DEPUTY COMMERCIAL TAX OFFICER AND ORS. v. CORROMANDAL PHARMACEUTICALS AND ORS.

The Judgments of the Court were delivered by

PARIPOORNAN, J. Special leave granted. B

2Copy pinpoint2. Respondents 1 to 4 in writ petition No. 21973 of 1995 before the High Court of An<lhra Pradesh, representing the Commercial Tax Depart- ment, Andhra Pradesh, arc the appellants in this appeal. The petitioner and respondents 5 and 6 in the writ petition are respondents 1 to 3 in this C appeal. This appeal is filed against the judgment and order of the High Court of Andhra pradesh <lated 4.11.1995.

3Copy pinpoint3. The petitioner in the writ petition is M/s. Corromandal Phar- maceuticals Ltd. The said company manufactures and markets bulk drugs and formulations. It was declared as a sick industrial company under the D Sick Industrial Companies (Special Provisions ) Act, 1985 (hereinafter referred to as 'the Act' (Act No. 1 of 1986) by the Board Industrial and Financial Reconstruction (shortly called 'BIFR'). The Industrial Reconstruction Bank of India (shortly called '!RBI') has been appointed as the operating agency. The BIFR sanctioned a scheme for the rchabilita- L tion of the petitioner in case No. 160 of 1988 in exercise of its powers under Section 18 (4) read with Section 19 (3) of the Act after obtaining the consent of the concerned financial institutions, on 19.11.1990. The said sanctioned scheme was brought into force with immediate effect. It was modified later on 29.12.1993. Shortly stated, the said sanctioned scheme for F rehabilitation of the company is under impelcmcntation.

4Copy pinpoint4. The petitioner-company is an assessee to sales tax under the Andhra Pradesh General Sales Tax Act, 1957. It was assessed for the assessment years 1992-93 by order dated 3.1.1994 and for the years 1993-94 by order passed in 1995. The Sales Tax authorities initiated action under G · Section 17 of the Andhra Pradesh General Sales Tax Act for recovery of the said dues. It is seen that appeals were preferred from the assessment orders and the appellate authority granted a conditional order of stay to pay the tax assessed in instalments. Even then, there was default. For the aforesaid two years, the sales tax arrears due from the petitioner-company, H

1030 SUPREME COURT REPORTS (1997) 2 S.C.R. f A is stated to be Rs.9,53,833/-. It is brought to our notice that there are sales tax arrears for the years 1986-87 lo 1992-93, but those arrears are not in qu.estlon in this appeal. We are concerned only with the collection of the bala1we of tax Rs. 9,53,833/- due for the assessment years 1992-93 and 1993-94. As stated, the assessment orders for the said years were passed B on 3.1.1994 and in.1995--long after the scheme was sanctioned by the BIFR on 19.11.1990.

•. ~-·The Petitioner-company assailed the recovery proceedings for the sales tax dues beforp the High Court. It prayed for the issue of a writ of ma~i.I~mus directing the first and second respondents (Commercial Tax C Authorities) not io procec,:d with the collection of balance sales tax amount of Rs. 9,53,833/- Without the pem1issio11 of BIFR, as required under Section ' 22 of the Act (Act 110. 1/86), and for other reliefs. The plea of the petitioner was that the sanctioned scheme by BIFR for rehabilitation of the company is under implementation, and so, no proceedings for execution, distress or the like against the company, shall lie except with the co11sent of the Board. Accordin~ to the Revenue, the arrears of the sales Tax in question relate to the period after the sanctioned scheme was brought under implementation and that the legal emb_argo/bar under Section 22 of the Act is inapplicable since Section 22 of the Act can apply only in respect ~f the sales taic dues included in the "sanctioned scheme". Only those dues which were included · in "the package" in the sanctioned s~heme will be governed by the said bar. The High Court considered the rival pleas in the light of the relevant statutory provisions, a few decisions of this Court and of other High Courts, and held thal there is no warrant to import the limitation as confended by the Revenue in applying section 22 of the Act and tlzat no coercive steps for the purpose of recovery of tax dues including action under Se~tion 17 of the Andhra Pradesh General Sales Tax Act can be taken by the Revenue without obtaining the consent ,of BIFR. The writ petition filed by the first respondent herein -- the company, was "allowed. It is thereafter, the Revenue moved this Court by way of S.L.P. No. 10474/96 and has come in appeal.

6Copy pinpoint6. We heard counsel. For the purpose of resolving the controversy raised in this case, it will be useful to q note Section 22( 1) and Section 22

H (5) of the Act as also Board of Industrial and Financial Reconstruction Regulations, 1987, regulalion Nos. 29 and 30 : -

p. 1031 Copy page pinpoint

"22. Suspension of legal proceedings, contracts, etc. -- (l) Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a C receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial ccim- pany or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board 01; as the case may be, the D Appellate Auth01ity.

(5) In computing the period of limitation for the enforcement of any right, privilege, obligation or liability, the period during which it or the remedy for the enforcement thereof remains suspended under this section shall be excluded." F Regulation Nos. 29 & 30.

"29. The Board shall publish or cause to be published short particulars concerning the draft scheme, by way of notification, in such daily newspapers and periodicals, a> it may consider neces-. G smy, inviting suggestions and objections regarding the draft scheme, within such time as may be mentioned in the notification, from the sharelwlde1~·, creditors and employees of the sick industrial com- pany, the transferee company as well as any other company con- cerned in the amalgamation. H

p. 1032 Copy page pinpoint

A 30. The Board shall consider the suggestions and objections received from the sick industrial company, the operating agency or, as the case may be, from the transferee· company and any other company concerned in the amalgamation and from any shareholder, creditor, or employee, of such industrial companies."

B (emphasis supplied)

It will be useful to understand the scheme of the Act (No. 1/1986): the Preamble to the Act states as follows:-

"An Act to make, in the public interest, special provisions with a c view to securing the timely detection of sick and potentially sick companies owning industrial undertakings, the speedy determina- tion by a Board of e-xperts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such - comp:o.:1ies and the expeditious enforcement of the measures so D determind and for matters connected therewith or incidental thereto."

Sxtion 3(b), 3(i) and 3(o) may also be read:-

3. (b) "Board means the Board for Industrial and Financial E Reconstruction established under section 4;

xxx xxx xxx

F (i) "Operating agency" means any public financial institution, State level institution, scheduled bank or any other person as may be specified by general or special order as its agency by the Board; - xxx xxx xxx

(o) "Sick industrial company" means an industrial company (being a company registered for not less than five)'ears) which has G at the end of any financial year accumulated losses equal lo or exceeding its entire net worth.

Explanation. -- For the removal of doubts, it is hereby declared than an industrial company existing immediately before the com- H mencement of the Sick Industrial Companies (Special Provisions)

. DY. COMMl!RCIAL TAX OFF!CllR v. CORROMANDAL PHARMACEUnCALS (PARIPOORNAN, J.J 1033

Amendment Act, 1993, registered for not less than five years and A having at the end of any financial year accumulated losses equal to or exceeding its entire net worth, shall be deemed to be a' sick industrial company;

xxx xxx xxx . . B Chapter III of the Act deals with '.'References, i11qttiries, a11d iche1i1e~"· Section 15 thereof authorise the Board of Directors of the Clomparty_ to make a reference to the Board (BIFR) for determination of the measures which shall be adopted With respect. to the. company. Section 16 authories the Board to make such 'inquiries 'as it may deem fit for determining C whether any industrial company has become a sick industrial company. 0 0

Where Board is satisfied tha t a company has ,be;c6me a: sick industdal company, it could give a reasonable time t9 the company to make its net worth positive [Section 17 (2) ]. Where~it is not practicablefor sick in- dustrial company to make its ~et 'fOrth positive within ·•a reasonable time, Section 17(3) steps in authorisingJhe Boar~ to direct any operating agency D . to prepare a scheme in relation to the company: The Board may speci(y ; the various measures t? ·be coqsidered by the operating' agency. These measures are _detailed out in ·Section 18. The operating agency has to . prepare a scheme as per the.:order specified by the Board. E Under Section 18 (3) of the Act a scheme prepared by the operating agency shall be examined by the Board and a copy of the scheme with modification made by the Board shall be sent to the Sick Industrial Company and the operating agency. The draft scheme shall be P,ublls~ed in brief in daily newspapers, inviting suggestion~ and objections. (Regula- tions No. 29 &30). It is open to the. Board to make ~odificafi0 mf' as it F considers necessary in the light of the suggestions and objections Tec;eived. It is thereafter the scheme is sanctioned by the Board and .it sh ail ·cofue into force . on such date as the Board may specify in-that behalf:' Sectio~ 19 of the Act provides for rehabilitation by giving financial assistance. Section 22 (1) deals With suspension 'of legal proceedings, contracts: 'etc. G It is common ground that a sanctioned scheme for the rehabilitation of the petitioner company is under implementation. The scheme was sanCtioned on 19.11.1990. It is also admitted before' us that the sales tax arrears for which proceedings were initiated by the Revenue are for the assessment years 1992-93 and 1993-94. The asse~sment orders for these H

p. 1034 Copy page pinpoint

A years were passed on 3.1.1994 and in 1995, long after the sanctioned scheme was brought into force. The main contention of the Revenue before the High Court and still in appeat before us is, that the arrears of sales tax in question for which proceedings are initiated against the petitioner company, relate to the period after the sanctioned scheme was brought under implementation and the legal bar or embargo under Section 22 of B the Act can only be in respect of the sales tax dues included in a sanctioned scheme. According to the Revenue, the Section should be reasonably construed and understood or read down in the above light. It was argued that apparently the embargo or bar envisaged by Section 22 of the Act is of wide import and covers a long period. This bar or embargo begins to c operate the moment an inquiry is ordered or pending, and continues during the course of the inquiry, when a scheme is under preparation or con- sideration, and still later when the scheme is under implementation or even when an appeal under Section 25 of the Act relating to the company is pending. It was urged that the inquiry itself will take time and the pendency - of the proceedings from the date of the inquiry till the scheme is imple- D mentcd or an appeal is disposed of, envisage going through various for- malities and will take <I Jong time. If the bar or embargo envisaged by Section 22 of the, Act is to cover the entire length of time, the situation may lead to very unreasonable or unintended state of affairs similar to the one of the present case; the suspension of proceedings specified in Section 22 of the Act should be confined to matters included, in pre-package state of affairs only, (in the sanctioned scheme) and not post-package matters like the instant one, which should be outside the pale or area of the "sanetioned scheme". Counsel submitted that when the scheme was sanctioned on 19.11.1990, there was no assessment for the sales tax for the years 1992-93 and 1993-94. The petitioner (assessee) itself could have collected sales tax for the said years only a(ter the scheme was sanctioned. The tax so collected really belongs to the State. But, the amount is not remitted to the is state. If the bar or embargo under Section 22(1) of the Act held to cover such amount collected by ·the assessee, which really belong to the State, and enables it to retain the sa~e, till the implementalion is over or the appeal under Section 25 of the Act is disposed of, it will result in a state of affairs enabling the assessee to retain the am·ounts due to the State for no reason and indefinitely; the Revenue will have to obtain consent of the Board or as the Appellate Authority .even for realising the legitimate amounts due to it and withheld by the assessee, unreasonably. There may be similar instances where the petitioner/assessee collects amounts due to the Revenue or other and is yet enabled to keep it back with itself

y DY. COMMERCIAL TAX OFFICER v. CORROMANDALPHARMACElll'ICAL~ (PARIPOORNAN, J.] 1035

unreasonaoly for a long time if the immunity under Section 22(1) of the Act A operates absolutely. According to the Revenue the bar under Section 22(1) of the Act should not lead to such an undesirable, state of affairs; and so the section should be understood or read down to act as a bar or embargo only for such of those pre-package dues reckoned or included in the scheme sanctioned. On the other hand, counsel for the first respondent (petitioner in the writ petition) company asserted that the embargo under Section 22(1) of the Act is absolute and cannot be diluted or whittled down. All that is required by Section 22 (1) of tl1e Act is that in cases where an inquiry is pending or scheme is under preparation or consideration or a sanctioned scheme. is under implementation or an appeal is pending, no proceedings, as stated in Section 22 of the Act[or execution, distress or the like, shall be proceeded with except with the consent of the Board or as the Appellate Authority. What is con- templated by Section 22 (1) of the Act is only a previous consent of the Board for the proceedings to be initiated against a sick company. It is not an absolute bar. The facts pointed out by the Revenue do not call for reading down the wide import of Section 22 (1) of the Act. D

8Copy pinpoint8. We considered the rival pleas urged before us. In Gram Panchayat and another v. S!zri Vallabh Glass Works Limited and others, (1990) 2 SCC 440, the concerned company was declared a sick industrial company and steps were taken under Sections 16 and 17 of the Act by the Board. The question was; whether the creditor (panchayat) could. recover the amount due to it from out of the property of the company without the consent of E the Board. This Court, stated the law at page 443 (paragraph 10), thus:-

"In the light of the steps taken by the Board under Sections 16 and 17 of the Act, no proceedings for execution, distress or the like proceedings against any of the properties of the company shall lie or be proceeded further except with the consent of the Board. F Indeed those would be automatic suspension of such proceedings against the compa11y's properties. As soon as the inquiry under Section 16 is ordered by the Board, the various proceedings set out under sub-section (1) of Section 22 would be deemed to have been suspended." G (emphasis supplied)

The above decision was followed by this court in Maharashtra Tubes Ltd. v. State Industlia/ & Investme11t Corporation of Maharashtra Ltd. and another, [1993] 2 sec 144. The following portion of the head note of the H

1036 'fI SUPREME COURT REPORTS [1997) 2S.C.R.

A report at pages 144-145 sufficiently brings out the ratio relevant for the purpose of the present appeal:- •.

"Where an inquiry is pending under Sections 16/17 or an appeal is pending under Section 25 of the 1985 Act there should be cessation of the coercive activities of the type mentioned in Section B 22(1) to permit the BTFR to consider what remedial measures it should take with respect to the sick industrial company."

"The purpose and object of suspension of proceedings etc. under S. 22(1) of the 1985 Act is to await the outcome of the reference made to the BIFR for the revival and rehabilitation of the sick c industrial company. The words 'or the like' which follow the words 'execution' and 'distress' are clearly intended to convey that the properties of the sick industrial company shall not be made the subject-matter of coercive action of similar quality and charac- te1istic till the BIFR finally disposes of the reference made under D Section 15 of 1he 1985 Aci. The legislature has advisedly used an omnibus expression 'the like' as it could not have conceived of all possible coercive measures that may be taken against a sick un- dertaking ............"

(emphasis supplied) E Our attention was also drawn to the following High Court decisions :

Reliance !spat lndust1ies Ltd. & Anr. v. Commissioner of Sales Tax, M.P. & Ors., Vol. 91 (1993) STC 521 M.P.; Himalaya Ruber Products F Limited and Anr. v. The Board for lndus!lial and Financial Reconstmction & Ors., Vol. 88 (1993) STC Cal. 47 and Vijay Mills Co. Ltd & Ors. v. State of Gujarat & Ors., Vol. 68 (1990) Co. Cases 597 Guj, etc.

9Copy pinpoint9. The Madhya Pradesh and Calcutta High Courts have followed the decision of this Court is Gram Panchayat and another v. Sltree Vallabh G Glass W01*s Limited and Others, (1990] 2 SCC 440.

10Copy pinpoint10. On a fair reading of the provisions contained in Chapter IIJ of Act 1/1986 and in particular Sections 15 to 22, we are of the opinion that the plea put forward by the Revenue is reasonable and fair in all cir- cumstances of the case. Under the statute, the BIFR is to consider in what H way various preventive or remedial measures should be afforded to a sick

( DY. COMMERCIAL TAX OFFICER v. CORROMANDALPHARMACEIJ11CALS [PARIPOORNAN,J.] 1037

industrial company. In that behalf, BIFR is enabled to frame an ap- A propriate scheme. To enable the BIFR to do so, certain preliminaries are _. required to be followed. It starts with the reference to be made by the Board of Directors of the sick company. The BIFR is. directed to make appropriate inquiry as provided in Sections 16 and 17 of the Act. At the conclusion of the inquiry, after notice and opportunity afforded to various persons including the creditors, the BIFR is to prepare a scheme which shall come into force on such date as it may specify in that behalf. It is impleme11tatio11 of the scheme wherein various preventive remedial or other measures, are designed for the sick industrial company, steps by way of giving financial assistance etc. by Government, banks or other institutions, are comtemplated. In other words, the scheme is implemented or given effect to, by affording financial assistance by way of loans, advances or guarantees or reliefs or concessions or sacrifices by Government, banks public financial institutions and other authorities. In order to see that the scheme is successfully implemented and no impediment is caused for the successful carrying out of the scheme, the Board is enabled to have a say when the steps for recovery of the amounts or other coercive proceedings are taken against sick industrial company which, during the relevant time, acts under the guidance/control or supervision of the Board (BIFR). Any step for execution, distress or the like against the properties of the industrial company of other similar steps should not be pursued which will cause delay or impediment in the implementation of the sanctioned scheme. In order to safeguard such state of affairrs, an embargo or bar is placed under Section 22 of the Act against any step for execution, distress or the like or other similar proceedings against the company without the consent of the Board or, as the case may be, the appellate authority. The language of Section 22 of the Act is certainly wide. But, in the totality of the circumstances, the safeguard is only against the impediment, that is likely to be caused in the implementation of the scheme. lf that be so, only the liability or amounts covered by the scheme will be taken in, by section 22 of the Act. So, we are of the view that though the lan1,ruage of Section 22 of the Act is of wide import regarding suspension of legal proceedings from the moment an inquiry is started, till after the implementation of the scheme or the disposal of an appeal under Section 25 of the Act, it will be reasonable to hold that the bar or embargo envisaged in G Section 22 (1) of the Act can apply only to such of those dues reckoned or included in. the Sanctioned scheme. Such amounts like sales tax, etc. which the sick industrial company is enabled to collect after the date of the sanctioned scheme legitimately belonging to the Revenue, cannot be and could not have been intended to be covered within Section 22 of the Act. Any other H

1038 SUPREME COURT REPORTS [1997] 2 S.C.R.

A construction will be unreasonable and unfair and will lead to a state of affairs enabling the sick industrial unit to collect amounts due to the Revenue and withhold it indefinitely and unreasonably. Such a construction which is unfair, unreasonable and against spirit of the statutes in a business sense, should be avoided.

11Copy pinpoint11. The situation which has arisen in this ease seems to be rather exceptional. The issue that has arisen in this appeal did not arise for consideration in the two cases decided by this Court in Gram Panchayat and another v. Shree Vallabh Glass Works Limited and others, [1990] 2 SCC

440. and Maharashtra Tubes Ltd. v. State Industrial & Investment Corpora- C tion of Maharashtra Ltd. and A11othe1; [1993] 2 SCC 144. It does not appear from the above two decisions of this Court nor from the decisions of the various High Courts brought to our notice, that in any one of them, the liability of the sick company dealt with therein itself arose, for the first time after the date of sanctioned scheme. At any rate, in none of those cases, a situation arose whereby the sick industrial unit was enabled to collect tax D due to the Revenue from the customers after the "sanctioned scheme" but the sick unit simply folded its hands and declined to pay it over to the Revenue, for which proceedings for recovery, had to be taken. The two decisions of this Court as also the decisions of High Courts brought lo our notice are, therefore, distinguishable. They will not apply to a situation as has arisen in this case. We are, therefore, of the opinion that Section 22 E (1) should be read down or understood as contended by the Revenue. The decision to the contrary by the High Court is unreasonable and unsus- tainable. We set aside the judgment of the High Court and allow this appeal. There shall be no order as to costs.

B.P. JEEVAN REDDY, J. I agree respectfully with the opinion F prepared by my learned brother K.S. Paripooman, :I.·

L;ioking at the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 [the Act), I was wondering how out o(tune the Act has become with the economic policies being pursued now in this country. G Since 1991-92, we arc launched upon, what is being called, liberalisation of our economy. we· have given up the policy of protecting our industries against foreign competition on the ground that it has given rise to an inefficient and outdated industrial system in our country. Our industries are suddenly being asked lo compete with foreign companies, many of whom being giant multi-nationals have vast resources at their disposal. H They are merrily gobbling up our poor native companies. Many local

DY. COMMERCIAL TAX OFFICER v. CORROMANDAL PHARMACEUTICALS (JEEVAN REDDY,J.)1039

industries, unable to stand the said conpetition are joining the foreign gaints in one form of venture or other. Several hundreds of small-scale and medium scale units in telecom sector, for example have suffered enormous- ... ly because of our love for foreign companies and their capital. The state of several public sector companies is no better. I arri not saying that we have totally embraced, what may be called "Reaganism" or "Thatcherism". The fact, however, remains that it is no longer thought advisable to keep alive inefficient and uneconomic industries by injecting public funds or in the name of safeguarding the employment of the workers. And here is this Act, a product of the era of protectionism, seeking to keep alive "sick" companies by pumping in funds - mostly public funds - and by providing various concessions. In the process, nobody inquires why a particular industrial company has become sick, viz., whether it is an induced one or whether it is on account of factors beyond their control. The object of the Act is undoubtedly laudatory but it must also provide for appropriate measures against persons responsible where it is found that sickness is caused by factors other than circumstances beyond the control of the management. It is also a well-known fact that the proceedings before the D Board of Industrial and Financial Reconstruction take a long time to conclude and all the while the protective umbrella of Section 22 is held over the company which has reported sick. We have come across cases where unfair advantage is sought to be taken of the provisions of Section 22 by certain industrial companies - and the wide language employed in the section is providing them a cover. We are sure Section 22 was not meant to breed dishonesty nor can it be so operated as to encourage unfair practices. The ultimate prejudice to public monies should not be over- looked in the process of promoting industrial progress. We are quite sure that the Government is fully alive to the situation and are equally certain that they must be thinking of necessary modifications in the Act. These few observations are meant merely to record the need for changes in the Act.

R.A.. Appeal allowed.