I am submitting details of a rare action by Income tax some 45-50 years ago. Here the Officers of the department took over a running sugar mill due to default in payments. The business was run smoothly by Officers and dues were realized. They showed exceptional courage in handling the business as well as personnel of the mill. An interesting article describing the real set of events.
We all have read case laws where the Assessing Officers are directed by the Courts, not to teach the taxpayers as to how to do the business. Such a situation may arise while deciding on admissibility of business expenses for the determination of true profits and consequential tax. In a rare case, about 45-50 years back, Officers of the Department proved that given a chance, they can also handle/manage and run a business in a professional manner.
APPOINTMENT OF THE RECEIVER
The Income Tax Act 1961 contains a provision for appointment of a receiver for the management of a tax defaulter’s movable and immovable properties. Such a receiver can be appointed by TRO under section 222(1)(d) of the Income tax Act 1961. There are certain businesses or certain situations of businesses where it is better to exercise this mode of recovery. There is no time limitation for appointment of a Receiver. It is a provision, which is rarely used, except for complying with the court orders in specific cases. A Receiver may be appointed for the business (Rule-69), for immovable property (Rule-70) under the Second Schedule. Receiver may also be appointed for a part of the business (say, sale proceeds etc.)
Chapter XVII of I.T. Act 1961 deals with “Collection & recovery of taxes”. Sections 222 to 232 of the 1.T. Act 1961, Schedules II and III of the Act, and the Income Tax (Certificate Proceedings) Rules, 1962 together constitute a self- contained code prescribing the various modes for the recovery of arrears of taxes under the Income Tax Act, 1961. These provisions have also been made applicable to the recovery of arrears under the Direct taxes. Rule 4 provides that when the defaulter does not pay the amount mentioned in the certificate within the time specified under Rule 2, the TRO shall proceed to realize the same, inter alia, by appointing a receiver for the management of the defaulter’s movable and immovable properties. Rules 69 to 72 of the Second Schedule and Rules 48 to 52 of the I.T.C.P. Rules, 1962, contain relevant provisions for management through a Receiver.
As stated earlier, the specific provisions for the ‘Appointment of Receiver for Business’ are sparingly invoked. As per Rule 69(1) Tax Recovery Officer may attach the business and appoint a person as receiver to manage the business. Rule 69(4) further provides that TRO may attach the business of the defaulter, and appoint a person as receiver to manage the same. Unlike the Code of Civil Procedure, the Receiver under this Act is not an officer of the Court. He is merely a person appointed by the TRO to manage the business of the defaulter.
Powers of the Receiver has been discussed in Rule 71 as shown below: –
(1) “Where any business or other property is attached and taken under management under the foregoing rules, the receiver shall, subject to the control of the Tax Recovery Officer, have such powers as may be necessary for the proper management of the property and the realization of the profits or rents and profits, thereof.
(2) The profits, or rents and profits, of such business or other property shall, after defraying the expenses of management be adjusted towards discharge of the arrears, and the balance if any, shall be paid to the defaulter.”
Under Rule 72, the attachment and management under the foregoing rules may be withdrawn at any time at the discretion of the Tax Recovery Officer, or if the arrears are discharged by receipt of such profits and rents as are otherwise paid.
Let us come to the interesting part of the story. Shri J.G Pendse was the assessing officer of M/s Changdeo Sugar Mills Ltd, Mumbai. During the year 1973-74, the AO was entrusted with the challenging job of collection of tax arrears amounting to about Rs. Fifty lakhs from this company, raised few years ago. This assessee company had their head office in Bombay and factory in Changdeo Nagar in Ahmednagar district, about eighty kilometers from Shirdi.
It would not be out of place to mention that Changdev Maharaj was a mystical yogi turned saint who is believed to have lived in the village of Vateshwar along the banks of the Tapti River for 1,400 years. As per popular belief, Changdev Maharaj achieved ‘Bhuta Siddhi’ based on his yogic powers and used these powers to perform various supernatural acts. Changdev Maharaj himself is believed to have godly status, his current following is mostly amongst the Varkari sect due to his association with Dnyaneshwar and Muktabai. Ahmednagar is also the land of the great warrior queen, Chand Bibi, who defended it from the aggression of Emperor Akbar in 1595 AD.
Shree Changdeo Sugar Mills was started in 1941 at Puntamba with initial capital of Rs. 225 lakhs. Till Independence, there were six sugar factories in Ahrnednagar district, all in the private sector. Changdeo Sugar Factory at Puntamba was erected in 1940. It started its first crushing in 1941. The crushing capacity was 350 tonnes in the beginning. It increased to 500 tonnes by 1948-49 and by 1955-56 it increased to 800 tonnes and kept on expanding. Later-on, sugar sector was reserved for the cooperative sector only.
Despite huge tax demands pending against the assessee company, raised some years ago, the assessee company did not respond to the various departmental notices. Shree J G Pendse, the Assessing Officer, referred the matter to Tax Recovery Officer. Shri R. B. Gade, TRO explored the options available for recovery, including the power to appoint the receiver for the defaulting company. The matter was discussed with the higher authorities, the Assistant Commissioner Shree R. Venkatraman and Commissioner Shree O.V. Kuruvilla (who later became the Chairman of CBDT, 1979-81).
A plan was chalked out secretly and Sh B.V. Mundkur, Commissioner, Bangalore, who was about to retire was selected as receiver with the approval of the Board. With great effort, I could locate that his name was mentioned in a book titled- CHITRAPUR SARASWAT RETROSPECT-A HISTORICAL AND SOCIOLOGICAL STUDY by K. GURU DUTT, published by the B. B. D. Power Press Cottonpet, Bangalore in 1955. It mentions that:-
“Among those holding other appointments connected with the Central Government, may be mentioned Mr. Bhasker V. Mundkur, Under Secretary to the Central Board of Revenue (Income Tax)”.
Shri Bhasker V Mundkur was appointed as Income tax Inspector in December 1943 in a batch of about 27 persons. He was promoted as Income Tax Officer, Class II in 1946. He was promoted to Income Tax Officer Class I in November 1950. In August 1957, was promoted as Assistant Commissioner of Income Tax.
From the Archives, I could locate The Gazette of India, New Delhi, in which Order vide S.R.O. 1876 dated 29/05/1957 was signed by him in the capacity of Under Secretary to the Government of India, published on June 8, 1957. Another Gazette notification vide, S.R.O. 1952, June 15, 1957, regarding the clarification of jurisdiction was also signed by Shri B V Mundkur, under same capacity.
In May 1970, he was promoted to the Additional Commissioner of Income Tax and in 1972 promoted as Commissioner of Income tax. He worked in various charges in Banglore and Mysore.
A team consisting of Shree M.S. Thanvi, Assistant Director of Investigation along with his staff was kept ready to assist him in the case of any contingency. At this stage, TRO took over the business of the factory, and Shree B V Mundkur started his work as an Officer appointed by TRO.
However, this move led to a panic in the business world, creditors of the company, as well workers of the factory. Speculation was ripe that the Government was planning to take over all companies through this route, where tax demands were outstanding. Two separate questions were raised in Lok Sabha on such issue, as shown below:-
LOK SABHA DEBATES (FIFTH SERIES) Vol XXXV, 1 March 1974 (Tenth session), Loksabha Secretariat
Changdeo Sugar Mills Ltd., Bombay 1412. SHRI GAJADHAR MAJHI:
Will the Minister of FINANCE be pleased to state:
(a) whether any receiver appointed by the Income Tax Department has taken over the business and management of Changdeo Sugar Mills Limited (Bombay); and
(b) if so, the salient features thereof and how long tax arrears were pending against the Firm ?
THE MINISTER OF STATE IN THE MINISTRY OF FINANCE (SHRI K. R. GANESH):
(a) Shri B. V. Mundkur, retired Commissioner of Income-tax, who has been appointed as Receiver, has taken over the business and management of Shri Changdeo Sugar Mills Limited (Bombay), as from 16th January, 1974; and
(b) The Tax Recovery Officer had served notices on the company under Rule 2 of the Second Schedule for payment of arrears of tax of over a crore of rupees (exclusive of interest under section 220). Despite the service of these notices, the company sold shares of M/s. Great Eastern Shipping Co. Ltd. The company also diverted some funds to its sister concerns. Its accounts were also not properly maintained. There was no unity among the directors of the company in the management of its affairs. In view of company’s record of non-payment of taxes and alienation of assets by it after the service of the notices referred to above by the Tax Recovery Officer etc., the Income-tax Department appointed the Receiver under Rule 69 of tbe Second Schedule to Income-tax Act, 1961. The Receiver is now managing the affairs of the company and taking steps to recover the funds which had been diverted to sister concerns.
The arrears of demand against the company relate to a number of assessment years commencing from assessment year 1964-65. The demands for these years were created at different times. The earliest demand for the assessment year 1964-65 was created on 16th February, 1971.
LOK SABHA DEBATES (FIFTH SERIES) Vol XXXVIII, (April 5 to 19) 1974 (Tenth session), Loksabha Secretariat
Changdeo Sugar Mills 5734. SHRI S. A. MURUGANATHAM:
Will the Minister of FINANCE be pleased to state:
(a) the present performance of Shri Changdeo Sugar Mills Ltd. Bombay whose management had been taken over by’ the Income-tax Department; and
(b) whether Government propose to take over the management of other concerns which default in payment of taxes?
THE MINISTER OF FINANCE (SHRl YESHWANTRAO CHAVAN):
(a) Prior to the take-over of the management of tho business of ‘Shri Changdeo Sugar Mills Ltd. by the- Receiver appointed by the Income-tax Department, Morarka Group who had secured the management of the company in May. 1964, were dissipating the funds of the company and were diverting them to sister concerns without caring to collect even interest accruing thereon even though the company had to discharge ‘heavy undisputed tax liabilities of over one crore of rupees. Secondly, Morarkas had alienated the goodwill of sugar-cane growers and transport operators by making, irregular payments. The management was incurring heavy and avoidable expenses under various heads which were also not incidental to company’s business. Accounts were not maintained properly and profit and loss account and balance-sheet were not drawn up for the last three years. Tax arrears were also mounting because of lack of effort on the part of the management, commensurate with the task of liquidation of arrears.
The Receiver appointed by the Income Tax Department took over the management of the business of the company from 16-1-74. Since the date of his take-over, he has completely stopped diversion of funds. Company’s legal advisors arc actively working in consultation with the Chartered Accountants on the action to be taken for recovery of loans and funds diverted to sister concerns. The Receiver has stopped all transactions on the stock exchange indulged in by the previous management in the name of the company. He has settled all disputes between the company on the one hand arid the sugarcane growers and transport operators on the other hand and payments are now being made to them regularly with the result that they have started extending full co-operation to the company. Proper planning has been made to ensure requisite supply of fuel (furnace oil), sugar-cane, and services of transport contractors and. harvesting and carting labour, etc.
The Receiver has effected economies in expenses under various heads. He has withdrawn all vexatious and fruitless litigation in various courts; reduced transport, petrol and insurance expenses by refusing to defray expenses in respect of cars not owned by the company and reduced expenditure on rent in respect of bungalow utilised by the previous management for purposes other than the company’s business. He has effected recovery and adjustment of sugar-cane advances, thereby resulting in reduction of expense on sugarcane purchases.
Backlog of accounting work for the last three years has been swiftly reduced and accounts have been brought more or less up-to-date. Audit by the Chartered Accountants for the previous years is nearing completion. Accounts are now being maintained systematically and regularly and accounting procedures have been streamlined. Steps have been taken to exercise control over stock inventories and disposal of unserviceable spare parts.
The Receiver has also paid Rs. 5 lakhs towards Income-tax arrears.
Affairs of the company have shown marked improvement after the appointment of the Receiver which is evident from the fact that whereas other sugar factories have nearly stopped work for the season 1973-74, production is still continuing in the company’s factory at Puntamba. Full benefit of all the measures taken by the Receiver will be reaped during the next crushing season.
(b) There is no such proposal at present before the Government in any other case but if the circumstances of any case warrant, necessary action to appoint a Receiver will be taken.
The issue of appointment of directors’ u/s 408(1) of the Companies Act 1956, by UOI was also raised before Hon’ Bombay High Court in Union of India v/s Changdeo Sugar Mills Ltd. Company Petition Appeal No. 764 of 1981. It was decided on, 09 March 1982 in the favour of Union of India. Department had to convince the bank to allow the receiver to perform day to day business work in his name.
Shree B V Mundkur managed the mill for three years and not only recovered the amount of the tax but with his sound administrative qualities, brought back the company to profit. The workers also cooperated due to his friendly approach. It is said that the company management was so impressed that they requested Shree Bhasker V Mundkur to continue as the Managing Director for few more years and he obliged.
Shree Mundkur upheld the flag of the Department with his exemplary work. He justified the words of author George Crane, who said- “There is no future in any job. The future lies in the man who holds the job”.
[NOTE- The views expressed by the author are his personal views and should not be taken as the official view].
Author: Chandra Prakash Bhatia, IRS | Additional Commissioner of Income Tax, Kolkata.