SALES TAX OFFICER v. BYFORD LIMITED — 1982 DIGILAW 140 (DEL)

AVADH BEHARI ROHATGI J. (Oral) ( 1 ) ON an application under section 391 (6) of the Companies Act 1956 (the Act) by the company, the court stayed proceedings against the company before the sales tax officer. The sales tax officer contests the validity of this order of the company judge. The question is whether the judge can restrain proceedings against the company before the sales tax officer. ( 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 section 391 of the Act in 1980 suggesting a scheme of arrangement for payment of debts to its creditors. On January 27, 1981, another application was made under section 391 (6) and section 443 of the Companies Act against the sales tax officer 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 father alleged that it apprehended that the sales tax authorities will impose heavy penalties on the company and, therefore, the court should restrain the sales tax officer and the commissioner of sales tax from imposing any penalty and from recovering any interest on its defaults. ( 4 ) THE sales tax officer opposed this application. By his order dated 5-2-1981 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 sales tax officer appeals to this court. 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 sales tax officer appeals to this court. ( 5 ) THE learned company judge has not stayed the assessment proceedings under section 23 of the Delhi Sales Tax Act, 1975 as there was no prayer of the company before him to that effect. But he has stayed the penalty proceedings. The levy of penalty is provided in sections 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 sales tax officer 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 sales tax officer was estopped from bringing the appeal because he had agreed to receive his dues by instalment of Rs. 50,0001- per month. This, counsel said, amounts to election. He referred us to Nagubai Ammal vs. B. Shama Rao and Ors. 1956 S. C. R. 451 (1) in this connection. We have no hesitation in rejecting this preliminary objection. It is not true to say that the sales tax officer 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. 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. 50,0001- per month to clear the past arrears that he made the order on those terms. Under sub-section (6) the company judge can make an order "on such terms as the court things fit". In order to soften the rigour of his order the company judge passed the stay order on terms. But the sales tax officer never consented to it. He is not, therefore, 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 section 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 section 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 section 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 section 391. 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 section 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 pan 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 section 391 is disposed of. The court must stay the creditors and the claimants from taking proceedings against the company. This will have a twofold object. Firstly, the rights of the creditors will be protected. Secondly, the assetsof 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 proceeding 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. 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 killeth more often than the spirit giveth life. The very conception of interpretation cannotes that the words have to be construed in the context in which they are used. Words derive colour from their context. But what is that meaning which the legislature wants to convey. Much of our case law certainly suggests that the letter killeth more often than the spirit giveth life. The very conception of interpretation cannotes 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 or 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 word?. and their function therefore 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. " ( 13 ) DOES sub-section (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 Income Tax Act. He cannot arrest the proceedings started by the sales tax officer which he is duty bound to take under the Act of the legislature. The order of the company judge is an injunction to the sales tax officer : "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 sales tax officer 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 section 67 of the Sales Tax Act which confers exclusive jurisdiction on the the sales tax authorities. 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 section 67 of the Sales Tax Act which confers exclusive jurisdiction on the 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. Therefore, 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 sales tax officer. Nor can the winding up court under section 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 suit or proceedings should order the sales tax officer 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 section 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 sales tax officer under section 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 the 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. The reason is that the 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. Kendaskar v. V. M. Deshpande, AIR 1972 SC 878 (2) the Supreme Court held that the income tax officer was not required to obtain leave of the liquidation court under section 446 of the Act in respect of proceedings for assessment or reassessment of income escaping assessment. The word legal proceeding used in sub-section (2) of Section 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 scope of section 446 is different from that of section 391. We do not agree with this distinction. In our opinion, the word proceeding must be interpreted in the same sense under both the sections in so far as proceedings under the two enactments the Income Tax Act and the Sales Tax Act are concerned. ( 16 ) IN Damji v. L. I. C. of India AIR 1966 SC 135 (3) it was held that the company court under section 446 (2) has no jurisdiction to entertain and adjudicate upon any matter which the tribunal under section 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 theprovisions of the General Act, namely. Companies Act which is an Act relating to the companies in general. Following that decision we hold that the sales tax officer has exclusive jurisdiction over the sales tax matters and the company court has no jurisdiction to stay the sale s tax proceedings. Furthermore, the Sales Tax Act will override the provisions of the Companies Act. This 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. . Furthermore, the Sales Tax Act will override the provisions of the Companies Act. This 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. . AIR 1946 F. C. 16 (4) 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 sales tax officer. ( 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 before hand. In Life Insurance Corporation of India v. Asia Udyos Private Ltd. Co. Appeal No. 308 of 1979 decided on 16-4-81 (5) a full bench of this court (R. Sachar, Ranganathan and 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 section 446. But proceedings for recovery of tax would fall within that section. The full bench said : "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 picture and prior leave will have to be obtained for starting proceedings for recovery. " ( 19 ) THAT was a case where the Life Insurance Corporation started eviction proceedings under the Public Premises Act against Asia Udyog, a company in liquidation. " ( 19 ) THAT was a case where the Life Insurance Corporation 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 a valuable asset of the company. The principle is that if the estate or the company or the effects of the 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 is essential before the Life Insurance Corporation can launch proceedings for the dispossession of the company from the premises. ( 20 ) THE same here. The recovery proceedings can be stayed by the company judge. But not the penalty proceedings. It would be startling to hold that the powers of the company judge are much wider under section 391 than when acting as a winding up court under section 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 Income Tax 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 AIR 1966 SC 35 (6) the income tax officer exercised his power of set off under section 49 E of the Income Tax Act. The Supreme Court held that that applies when insolvency rules do not apply. The department cannot by exercising the right under section 49 E get priority over other unsecured creditors. It was held that the special provisions of winding up in the Act will override the general provisions in the Income Tax Act. This case extends the principle of Shiromani Sugar Mills (supra ). 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. This case extends the principle of Shiromani Sugar Mills (supra ). 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 section 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 effect 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 section 391 the company judge has no power to stay assessment proceedings for imposition of penalty under the Sales Tax Act. The proviso to section 391 (2) says : "no order sanctioning any compromise of arrangement shall be made by, the court unless the court is satisfied that thecompany 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 section 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 sales tax officer from imposing the penalty ? How can the company judge approve the scheme unless he has before him the latest financial position ? That is possible only if the sales tax officer is allowed to go on with the proceedings under the Sales Tax Act. How can the company judge approve the scheme unless he has before him the latest financial position ? That is possible only if the sales tax officer 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 he giving a false picture to the creditors of the latest financial position of the company. Nor does section 391 say that you give a 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 those 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 sec 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 sales tax officer 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 if hiding from the creditors the true picture of the company. ( 25 ) MR. 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 if hiding from the creditors the true picture of the company. ( 25 ) MR. Khaima laid a good deal of stress on a comparison of the provisions of section 391 (6) with 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. (Cozens v. Brutus (1972) 3 WLR 521 (7) at page 525 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 be 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 sales tax officer. ( 26 ) THIS is the only point which Mr. Chawla took up in his appeal against the impugned order. He said that he was aggrieved by that part of the order which stayed the imposition of penalty by the sales tax officer. 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.