section should not be read as a disjunctive and should be given the meaning “and” so that the two clauses forming the conditions about which the Central Government has to be satisfied before it can act under the section are taken to be one single whole; but we do not see any reason why the plain meaning of the word should be distorted to suit the convenience or the cause of the employees. 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 (see Mazagaon Dock Ltd. v. Commissioner of Income Tax and Excess Profits Tax [AIR 1958 SC 861 : 1959 SCR 848] ). 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. This rule was thus applied to the interpretation of clause (c) of Section 3(1) of the U.P. (Temporary) Control of Rent and Eviction Act, 1974 in Babu Manmohan Das Shah v. Bishun Das [AIR 1967 SC 643 : (1967) 1 SCR 836] by Shelat, J.:
“The clause is couched in single and unambiguous language and in its plain meaning provides that it would be a good enabling a landlord to sue for eviction without the permission of the District Magistrate if the tenant has made or has permitted to be made without the landlord's consent in writing such construction which materially alters the accommodation or is likely substantially to diminish its value. The language of the clause makes it clear that the legislature wanted to lay down two alternatives which would furnish a ground to the landlord to sue without the District Magistrate's permission, that is, where the tenant has made such construction which would materially alter the accommodation or which would be likely to substantially diminish its value. 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.”
# 27. In “Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors. - Writ Petition (Civil) No. 99 of 2018”, the Hon’ble Supreme Court while dealing with the different provisions of the ‘I&B Code’, including Section 5(20), observed as follows:
“23. A perusal of the definition of “financial creditor” and “financial debt” makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, 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.”
# 28. From the plain reading of sub-section (21) of Section 5, we find that 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’.
# 29. ‘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’.
# 30. For the said very reason, we also hold 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’.
# 31. In Company Appeal (AT) (Insolvency) No. 205 of 2017, when the matter was taken up on 26th February, 2019, learned counsel appearing on behalf of the ‘Successful Resolution Applicant’- (2nd Respondent) submitted that in the ‘Resolution Plan it has been agreed to pay full payment of outstanding dues of Rs.389.53 lakhs in staggered manner over a period of three years and referred to clause 4.4.3, which reads as under:-
“(b) Statutory Dues
4.4.3 As per the latest provisional financial statement of SDAL for the FY ended on 31st March 2017 made available to us, the amount outstanding towards Statutory Dues was Rs. 389.53 Lac (constituting of Rs. 351.69 Lac as deferred sales tax and Rs.37.84 Lac as service tax dues). It is proposed to make full payment of Rs.389.53 Lac (as reduced by any payments that would have been already made by SDAL till the date of approval) pertaining to Statutory dues, however the payment shall be made in a staggered manner over a period of three years on an interest free basis, and the payment shall commence after completion of due payment of restructured dues to all the secured financial creditors of SDAL.”
# 32. In view of our finding as aforesaid and stand taken by the ‘Resolution Applicant’, no interference is called for against the impugned order dated 2nd August, 2017 challenged in Company Appeal (AT) (Insolvency) No. 205 of 2017.
# 33. In the other appeal, the statutory dues have been treated as ‘Operational Debt’ and equated them with similarly situated ‘Operational Creditors’, we find no reason to interfere with the impugned order(s) challenged in Company Appeal (AT) (Insolvency) Nos. 309, 559, 671 & 759 of 2018. All the appeals stand disposed of with aforesaid observations. No cost.
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