Introduction
In the case of Commercial Tax Department v. Mrs. Teena Saraswat Pandey & Anr.,[i] the Hon’ble National Company Law Appellate Tribunal (‘NCLAT’) clarified the treatment of tax dues under the Madhya Pradesh Value Added Tax Act, 2002 (‘MPVAT’) within the Insolvency and Bankruptcy Code, 2016 (‘IBC’) framework. This decision reaffirmed the hierarchy established under the IBC’s waterfall mechanism, which prioritises the financial creditors and secured debts over operational creditors, including tax authorities. The Madhya Pradesh Commercial Tax Department (‘Appellant’) argued that its tax claim should be treated as a secured debt, relying on the precedent from the Hon’ble Supreme Court.
Brief Facts
The Appellant challenged the order passed by the National Company Law Tribunal (‘NCLT’), which admitted the insolvency petition filed under s. 9 of the IBC by M/s Chandraudai Automobiles Pvt. Ltd. against M/s Rajpal Abhikaran Pvt. Ltd., the corporate debtor (CD) and interim resolution professional (IRP) was appointed.
During the corporate insolvency resolution process (‘CIRP’), a Committee of Creditors (CoC) was constituted, which approved a resolution plan submitted by Agarwal Real City Pvt. Ltd.
However, the NCLT approved the resolution plan vide order dated 25.08.2022 without prioritising the Appellant’s claim of Rs. 12,61,57,345 by categorising it as unsecured debt instead of secured debt. The Appellant filed the present appeal challenging the NCLT’s order.
The Appellant relied on the Supreme Court’s ruling in the case of State Tax Officer (1) v. Rainbow Papers Ltd.,[ii]* *arguing that its tax dues should be treated as secured debt under s. 33 of the MPVAT, similar to s. 48 of the Gujarat Value Added Tax Act, 2003 (‘GVAT Act’).
Held
The NCLAT observed that s. 33 of the MPVAT is not in pari materia with s. 48 of the GVAT Act. Crucially, s. 33 of the MPVAT Act is subject to the provisions of s. 530 of the Companies Act, 1956, governs preferential payments and subordinates tax claims.
The NCLAT referred to its previous rulings in the case of Department of State Tax v. Zicom Saas Pvt. Ltd.[iii] and Department of State Tax v. D.S. Kulkarni Developers Ltd.[iv]* *wherein similar claims based on state tax were denied priority due to differences in statutory language compared to the GVAT Act.
Additionally, the Supreme Court’s ruling in Paschimanchal Vidyut Vitran Nigam Ltd. v. Rama Ispat Pvt. Ltd.[v] was referred to, clarifying that the decision in the case of State Tax Officer (1) v. Rainbow Papers Ltd. (Supra) was specific to its facts and did not establish a general principle applicable to all state tax claims.
The NCLAT dismissed the appeal, holding that the Appellant’s dues could not be classified as secured debt under the IBC.
Conclusion
The NCLAT’s careful distinction between the provisions of the MPVAT Act and the GVAT Act highlights the importance of statutory language in determining creditor priorities. This ruling also solidifies the limited scope of the *State Tax Officer (1) v. Rainbow Papers Ltd. (Supra) *judgement, confining it to cases where the state tax law unequivocally grants a first charge on assets. In contrast, laws like the MPVAT Act, subject to the Companies Act, do not enjoy the same preferential status as secured debts. The tribunal reaffirmed the primacy of secured creditors and workmen’s dues over tax claims in insolvency proceedings, as outlined under the IBC and the Act. By analyzing the reasoning given by the tribunal, the limitations placed on state tax claims during the CIRP can be understood.
End Notes
[i]* *2024 SCC OnLine SC 1754.
[ii] 2022 SCC OnLine SC 1162.
[iii] 2022 SCC OnLine NCLAT 2984.
[iv] 2023 SCC OnLine NCLAT 2768.
[v] 2014 SCC OnLine All 716.
Authored by Manmohan Bhola, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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