Pr. Director General of Income Tax (Admn & TPS) Vs Indian Plywood MFG Co Pvt Ltd & Anr (Delhi High Court)
Delhi High Court held that no additional concession could be included in BIFR [Board for Industrial and Financial Reconstruction] by the Income Tax Department without any extension or modification of the Scheme.
Facts- The Principal Director General of Income Tax [DGIT] has filed the present petition impugning an order passed by the Board for Industrial and Financial Reconstruction [BIFR] relating to respondent no.1 – M/s The Indian Plywood Mfg. Co. Pvt. Ltd.
BIFR had directed the Income Tax Authorities to comply with its earlier order dated 26.02.2013 within a period of 45 days.
The DGIT assailed the impugned order, essentially, on two fronts. First, that further concessions, as contemplated in the order, could not be granted as the Scheme had come to an end. According to the DGIT no further concessions could be considered or granted without extending the term of the Scheme. Second, that in terms of the order, the Scheme was modified to require the Income Tax Department to consider the grant of further concessions as specified in the said order and there is no requirement to necessarily grant the same.
the DGIT has filed the present petition praying that the directions to comply with the order dated 26.02.2013 – which is construed by the Company as a direction to grant further concessions – be set aside.
Conclusion- In view of the above, there is merit in the contention that the Scheme sanctioned by the BIFR had expired. The Scheme contemplated measures for exceeding the net worth within the period specified in the Scheme and in the manner as stipulated therein viz by settlement with banks and workmen, repayment of statutory dues in instalments over a specified period of time, and infusion of funds by the promoters and sale of certain assets, and other measures.
The measures mentioned in the Scheme were timebound measures and were required to be implemented within the given time frame stipulated, therein. In view of the above, there is merit in the DGIT’s contention that without extension or modification of the Scheme, no additional concessions could be included in the Scheme.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. The Principal Director General of Income Tax (Admn. & TPS) [hereafter ‘DGIT’] has filed the present petition impugning an order dated 01.07.2016 (hereafter ‘impugned order’) passed by the Board for Industrial and Financial Reconstruction (hereafter ‘BIFR’) in Case No.53/1995 relating to respondent no.1 – M/s The Indian Plywood Mfg. Co. Pvt. Ltd. (hereafter ‘the Company’).
2. In terms of the impugned order, the BIFR had directed the Income Tax Authorities to comply with its earlier order dated 26.02.2013 within a period of 45 days.
3. The aforesaid order dated 26.02.2013 passed by the BIFR modified the Rehabilitation Scheme (hereafter ‘the Scheme’), which was approved by the BIFR under Section 18(5) of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereafter ‘SICA’) by an order dated 13.02.2001. The Scheme was amended to the limited extent of including additional exemptions from payment of income tax under the Income Tax Act, 1961 (hereafter ‘IT Act’).
The controversy
4. The DGIT assails the impugned order, essentially, on two fronts. First, that further concessions, as contemplated in the order dated 26.02.2013, could not be granted as the Scheme had come to an end. According to the DGIT no further concessions could be considered or granted without extending the term of the Scheme. Second, that in terms of the order dated 26.02.2013, the Scheme was modified to require the Income Tax Department to consider the grant of further concessions as specified in the said order and there is no requirement to necessarily grant the same.
5. The DGIT preferred an appeal1 against the impugned order before the Appellate Authority for Industrial and Financial Reconstruction (hereafter ‘AAIFR’) under Section 25 of SICA. However, in terms of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (hereafter ‘the Repeal Act’), which came into force with effect from 01.12.2016, SICA stood repealed and the DGIT’s appeal before the AAIFR stood abated. Thus, the DGIT has filed the present petition praying that the directions to comply with the order dated 26.02.2013 – which is construed by the Company as a direction to grant further concessions – be set aside.
6. Mehta, learned counsel appearing for the Company contested the present petition on several grounds. First, he submitted that the present petition is not maintainable. According to him, since the remedy of an appeal against any revival scheme or an order of the BIFR, under Section 25 of SICA, is no longer available as a result of the legislative repeal of SICA; a challenge to the orders passed by BIFR would not be maintainable in any other forum as well.
7. Second, he submitted that in terms of the Insolvency and Bankruptcy (Removal of Difficulties) Order, 20172, the DGIT’s remedy would be an appeal before the National Company Law Appellate Tribunal (hereafter ‘NCLAT’) and it is not open for the DGIT to file a petition under Articles 226 and 227 of the Constitution of India. He also submitted that in terms of Section 5 of the Repeal Act, the repeal of SICA does not affect a rehabilitation scheme sanctioned by the BIFR. He referred to Ashapura Minechem Ltd. v. Union of India & Ors3 in support of his contention that appeal against the order of BIFR would lie to NCLAT
8. Third, he submitted that in terms of SICA, the BIFR would continue to have jurisdiction over a sick company, notwithstanding that its net worth has turned positive, till it is de-registered. He submitted that the order dated 26.02.2013 had the effect of modifying the Scheme which continues to be binding and the DGIT’s understanding that the term of the Scheme had come to an end is erroneous. He also contended that the Scheme merely includes projections for seven years, however, that does not imply that the Scheme has ceased to be operative after the expiry of the said period of seven years. The BIFR continued to monitor the implementation of the Scheme; thus, the order dated 26.02.2013 modifying the Scheme is binding on the parties. He referred to the decision in the case of Ghanshyam Sarda v. Shiv Shankar Trading Company & Ors4. in support of his contention.
Factual context
9. Briefly stated the relevant facts necessary to address the aforesaid controversy are as under:
10. The Company filed a reference before the BIFR under Section 15(1) of SICA, which was registered as Case No.53/1995. By an order dated 05.10.1995, the BIFR declared the Company as a Sick Industrial Company within the meaning of Section 3(1)(o) of SICA and appointed Central Bank of India as the operating agency to prepare a rehabilitation package for the Company.
11. The Draft Rehabilitation Scheme was prepared in January 1996, and was circulated. However, the promoters of the Company expressed their difficulty to contribute ₹8 crores, which was envisaged as their contribution in the Draft Rehabilitation Scheme. The Draft Rehabilitation Scheme was subsequently revised and discussed at various hearings.
12. In the meantime, the Company made a proposal for settlement of dues to two of its financial creditors, Central Bank of India and Union Bank of India, which was approved. The revised Draft Rehabilitation Scheme was circulated contemplating one time settlement of dues with various financial creditors. The said Draft Rehabilitation Scheme was approved by an order dated 25.01.2001 (the Scheme).
13. The Scheme, inter alia, provided that (i) the dues of Central Bank of India, Union Bank of India, Sakura Bank Limited and the Bank of Nova Scotia would be settled by payment of a sum of ₹511.78/- lacs; (ii) the Company would downsize its manufacturing operations by closing its unviable units at Dandeli and Dharwad; (iii) the dues of the workmen at Dharwad would be settled at an agreed value of ₹125 lacs; (iv) the Company would endeavour to arrive at a similar settlement with the workmen at Dandeli; (v) the manufacturing operations at the units located at Hungarcutta, Nettana and Mumbai would be revived; (vi) the arrears of payment to various statutory dues aggregating ₹194.20 lacs (as on 31.03.2000), would be partly paid within a period of three months and the balance would be converted to long term debt to be repaid in 16 quarterly instalments along with interest at the rate of 12% per annum;(vii) the dues payable to excise dues aggregating ₹149.86 lacs would be paid in 12 quarterly installments along with interest at the rate of 20% per annum; (viii) arears of wages and salaries amounting to ₹76 lacs would be carried forward for a period of two years; (ix) the outstanding dues of SBICI, an unsecured creditor, would be settled at ₹45.32 lacs; (x) other unsecured and presenting creditors would be repaid aggregating to an amount of ₹605.37 lacs, which would be settled in 24 quarterly instalments carrying along with it, interest at varying rates ranging from Nil to 14% per annum; and (xi) the Company would sell the surplus machinery and land and mobilise ₹460 lacs.
14. The total dues as on 31.03.2000 were specified at ₹4464.03 lacs. The Scheme provided that the said dues would be repaid in seven years in the manner as specified in the Scheme.
15. The Scheme also provided the source of funds for repayment of the dues, which included contribution by promoters of the Company by subscription of preference shares as well as loans, sale of assets, and internal generation of funds. Article 9 of the Scheme sets out the reliefs of the concessions envisaged from various secured creditors; statutory authorities; Government of India and workmen. Clause 9.8, which sets out the reliefs and concessions to be provided by the Income Tax Department, Government of India, is reproduced below:
“9.8 The Government of India (Income Tax Department)
a) To consider to allow the company to carry forward its accumulated losses and unabsorbed depreciation beyond the period of eight years till the networth becomes positive.
b) To consider to grant exemption under Section 41(i) of the Income Tax Act, 1961, in respect of waivers agreed to by banks.
c) To consider to exempt the company from capital gains tax on the sale of Dharwad land and other surplus assets of the company.
d) To consider to exempt the company from MAT, during the period of rehabilitation, from the year 2000-01 to the year 2006-07.
e) To consider to withdraw the attachment order on the assets of the company u/s 281B of the Income Tax Act, 1961.
f) To consider to waive penalty/interest on late payment of tax deducted at source on salaries, interest and payment to contractors.
If the above reliefs are not sanctioned, the company will be required to pay capital gains tax on Rs.460 lakhs, which is the projected income from the sale of surplus assets during the year 2001-02. The company will also have to start paying Income Tax, from the fourth year of rehabilitation. As a result, the closing cash balances would become negative right from the second year of rehabilitation. Inspite of the fact that the promoters are inducting large amounts with a view to rehabilitate the company, the company will experience severe cash crunch during these years, which could affect the commercial operations and repayments. The cash balance at the end of the seventh year would be Rs.528.17 lakhs. The total tax waiver sought by the company in respect of the above reliefs envisaged from the IT Department would work out to Rs.544.52 lakhs. The details are given in Annexures 12 and 13.”
16. It is also relevant to mention that the terms and conditions as set out in the Scheme expressly provide that the Company would satisfy the monitoring agency regarding physical progress on the Scheme and that the expenditure as contemplated under the Scheme, is incurred. It is also important to note that Scheme also provided that if there was any shortfall in the Scheme, the same was required to be made by the Company and / or its promoters without seeking any further reliefs and concessions. Clause (c) of Article 11 of the Scheme is set out below:
“c) The company shall satisfy MA that the physical progress as well as expenditure incurred on the Scheme is achieved as per the original schedule. To this end, the company shall furnish to MA such information and data as may be required by it at intervals stipulated by it. Any financial shortfall arising out of the delayed implementation of the schedule or for any other reason shall be met by the company / promoters without any recourse to FI/Banks or seeking any further reliefs/concessions from them than what has already been provided for in the Scheme.”
17. Admittedly, the DGIT extended the reliefs as envisaged under the Scheme. It permitted carry forward of the losses to the extent of ₹710 lacs for an adjustment against the income of the Company, notwithstanding that, carry forward of such losses was beyond the period as stipulated under the IT Act.
18. Apparently, some of the assets sold by the Company were not a part of the Scheme and no permission of the BIFR was sought for making such sales. Taking note of the same, the BIFR by its order dated 06.04.2010 declared the sale of the assets as null and void. The BIFR also set aside the Scheme and revoked all reliefs and concessions.
19. Being aggrieved by the order dated 06.04.2010 passed by the BIFR, the Company had preferred an appeal5 before the AAIFR. The Company was successful and by an order dated 30.12.2011, the AAIFR upheld the sale of the assets and set aside the BIFR’s order dated 06.04.2010. The AAIFR observed that there was no specific order passed by the BIFR under Section 22A of SICA restraining sale of assets other than those assets, which were contemplated to be sold under the Scheme. Thus, the sale of assets could not be declared as null and void. However, the AAIFR also held that a company ought to have sought modification of the Scheme under Section 18(5) of SICA and that the proceeds of the sale of assets were required to be utilised for rehabilitation of the Company. The AAIFR also directed the BIFR to consider the Company’s application6 seeking modification of the Scheme by way of additional reliefs and concessions from the Income Tax Department.
20. Additionally, the AAIFR directed the BIFR to consider how the sale proceeds of assets could be used while considering the MDRF (Modified Draft Rehabilitation Scheme).
21. In compliance with the orders passed by the AAIFR, the BIFR considered the Company’s application4 for modification of the Scheme on merits. The Company, inter alia, sought an additional relief from the Income Tax Department in respect of the sale of shares, which were gifted by the promoters of the Company as a part of their promoters’ contribution. The sale of the shares so gifted had resulted in capital gains, which were chargeable to income tax.
22. The said request was opposed by the Income Tax Department. It was the Income Tax Department’s unequivocal stand that it had granted all reliefs and concessions as envisaged in the Scheme. In this context, it was the Company’s stand that the additional modification of the Scheme did not prejudice the income tax authorities as the question whether additional reliefs would be granted was at the discretion of the income tax authorities.
23. The BIFR allowed the Company’s application and modified the Scheme in terms of Section 18(5) of SICA. A tabular statement indicating Clause 9.8 as included in the Scheme and the modified Clause as set out in the BIFR’s order dated 26.02.2013 is set out below:
