Recently, the National Company Law Appellate Tribunal ("NCLAT") disposed of various appeals1 vide a common judgment dated 20th March, 2019 wherein the NCLAT was posed with the following two questions which were common in all the appeals:
- Whether the 'Income Tax', 'Value Added Tax' or other statutory dues, such as 'Municipal Tax', 'Excise Duty', etc. come within the meaning of 'Operational Debt' or not?
- Whether the Central Government, the State Government or the legal authority having statutory claim, come within the meaning of 'Operational Creditors'?
It was contended by the Appellants that a bare perusal of the definition of 'Operational Debt' would reveal that Income Tax cannot be in the nature of 'Operational Debt' as 'Operational Debt' refers to the claim in respect of 'goods' or 'services' including employment or a debt in respect of repayment of dues of the Central Government, State Government or the Local Authorities. It was also contended that 'Income Tax' is the statutory liability of every person under Section 4 of the Income Tax Act, who are bound to pay Income Tax on its 'Total Income'. This is required to be discharged by every person including a 'Resolution Applicant'. A similar plea was taken by the 'Sales Tax Department, State of Maharashtra' by relying on Section 37(1) of the 'Maharashtra Value Added Tax, 2002.
According to counsel appearing on behalf of one of the 'Successful Resolution Applicant', the statutory dues including the 'Income Tax' and the 'Sales Tax' come within the meaning of Section 5(20) read with Section 5(21) of the 'I&B Code'. Reliance was placed on the provisions aforesaid to suggest that the 'Operational Debt' also included debts arising under any law payable to the Central Government and the State Government.
According to Mr. Rajiv Ranjan, Senior Advocate and Mr. Sugam Seth, Amicus Curiae, the 'Income Tax' or 'Value Added Tax' are not required for operation of the 'Corporate Debtor' and, therefore, they do not come within the meaning of 'Operational Debt'. It was further submitted by them that the word 'or' before the sentence 'a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority' should be read as 'and' and it should be related to either supply of goods or for rendering services to the 'Corporate Debtor'. It was thus submitted that as tax is not related to 'supply of goods' or services rendered to the 'Corporate Debtor', they cannot be treated to be the 'Operational Debt'.
The NCLAT referred to the definition of 'Operational Creditor' and the 'Operational Debt' as defined in Section 5(20) and Section 5(21), as quoted below:
"(20) "operational creditor" means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;
(21) "operational debt" means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;"
The NCLAT noted that the word 'or' has been used at three places in Section 5 (21) namely: a claim in respect of provision of goods 'or' services including employment 'or' a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government 'or' any local authority.
Whilst deciding whether 'or' used in three places in Section 5(21) is disjunctive or should be given the meaning 'and' held that there is no ambiguity in the said provision and the legislature has not used the word 'and' but chose the word 'or' between 'goods or services' including employment and before 'a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, and State Government or any local authority'.
The NCLAT further held:
"Operational Debt' in normal course means a debt arising during the operation of the Company ('Corporate Debtor'). The 'goods' and 'services' including employment are required to keep the Company ('Corporate Debtor') operational as a going concern. If the Company ('Corporate Debtor') is operational and remains a going concern, only in such case, the statutory liability, such as payment of Income Tax, Value Added Tax etc., will arise. As the 'Income Tax', 'Value Added Tax' and other statutory dues arising out of the existing law, arises when the Company is operational, we hold such statutory dues has direct nexus with operation of the Company. For the said reason also, we hold that all statutory dues including 'Income Tax', 'Value Added Tax' etc. come within the meaning of 'Operational Debt'.
...For the said very reason, we also hold that 'Income Tax Department of the Central Government' and the 'Sales Tax Department(s) of the State Government' and 'local authority', who are entitled for dues arising out of the existing law are 'Operational Creditor' within the meaning of Section 5(20) of the 'I&B Code'."
The analysis given by the NCLAT is reflective of the intention of the legislature while framing the Insolvency and Bankruptcy Code. In this regard reference can also be made to the report of the Bankruptcy Law Reforms Committee (November 2015) wherein it is provided that, "operational contracts typically involve an exchange of goods and services for cash. For an enterprise, the latter includes payables for purchase of raw-materials, other inputs or services, taxation and statutory liabilities, and wages and benefits to employees."
However, as rightly pointed out by the amicus curiae in the aforesaid appeals, it cannot be ignored that per se these taxes are not required for operation of the corporate debtor and are not on account of supply of any goods or services. Since the Code is still evolving, the question may again be raised before the Supreme Court which may further clarify on the issue.
1 Pr. Director General of Income Tax (Admn. & TPS) v. M/s. Synergies Dooray Automotive Ltd. & Ors. , Company Appeal (AT) (Insolvency) No. 205 of 2017; Sales Tax Department, State of Maharashtra v. M/s. Raj Oil Mills Limited & Ors., Company Appeal (AT) (Insolvency) No. 309 of 2018; Sales Tax Department State of Maharashtra v. Phoenix Erectors Pvt. Ltd. & Ors., Company Appeal (AT) (Insolvency) No. 559 of 2018; Pr. Commissioner of Income Tax (Central)-3, Mumbai v. Raj Oils Mills Ltd. & Ors., Company Appeal (AT) (Insolvency) No. 671 of 2018; Sales Tax Department, State of Maharashtra v. Parte Casters Pvt. Ltd. & Ors., Company Appeal (AT) (Insolvency) No. 759 of 2018.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.