By TIOL News Service

NEW DELHI, MAY 19, 2016: THE issue is - Whether when assessee's closed unit was rehabilitated under sanctioned Scheme but assessee sold the property without taking prior approval of Board, it would amount to alteration of scheme and assessee loses rights to seek extension of Scheme. YES is the answer.

Facts of the case

The assessee company became sick Company sometime in the year 1997 as its net worth had eroded. As per the requirements of Section 15 of SICA, it had filed reference before the BIFR which was admitted. The Board conducted enquiry into the working of Company to determine whether it had become a sick industrial company and in the process appointed the Managing Director, State Bank of India (MA) (RCB), Mumbai as the Operating Agency (OA) to enquire into and make a report with respect to certain matters which was specified in the orders passed by the Board in this behalf. The Board, on the completion of the enquiry, satisfied itself that Company had become a sick industrial company. A Draft Rehabilitation Scheme (DRS) was prepared by the OA which was submitted to the Board and the Board circulated the said Scheme vide its order dated 14.01.2000. In this DRS, income tax reliefs were proposed to exempt from the applicability of the provisions of Section 41(1) and to allow carry forward of unabsorbed losses and allowances beyond eight years. To lift attachment order imposed by Income Tax Department against immovable and movable properties including Debtors and Bank Accounts. Thereafter, not to attach any property including movable properties of the company during the rehabilitation period. To grant stay against demand raised by Department but are in dispute before various appellate authorities/Courts. To waive interest and penalty, if any, imposed and not to levy such interest and penalties during the rehabilitation period. To exempt GTC from Capital Gain on sale of surplus land and/or sale of industrial sheds proposed for development on surplus land at Marol. To exempt from TDS against payments to be received by the company. An objection was filed by assessee against the DRS. The Scheme of reconstruction/rehabilitation which was submitted by the OA, after consultation with all the stakeholders and creditors as per the requirement of law, was approved and sanctioned by the Board. It may be mentioned here that after the DRS was circulated and before it could be sanctioned, the income tax demand of Rs.366 crores was intimated by the Department to OA with various tax exemptions 2001. While sanctioning the Scheme, various income tax reliefs were kept in the Scheme.

Besides this, under the head 'General Terms and Conditions' of the Rehabilitation Scheme, the Board directed that the Income Tax Department would lift the attachment orders imposed by them against immovable and movable properties of GTC including debtors and bank accounts and thereafter not to attach any property including movable properties of the company during the rehabilitation period without prior consent of BIFR. The recovery proceedings against demands raised by Department against disputed liabilities shall remain suspended and refunds due to company, if any, would not be adjusted against such demands. The said relief was not envisaged under the head reliefs and concessions asked from CBDT and such direction was given under the head General Terms and Conditions, without consent of the appellants required u/s 19(2) of SICA. As per the projected profitability statement, the projected sales comprised of cigarettes only, and that as per the projected fund flow statement, there was to be no decrease in the fixed assets. It was further laid down under the head 'General Terms and Conditions' that "the company would not undertake any major modernization/diversification program/ capital expenditure except normal capital expenditure during the period of implementation of the rehabilitation scheme without specific prior permission of the MA/BIFR." Board further directed the Promoters in of the Sanctioned Rehabilitation Scheme "to meet any shortfall in the cash flow projections or any contingency not conceived in the Scheme. In this regard, promoters may raise moneys by way of development of industrial estate and sale thereof of surplus land available at Marol, Mumbai or sale/development of any other surplus assets." The Revenue did not resort to any action by way of attachment of movable or immovable assets of the company. The cut-off date in the Scheme was 31.12.1998 and the rehabilitation period of eight years was prescribed therein. However, later on the cut-off date in the Scheme was changed from 31.12.1998 to 31.03.2003 by the Board and the eight years period provided for rehabilitation was to be reckoned from 31.03.2003. In this way, the Scheme was to lapse on 31.03.2011.

When this Scheme was still in operation, the Revenue filed petition u/s 22(1) of SICA seeking permission to recover the outstanding dues of Rs. 426.37 crores which were raised after the date of Sanctioned Scheme. On this petition, the Board passed order directing the Revenue to release a sum of Rs. 4.28 crores which was withheld by the Revenue and further directed the Department to expedite the settlement of the disputed demands. It was also observed that in the event of crystallization of the disputed demand of the Revenue and in case of shortfall of funds thereof for repayment by the company, company/promoters would bring the requisite amount of interest free unsecured loan and/or would raise the necessary fund by way of disposal of the company's surplus assets as envisaged in the scheme. It also directed that the company would settle/pay the income tax dues, if any, which would become payable after sanction/implementation of scheme in the normal course and neither the Company nor its promoters would be entitled for any protection under SICA for delay/non-payment of such dues.

On 29.06.2007 the Company submitted before the Board that its net-worth became positive on 31.03.2007 and sought de-registration from SICA/Board. The Board, passed order dated 29.06.2007 holding that since net-worth of the company had turned positive as on 31.03.2007, it seized to be a sick industrial undertaking within the meaning of Section 3(1)(O) of SICA and discharged the company from the purview of SICA. As per Revenue, there were outstanding dues and income tax amounting to Rs. 761.35 crores and the demand thereof was sent to the Company for payment and it was also mentioned that coercive action may be taken to recover the said amount. Such a demand was made on the premise that the net-worth of the company had turned positive and it has ceased to be a sick company. Therefore, having lost the status of a sick company, it was not entitled to the protection under provisions of SICA. Within few days of this demand, the Revenue found from the reports in print media that the company had sold its Vile Parle Property in Mumbai for a sum of Rs.591 crores. In order to verify this sale transaction, a specific survey u/s 133(A) was conducted from which it was gathered that the Company had entered into a MOU with M/s. Sheth Developers Pvt. Ltd. and Suraksha Reality Ltd. for developing the said property. This MOU prescribed that on execution of agreement for development, the assessee Company would receive a total consideration of Rs.542.70 crores out of which the assessee Company had already received advance consideration of Rs.60 crores at the time of signing the MOU. Further, the company had also entered into an agreement for development of assessee's land at Hyderabad. The company had not passed on the possession of Vile Parle as development agreement was not signed. Thus, the company had converted almost all the immovable properties owned by it as business assets into stock-in-trade and almost all properties were put on sale. The tentative cost of sale of all these properties would be between Rs. 700 crores to Rs. 1000 crores approximately. Thus, Tax Recovery Officer of the Revenue demanded tax and penalty of remaining AYs was also served. On receiving the said letter, the Company filed M.A. before the Board seeking stay of any coercive action proposed to be taken by the Revenue.

This order of the Board was challenged by the Revenue by filing appeal before the Appellate Authority for Industrial and Financial Reconstruction. In this appeal, interim order was passed directing both the parties to maintain status quo. According to the Revenue, despite the aforesaid order, the Company invited online forward auction for the land situated in Marol Industrial Area which forced the Revenue to file MA No.448/2010 before the Appellate Authority on 24.08.2010. In this application, the Appellate Authority passed the order suspending the proposed online e-auction. The appeal was ultimately decided by the Appellate Authority on 31.01.2011. With other connected appeals, inter alia, ordering that Income Tax Department could not have initiated any coercive action for recovery of its dues against the Company since the unimplemented provisions of the sanctioned rehabilitation scheme for the unexpired period of the scheme are still under implementation.

This order was challenged by the Revenue by filing Writ in the HC of Delhi. While the aforesaid writ petition was pending certain other developments took place. Some dues of Central Excise Authority were also payable by the company. The Company had written few letters to the Central Excise Authorities, in the year 2010, stating that their manufacturing operation has become unviable because of fixed overheads and consequently a decision was taken to restructure business by entering into reality business. The company also had filed Misc. Application with a prayer to extend the duration of rehabilitation period by another one year. Due to the delay caused in implementation of the said Scheme because of the coercive measures taken against the company by the Revenue this application was decided by the Board on 31.03.2011. The Board by a detailed order recorded a specific finding, based on material produced before it, that the Tax Departments could not be held responsible for any delay in the implementation of the Scheme. It also held that once the Company had been discharged under SICA on its net-worth turning positive in the year 2007, provisions of Section 18(5) were not applicable and, therefore, any major modification by way of extension of time, was not permissible. Against the above ordere of the Board, the Company filed an appeal before the Appellate Authority. This appeal was, however, dismissed by the Appellate Authority holding that the Company was not entitled to get the period of rehabilitation scheme extended. It specifically affirmed the finding of the Board that the Company had violated the sanctioned scheme and that no modification of the Scheme was possible.

Having heard the matter, the Apex Court held that,

++ in the writ petition preferred by the Revenue, HC has passed impugned orders dated 16.08.2011 dismissing the writ petition with the observations that the appropriate remedy for the petitioner is to move the Board for lifting of the bar u/s 22 of SICA. What follows from the above is that HC was convinced by the reason that the question as to whether the Company had indulged in sale of assets unauthorisedly and in violation of para 9(5)(b) which is yet to be taken by the Board. HC also proceeded on a palpably wrong presumption that the sanctioned Scheme was still under operation and, therefore, bar u/s 22 of the SICA applied. For this reason, it directed that the only remedy left for the Revenue was to approach the Board for lifting of the bar u/s 22 of the SICA. From the facts and events noted above, this premise and assumptions are clearly erroneous and contrary to record. In the first instance, it is to be seen that the Scheme had already expired on 31.03.2011. Application for extension of the Scheme was filed before the Board which was dismissed. The reason given by the Company seeking extension was that the implementation of the Scheme was delayed because of the coercive tactics which the Revenue had adopted against the Company. This claim was found to be hollow and incorrect. The Appellate Authority had upheld this order of the Board, albeit by a majority of 2:1. Thus, no Scheme was in operation. Another significant aspect which is to be kept in mind is that way back in the year 2007, the net worth of the Company had turned positive and it was no more a sick Company. Thus, the Revenue had right to recover arrears of income tax after 2007 and in any case after 31.03.2011 when the Scheme expired. It may be pertinent to mention at this stage that the Company has approached the Board, after withdrawal of its Writ Petition No. 4614 of 2011 on the ground that while withdrawing this petition the High Court had permitted the Company to seek recourse to the Board in view of the observations of the majority opinion of the Appellate Authority. Even this is erroneous. The Appellate Authority dismissed the appeal on merits. In the course of discussion on various aspects and arguments that were raised before the Appellate Authority, the Appellate Authority noted that the Company had taken steps to close a unit which was rehabilitated under the Sanctioned Scheme and to sell the property thereof without obtaining the prior approval of the Board. It further observed that when those steps were taken, jurisdiction of the Board over the Company continued under Section 18(9) and Section 18(12) of SICA. In the opinion of the Appellate Authority, since the Company had availed itself of and was continuously availing the beneficial measures of SS-02, which included rehabilitation measures for the Mumbai unit, it was obligatory on the part of the Company to seek and obtain the prior permission of the Board to close the Mumbai unit, shift its plant and machinery to the Vadodara and engage in reality business. Thus, while rejecting the argument of the Company that there was no violation of the Scheme in dismantling the Ville Parle Unit and selling its land and building, the Appellate Authority took the view that it had altered the essential ingredients of the SS-02 as a result of which that Scheme stood mutilated and, therefore, seeking extension of such Scheme was untenable. By these remarks the Appellate Authority only pointed out the breach committed by the company in not taking prior permission and nowhere permitted the company to resort to the same even now as that opportunity was already lost;

++ it is the aforesaid remarks, advantage whereof was taken by the Company when orders dated 5th July, 2011 were passed in Writ Petition No. 4614 of 2011. Though, the petition was withdrawn, the counsel for the Company made the statement that the Company would like to pursue the course 'suggested' by the majority view of the Appellate Authority in its order dated 29th June, 2001 for seeking modification of the Scheme by approaching the Board. No such suggestion or permission at all was given. It is stated at the cost of repetition that the aforesaid observations were made while dealing with the particular argument of the Company. That did not mean that the aforesaid observations gave the Company any liberty to approach the Board even at this juncture. The filing of such application by the Company before the Board seeking modification is, therefore, totally untenable move on the part of the Company. Such an application is not maintainable in law. When the matter is considered in this hue, keeping in mind the aforesaid backdrop, the impugned order passed by HC in the writ petition that was preferred by the Revenue, is manifestly wrong and unsustainable. For the reasons stated above, we are of the view that the Sanctioned Scheme (SS-02) has outlived its life which came to an end on 31st March, 2011. the Revenue is, thus, entitled to recover its dues;

Quantum of dues that the Revenue has to recover from the Company

++ another important submission, which needs consideration, advanced by the senior counsel appearing for the Company was that in the Scheme which was approved by the Board, Income Tax Department had agreed to waive interest and penalty and, therefore, it was not permissible for the Department to include the interest and penalty. It was argued that the words 'to consider' are to be treated as mandate. It was submitted that the expression 'to consider' in similar Schemes approved by the Board has been interpreted by various Division Benches of HC to mean that the relief granted is mandatory and not merely recommendatory. Reference was made to the judgment of Delhi High Court in Union of India v. CIMMCO Ltd. & Ors., bearing W.P.(C) No. 626 of 2014 and that of Madras HC in CIT-I, Chennai v. M/s. Tube Investments of India Ltd.-I, Chennai, bearing Tax Case (Appeal) Nos. 2012-TIOL-84-HC-MAD-IT. We are not deciding this issue in the present appeal and permit the parties to approach the Board seeking clarification as to what was meant by the words 'to condsider' i.e., whether the Board meant that it was mandatory on the part of the Revenue to waive the interest and penalty or it was only recommendatory and, therefore, it was upto to the Department to agree or not to agree to the said request. The jurisdiction of the Board, whenever such application is filed, would be limited to the aforesaid aspect alone and the Board shall decide the issue within the period of two months. Otherwise, we make it clear that as the Scheme has lapsed no further proceedings of any nature are to be entertained by the Board including the application for modification filed by the Company and pending before the Board. The Income Tax Department shall be entitled to take steps for attachment of the properties of the Company, including Ville Parle land as per the provisions of the Income Tax Act and shall be entitled to sell the same. If there are any secured creditors in respect of these properties, such attachment and sale shall be subject to the rights of those creditors. Out of the proceeds, the Principal amount of tax due to the Income Tax Department and even the admitted excise dues shall be paid to the Revenue. Insofar as payment of interest and penalty is concerned, that would be dependent upon the decision which the Board would give. Before parting with, we may point out that M/s. Sheth Developers Private Limited and Suraksha Realty Limited have filed applications to intervene in the matter as they submit that in respect of Ville Parle Land, MOU was entered into by the Company with them. However, once it is found that such an agreement was in violation of the Scheme, the arrangement with the aforesaid interveners entered into by the Company loses its legal force and no right would accrue to these interveners on the basis of the said agreements. We, thus, dismiss the plea raised by the intervener. Appeal stands allowed and disposed of on the terms indicated above.

(See 2016-TIOL-77-SC-IT)