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Sales Tax Officer, Central Circle, New Delhi Vs. Byford Ltd. - Court Judgment

LegalCrystal Citation
Subject Company
CourtDelhi High Court
Decided On
Case NumberCompany Appeal No. 3 of 1981. Appeal from the judgment of Kirpal J. dated February 5, 1981, in C.A.
Judge
Reported in[1984]55CompCas204(Delhi); ILR1982Delhi181; [1984]145ITR537(Delhi); [1983]53STC357(Delhi)
ActsCompanies Act, 1956 - Sections 235, 236, 237, 238, 239, 240, 241, 242, 243, 244, 245, 246, 247, 248, 249, 250, 251, 391, 391(2), 391(6), 443, 446, 446(1) and 446(2); Delhi Sales Tax Act, 1975 - Sections 25, 25(7), 55, 56, 57 and 67
AppellantSales Tax Officer, Central Circle, New Delhi
RespondentByford Ltd.
Cases Referred(Brutus v. Cozens
Excerpt:
.....391(6)--'proceedings' whether includes penalty proceedings--power of the winding up court to stay penalty proceedings in taxation matters.; a winding up petition was presented against the respondent in 1978. the petition is still pending and no order of winding up has been made. a scheme of arrangement was also pending before the company judge. during the pendency of the proceedings the respondent made an application under section 391 and 443 of the companies act praying for a stay of the penalty proceedings pending before the sales tax officer. the company judge allowed the application and stayed the proceedings for the levy of penalty. the sales tax officer filed the present appeal and the only question for the consideration of the court was whether the company judge can..........by the company judge. 9. the single question in the appeal is : has the company judge power to stay penalty proceedings under s. 55 of the sales tax act in our opinion, he has none. section 391(6) says : 'the court may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceeding against the company on such terms as the court thinks fit, until the application is finally disposed of.' 10. it is this word 'proceeding' which has to be interpreted. will this expression comprehend 'sales tax proceedings' a company which has run into difficulties can propose a scheme of arrangement to the creditors under s. 391 of the act. section 391 is applicable both to a going company and a company in winding up. but it must be.....
Judgment:

Avadh Behari Rohatgi, J.

1. On an application, under s. 391(6) of the Companies Act, 1956 (the Act), by the company, the court stayed proceedings against the company before the STO. The STO contests the validity of this order of the company judge. The question is whether the judge can restrain proceedings against the company before the STO.

2. These are the facts. The respondent Byford Limited (the company), is a dealer in Fiat cars. It went into rough weather. It was in troubled waters. It became heavily indebted to various creditors on account of its inability to pay its debts. A winding-up petition was presented by the Bank of Madura in 1978. This petition is still pending. The order of winding-up has not been made so far.

3. During the pendency of the winding-up petition, the company made an application under s. 391 of the Act in 180 suggesting a scheme of arrangement for payment of debts to its creditors. On January 27, 1981, another application was made under s. 391(6) and s. 443 of the Companies Act against the STO and the Commissioner of Sales Tax on the allegation that for the assessment year 1976-77, the company was liable to pay a sum of Rs. 11,84,054.58 as sales tax and out of this amount a sum of Rs. 2,25,504.65 had been paid leaving an unpaid balance of Rs. 9,58,550.93, which remains due from the company to the sales tax department. The company further alleged that it apprehended that the sales tax authorities will impose heavy penalties on the company and, thereforee, the court should restrain the STO and the Commissioner of Sales Tax from imposing any penalty and from recovering any interest on its defaults.

4. The STO opposed this application. By his order dated February 5, 1981, the learned company judge allowed the application. He stayed the proceedings for the levy of penalty and recovery of interest. At the suggestion of the company he, however, imposed this condition of stay that the company shall pay Rs. 50,000 per month to clear up the past arrears. From his order the STO appeals to this court.

5. The learned company judge has not stayed the assessment proceedings under s. 23 of the Delhi Sales Tax Act, 1975, as there was no prayer of the company before him that effect. But he has stayed the penalty proceedings. The levy of penalty is provided in ss. 55, 56 and 57 of the Sales Tax Act. He has also stayed the recovery of interest.

6. As regards stay of recovery of interest there is no dispute between the parties. Mr. Chawla on behalf of the STO has conceded that recovery of interest can be stayed by the company judge. He has mainly disputed the jurisdiction of the company judge to stay the penalty proceedings.

7. The learned company judge was of the opinion that the scheme of arrangement will be completely frustrated if an additional demand by way of penalty is permitted to be raised against the company before the creditors have had an occasion to consider the scheme. The sole question is whether the company judge had jurisdiction to make an order staying the penalty proceedings.

8. At the very outset Mr. P. C. Khanna, on behalf of the company, raised a preliminary objection. He argued that the STO was estopped from bringing the appeal because he had agreed to receive his dues by Installment of Rs. 50,000 per month. This, counsel said amounts to election. He referred us to Nagubhai Ammal v. B. Shama Rao, : [1956]1SCR451 , in this connection. We have no hesitation in rejecting this preliminary objection. It is not true to say that the STO agreed to the order made by the company judge. In fact his counsel protested against the making of the order and respectfully submitted that he, the company judge, had no jurisdiction to make the order sought by the company. The company judge rejected the argument. He held that he had jurisdiction in the matter. It was at the company's suggestion and offer to pay Rs. 50,000 per month to clear the past arrears that he made the order on these terms. Under sub-s. (6), the company judge can make an order 'on such terms as the court thinks fit'. In order to soften the rigour of his order the company judge passed the stay order on terms. But the STO never consented to it. He is not, thereforee, precluded from appealing from the order of stay passed by the company judge.

9. The single question in the appeal is : Has the company judge power to stay penalty proceedings under s. 55 of the Sales Tax Act In our opinion, he has none. Section 391(6) says :

'The court may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceeding against the company on such terms as the court thinks fit, until the application is finally disposed of.'

10. It is this word 'proceeding' which has to be interpreted. Will this expression comprehend 'sales tax proceedings' A company which has run into difficulties can propose a scheme of arrangement to the creditors under s. 391 of the Act. Section 391 is applicable both to a going company and a company in winding up. But it must be 'a company liable to be wound up' under the Act. A scheme cannot be said to be an alternative mode of liquidation but only an alternative to liquidation. After an application under s. 391 proposing a scheme of arrangement to the creditors has been made, the court has power to stay any suit or proceeding against the company on such terms as the court thinks fit, until the application is finally disposed of. The object of conferring this power on the court is that no creditor or claimant must touch the assets of the company or take proceedings by way of suit, execution, attachment or other proceedings pending the disposal of the application under s. 391. This protection is indispensable to prevent a scramble for assets An even-handed justice requires that court should have power to interfere for the protection of the assets.

11. The object is to put all unsecured creditors upon an equality and to pay them pari passu. To achieve this end it is necessary that proceedings against the company by way of suit, execution, attachment or other process is stopped till the application under s. 391 is disposed of. The court must stay the creditors and the claimants from taking proceedings against the company. This will have a two-fold object. Firstly, the right of the creditors will be protected. Secondly, the assets of the company will not be dissipated. But that does not mean that the company judge has an unfettered power to stay all kinds of proceedings. Now proceedings are of various kinds. There can be an infinite diversity of proceedings. What kind of proceedings is contemplated by the section What is the type of proceeding which the legislature intended to be stayed by the company judge This is the question we have to decide. This is a question of interpretation of the statute. The words used in the section are 'suit' or 'proceeding'. The word 'proceeding' has to be interpreted. Words mean nothing by themselves. We have to discover the intention of the Legislature.

12. The 'plain and unambiguous meaning of words' by which the courts so often believe themselves to be governed is really a delusion, since no words are so plain and unambiguous that they do not need interpretation in relation to a context of language or circumstances. Without this process 'intention' is always undiscoverable. Words are vehicles of meaning. But what is that meaning which the legislature wants to convey Much of our case law certainly suggests that the letter killed more often than the spirit given life. The very conception of interpretation connotes that the words have to be construed in the context in which they are used. Words derive colour from their context.

''Words', writes Professor H. A. Smith, 'are only one form of conduct, and the intention which they convey is necessarily conditioned by the context and circumstances in which they are written of spoken. No word has an absolute meaning, for no word can be defined in vacuo or without reference to some context .... The practical work of the courts is very largely a matter of ascertaining the meaning of words, and their function, thereforee, becomes the study of contexts. Since the number and variety of contexts is only limited by the possibilities of human experience, it follows that no rules of interpretation can be regarded as absolute'.'

(Quoted in C. K. Allen - Law in the Making, 6th edition, page 492)

13. Does sub-s. (6) give power to the company judge to stay penalty proceedings under the Sales Tax Act The learned company judge thought that he had power. With utmost respect we think that he was in error. He has no power to stay proceedings under the Sales Tax Act for the imposition of penalty. It will be surprising if this power can be exercised to defeat the provisions of the Delhi Sales Tax Act, 1975. The company judge cannot stay the operation of a legal enactment such as the Sales Tax Act or the Income-tax Act. He cannot arrest the proceedings started by the STO which he is duty bound to take under the Act of the legislature. The order of the company judge is an injunction to the STO : 'You shall not levy penalty under the Sales Tax Act until the scheme is considered by the creditors.' But under the provisions of the Sales Tax Act the STO is bound to do his duty. The Legislature never intended that he should be restrained by the court from doing his duty laid upon him by the statute. That this is so is clear from s. 67 of the Sales Tax Act which confers exclusive jurisdiction on the sales tax authorities. No suit can be brought in any civil court to set aside or modify any assessment made or any order passed under the Sales Tax Act. thereforee, the order of imposition of penalty cannot be challenged in a civil court. The Sales Tax Act is a complete code. With respect to assessment, levy of penalty, charging of interest, exclusive jurisdiction vests in the hierarchy of authorities under the Sales Tax Act. The company court cannot perform the functions of the STO. Nor can the winding-up court, under s. 446 transfer the assessment proceedings to itself and assess the company to sales tax or for that matter levy penalty. The Legislature never intended that the company court invested with the power to stay suits or proceedings should order the STO to stay his hands and not levy penalty where in his opinion, under law, the circumstances of the case require him to do so.

14. After the amount of tax and penalty has been determined, the Collector must apply for leave to the winding up court under s. 446 of the Act before putting the machinery for the collection of tax as arrears of land revenue into motion on receipt of the certificate from the STO under s. 25(7) of the Sales Tax Act. He cannot seize the assets of the company straightaway without obtaining the leave of the company judge. The winding up court will have full power to scrutinise the claim of the Revenue after proceedings by the sales tax authorities have been concluded and the amount due from the dealer ascertained. The reason is that sales tax being a debt shall rank pari passu with the other debts of the company, the claim for priority in certain cases being a separate matter. We shall now refer to the rulings in support of our conclusion.

15. In S. V. Kondaskar v. V. M. Deshpande, ITO : [1972]83ITR685(SC) the Supreme Court held that the ITO was not required to obtain leave of the liquidation court under s. 446 of the Act in respect of proceedings for assessment or reassessment of income escaping assessment. The word 'legal proceeding' used in sub-s. (2) of s. 446 was held not to include income-tax proceedings of assessment and reassessment. In our opinion, the principle laid down in that decision fully applies to the present case. This ruling was cited before the learned company judge. He distinguished it on the ground that the scope of s. 446 is different from that of s. 391. We do not agree with this distinction. In our opinion, the word 'proceeding' must be interpreted in the same sense under both sections in so far as proceedings under the two enactments - the I.T. Act and the Sales Tax Act - are concerned.

16. In Damji Valji Shah v. LIC of India : [1965]3SCR665 , it was held that the company court under s. 446(2) has no jurisdiction to entertain and adjudicate upon any matter which the Tribunal under s. 41 of the Life Insurance Corporation Act, 1956, has exclusive jurisdiction to decide and to determine. It was further held that the Act of 1956 will override the provisions of the general Act, namely, the Companies Act, which is an Act relating to companies in general. Following that decision we hold that the STO has exclusive jurisdiction over the sales tax proceedings. Furthermore, the Sales Tax Act will override the provisions of the Companies Act. It is subject to this that the recovery proceedings can be stayed by the company judge, as we have already said.

17. The Federal Court in Governor-General in Council v. Shiromani Sugar Mills Ltd. [1946] 16 Comp Case 71; 14 ITR 248 , held that the leave of the company court will be necessary if the machinery for the collection of the arrears of income-tax is put into motion. This clearly shows that till the proceedings of assessment, imposition of penalty, charging of interest, are completed and the amount determined and quantified, the company court has no jurisdiction to stay the proceedings before the STO.

18. When the Sales Tax Officer starts recovering arrears of sales tax with the help of the Collector as arrears of land revenue and sets the machinery of law into motion the company court will certainly have power to restrain him from doing so if he has not obtained leave beforehand. In LIC of India v. Asia Udyog Private Ltd, Appeal No. 308 of 1979, decided on 16-4-81 [1984] 55 Comp Cas 187, a Full Bench of this court (R. Sachar, Ranganathan & Leila Seth JJ.) to which one of us was a party, held, on a review of the above decision, that assessment proceedings are outside the purview of s. 446. But proceedings for recovery of tax would fall within that section. The Full Bench said at p. 202 :

'It is for this reason that such like proceedings for example, income tax, sales tax, excise, etc., may in the first instance have to be decided by the authorities under the special Acts. As the said matters cannot be determined in the first instance by the winding up court it is self-evident that there is no need to obtain prior leave to proceed before the said authorities. However, when the time comes for realisation of dues from the company in liquidation the court dealing with the winding-up comes into the picture and prior leave will have to be obtained for starting proceedings for recovery.'

19. That was a case where the LIC started eviction proceedings under the Public Premises Act against Asia Udyog, a company in liquidation. This was clearly a case where the creditor was trying to get at the assets of the company. The premises are valuable assets of the company. The principle is that if the estate of company or the effects of company are sought to be taken away in execution or attachment or distress or by any other process, the company judge can stop those proceedings. The Full Bench held that the leave of the company court was essential before the LIC could launch proceedings for the dispossession of the company the premises.

20. The same here. The recovery proceedings can be stayed by the company judge. But not the penalty proceedings. It would be starting to hold that the powers of the company judge are much wider under s. 391 than when acting as a winding up court under s. 446(2). In so far as income-tax and sales tax are concerned the powers are the same. He has no jurisdiction over them. Exclusive jurisdiction vests in the authorities created by the I.T. Act and the Sales Tax Act. The jurisdiction of the company court is ousted except when recovery proceedings are started and those authorities lay their hands upon the estate of the company.

21. In Union of India v. India Fisheries P. Ltd. : [1965]57ITR331(SC) , the ITO exercised his power of set off under s. 49E of the Indian I.T. Act. The Supreme Court held that applies when insolvency rules do not apply. The Department cannot, by exercising the right under s. 49E, get priority over other unsecured creditors. It was held that the special provisions of winding up in the Act would override the general provisions in the Indian I.T. Act. This case extends the principle of Shiromani Sugar Mills [1946] 16 Comp Case 71; 14 ITR 248 . This case illustrates that whenever any action, recovery or substantive provisions of law, cuts at the root of the principle of equality of unsecured creditors, the company judge can stay the proceedings. We can illustrate this point with reference to the Sales Tax Act. If the security furnished by the dealer company under the proviso to s. 25(7) of the Sales Tax Act, is sought to be realised by the Sales Tax Commissioner, we have no doubt that the company judge will have jurisdiction to restrain him from doing so. The company judge cannot allow the Commissioner to realise the amount of tax or penalty remaining unpaid by ordering forfeiture of the security because that would affect the estate or effects of the company to the prejudice of the general body of unsecured creditors.

22. There is a very good reason to hold that under s. 391 the company judge has no power to stay assessment proceedings for the imposition of penalty under the Sales Tax Act. The proviso to s. 391(2) says :

'No order sanctioning any compromise or arrangement shall be made by the court unless the court is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like.'

23. This means that if sanction of the court is to be obtained all material facts relating to the company must be disclosed on affidavit.' The latest financial position' of the company has to be stated. The 'latest auditor's report' on the accounts of the company will have to be laid before the company judge. How can this be done if the company judge by his own order prevents the STO from imposing the penalty How can the company judge approve the scheme unless he has before him 'latest financial position' That is possible only if the STO is allowed to go on with the proceedings under the Sales Tax Act. If under law he finds that penalty has to be imposed, the company judge cannot say to him 'Do not levy penalty because the scheme of arrangement will be completely frustrated'. This is the argument which appealed to the learned company judge. It does not appeal to us. This will be giving a false picture to the creditors of the 'latest financial position' of the company. Nor does s. 391 say that you give rosy picture of the financial position of the company to the creditors because the company has put forward a scheme of arrangement before the creditors. A complete, true and accurate picture has to be put forth. This is what is meant by the expression 'latest financial position' of the company. There can be no true and accurate picture of the liabilities of the company unless penalty proceedings are allowed to be concluded. Unless these proceedings are concluded neither the company judge nor the creditors will have any idea of the tax liabilities of the company. In any scheme of arrangement there must be provision for the payment of liabilities of sales tax. Liability to sales tax is also one of the liabilities which the court is expected to provide for in the scheme which it is asked to sanction. This liability will also include the liability to pay penalty, if penalty is to be imposed. We see no distinction between the assessment proceedings and penalty proceedings in so far as the liabilities of the company are concerned.

24. In our opinion, it will be an undue extension of the term 'proceeding' to say that it gives power to the judge to restrain the STO from imposing the penalty under the Sales Tax Act. In the ultimate analysis, the judge by his own act will be preventing himself from having before him the latest financial position of the company for the purposes of sanctioning the scheme. The order in question will have the effect of hiding from the creditors the true picture of the company.

25. Mr. Khanna laid a good deal of stress on a comparison of the provisions of s. 391(6) with (those of) s. 446(1) and (2) of the Act. It was said that the word 'proceeding' is not the same as 'legal proceeding'. Words have no absolute meaning. They derive colour from those which surround them. It is true that meanings generally overlap. Few words have exact synonyms. The overtones are almost always different (Brutus v. Cozens [1972] 3 WLR 521 per Lord Reid). Words are the greatest tricksters. They play pranks with the human mind. We must discover the intention of the Legislature. So we must not strict constructionists. We have to be intention seekers. It appears plain to us that it was never the intention of the Legislature to give the company court the power to stay the penalty proceedings before the STO.

26. This is the only point which Mr. Chawla took up in his appeal against impugned order. He said that he was aggrieved by that part of the order which stayed the imposition of penalty by the STO. He has not challenged the rest of the order before us.

27. For these reasons the appeal is allowed. The penalty proceedings are allowed to go on before the Sales Tax Officer. The order of stay passed against him with regard to the levy of penalty is hereby discharged. The rest of the order we do not upset. The parties are left to bear their own costs.

28. Appeal allowed.


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