Kerala Clays and Ceramic Products Ltd. vs Tax Recovery Officer and Others

D.J. Jagannadha Raju, J.—This original petition is filed by the petitioner which is a Government owned company. It was formed for acquiring the undertakings of the fourth respondent-company and running the company. The main controversy relates to Income Tax due for the assessment year 1974-75 which was payable by the fourth respondent.

The facts leading to the present original petition are as follows. The fourth respondent-company was carrying on the business of mining and processing of china clay. It was running at a loss and it was not even able to pay wages to the workers. The Government of Kerala declared the undertaking of the fourth respondent as a relief undertaking under the Kerala Relief Undertakings (Special Provisions) Act, 1961 (Act 6 of 1962) (hereinafter called the "Relief Undertakings Act"). Exhibit P-l notification and exhibit P-2 notification, respectively, were issued under Sections 3 and 4 on March 2, 1976. Subsequently, the company was entrusted to the Kerala State Industrial Enterprises Limited, a holding company. While the company was functioning as a relief undertaking, the company was acquired by the Government under the Super Clays and Minerals Mining Company (Private) Limited (Acquisition of Undertakings) Act, 1983 (hereinafter called the "Acquisition Act"). By reason of the notification issued under the Acquisition Act, the petitioner became the owner of the company with effect from November 5, 1983. From 1983 onwards, the Income Tax Department has been making various efforts to collect the Income Tax dues and the interest that had accrued on the Income Tax arrears. When exhibit P-5 was sent to the petitioner demanding Income Tax arrears for the assessment year 1974-75 together with interest, the petitioner sent exhibit P-6 reply taking the stand that, u/s 7(4) of the Acquisition Act, the Government of Kerala has to pay the amount which is an unspecified liability and that the company is not liable to pay it. Then exhibit P-7 was addressed by the first respondent to the Government. The Government gave exhibit P-8 reply claiming that it is not liable to pay the amount, as it is a liability which arose before the vesting took place. It also contended that the compensation has been deposited with the Commissioner of Payments and hence the Income Tax Department should proceed to collect the amount from the Commissioner of Payments. A plea was raised to the effect that, in view of Section 5 of the Acquisition Act, the Government is not liable to pay interest on the Income Tax arrears. The correspondence went on, but nobody paid the Income Tax arrears and ultimately exhibit P-12 was issued on March 9, 1987, to the petitioner. This also did not result in payment of Income Tax arrears. In exhibit P-12, the Tax Recovery Officer threatened to take coercive action and informed that he would be constrained to attach the bank account and other assets of the company to collect the amount of Rs. 1,04,400. Then, the present original petition has been filed seeking the following prayers ; to quash exhibit P-12 by issuing a writ of certiorari; to quash the demand for penalty and interest levied u/s 220(2) of the Income Tax Act for the period from March 2, 1976, to November 5, 1983, and for other consequential reliefs.

Though standing counsel for the Income Tax Department filed vakalath for R-1 to R-3, a counter was filed only by the first respondent, the Tax Recovery Officer. Mrs. Karuna Joseph filed vakalath on behalf of an ex-director of the fourth respondent, but no counter has been filed. The original petition is resisted by the first respondent on the following grounds. The amount entrusted to the Commissioner of Payments does not include the tax liability. The tax liability is also not revealed in the audited balance sheet as on December 31, 1975. This is obviously an omission committed by the Government as well as the petitioner. The petitioner having taken over all the profit-earning assets of the company and appropriating the income earned therefrom, has not paid the tax liabilities. No convincing reason has been given for omitting this liability in the balance sheet. The tax due was quantified at Rs. 42,263 and with the defaulting interest u/s 220(2) of the Income Tax Act, the total amount has come to Rs. 1,04,400 as indicated in exhibit P-12. The assessment order was passed on June 11, 1975. An appeal filed was dismissed on January 6, 1976, and the assessment was confirmed. Under the Relief Undertakings Act, unless the notification is extended, there is no moratorium, and under the 1962 Act, the maximum period contemplated is only five years. The Income Tax Act is not one of the Acts included in the Schedule to the Relief Undertakings Act, Act 6 of 1962. The petitioner had taken over all the assets of the fourth respondent along with the liabilities. It is bound to pay the tax due. Income Tax is a charge on the company and it will run on the assets. The petitioner cannot evade responsibility for payment of the Income Tax and the interest accrued thereon. The petitioner, being a successor-in-interest, is bound to discharge the tax liability. The stand taken by the Kerala Government as well as the petitioner is untenable. The clarification given by the Government of Kerala that it has no responsibility to discharge any liability of the predecessor-company is not correct. Though the Commissioner of Payments was approached, he did not send any reply to the notice issued to him. In view of the attitude adopted by the petitioner and the Kerala Government, the Tax Recovery Officer is entitled to realise the arrears and he rightly proposed to attach the bank account and other assets which would yield early collection of tax arrears. It should be remembered that, under the Relief Undertakings Act, there is a prohibition against recovery during the period of the notification. But the statutory interest accruing u/s 220(2) of the Income Tax Act would continue to accrue.

The present original petition is without merit and the Tax Recovery Officer is certainly entitled to take coercive steps as indicated in exhibit P-12. The original petition may be dismissed with costs.

In this original petition on behalf of the petitioner, it is contended that the fourth respondent is still in existence. It is not a wound-up company. As the tax liability for the assessment year 1974-75 is the liability incurred by the fourth respondent, the first respondent should proceed against the fourth respondent No steps can be taken to recover the Income Tax and the interest against the petitioner. At any rate, when the notification under the Relief Undertakings Act is in force, there cannot be any default of interest. Under the Acquisition Act, exhibit P-3, the Government has a liability only for the unspecified future liabilities. If the first respondent wants to claim the amounts due as Income Tax which became due long ago, the first respondent should only proceed against the money in the hands of the Commissioner of Payments. On behalf of the petitioner, it is contended that due to the peculiar position of the industry being declared as a relief undertaking, and subsequently being taken over under exhibit P-3 Act, neither the petitioner nor the State Government is liable to pay the Income Tax arrears which are prior to the declaration of the industry as a relief undertaking. The first respondent can only proceed against the fourth respondent, or the compensation payable to the fourth respondent, which is now in the hands of the Commissioner of Payments.

On behalf of the Income Tax Department, Shri. N.R.K. Nair contends that, under the Relief Undertakings Act, the maximum period for which a notification can subsist is five years, and if the alleged amendment of the Act is taken into consideration, it can at best subsist for 10 years. By virtue of the notification, there is only an embargo against recovery u/s 4(2)(c). Once the notification ceases to operate, all claims revive, and there is no bar of limitation. What is prohibited under the Relief Undertakings Act is only recovery of the amount, but there is no statutory bar to the interest accruing u/s 220(2) of the Income Tax Act. Here, the petitioner is a successor-in-interest. It has taken over the company with all its assets and liabilities. It is bound to pay the amount. The State Government and the petitioner were dodging payment by trying to pass on the responsibility from one to the other. The Tax Recovery Officer is fully justified in threatening to take coercive steps as indicated in exhibit P-12.

The point for consideration is whether exhibit P-12 is liable to be quashed.

The point: If we examine the various documents filed along with the original petition, we find that the parties proceeded on wrong premises and their anxiety was to evade liability. The petitioner was trying to shift the responsibility to the State Government, and the State Government was disowning the responsibility taking shelter u/s 7(4) of the Acquisition Act. The petitioner was also trying to seek protection against recovery under the Relief Undertakings Act. I shall now examine the legal position and the correctness of the stand taken by the different parties at different points of time.

The Kerala Relief Undertakings (Special Provisions) Act, 1961, Act 6 of 1962, provides for grant of certain reliefs to sick industries. u/s 3, the Government can notify an industrial undertaking as a relief undertaking for the purpose of the Act. u/s 3(2), a notification shall have effect for a period not exceeding two years, but it is extendable by like notifications from time to time not exceeding a total period of five years. Every extension should be for twelve months or less. Section 4 is a very important section. Section 4 has overriding effect and under Clause (a), as long as an undertaking continues as a relief undertaking under Sub-section (2) of Section 3, the laws specified in the Schedule to the Act shall not apply. It is open to the Government to apply them with modification. Under Sub-clause (ii) of Clause (a), agreements, settlements, awards, etc., will stand suspended. Under Clause (b), any remedy for the enforcement of a liability or obligation shall be suspended. Under Clause (c), the right, privilege, obligation or liability referred to in Clause (b) shall revive and be enforceable on the notifications ceasing to have force. The proviso to Section 4 contemplates the period of limitation for the enforcement of such right, privilege, obligation or liability. The period of suspension shall be excluded. It should be remembered that the Income Tax Act is not one of the Acts which stands suspended u/s 4(a)(ii). By the Kerala Relief Undertakings (Special Provisions) Amendment Act, 1980 (9 of 1981), the maximum period for which a notification u/s 3 can be in force has been increased from five years to ten years. By an amendment to Section 4, the collection of sales tax has been stayed during the period of the notification. The net result of the Relief Undertakings Act and its amendment is that a notification issued on March 2, 1976, can be continued at the most up to March 2, 1986. Under any circumstances, no protection can be claimed under the Relief Undertakings Act after March 2, 1986. Exhibit P-12 issued on March 8, 1987, cannot be objected to under the Relief Undertakings Act.

Exhibit P-l is the first notification issued u/s 3(1) of the Relief Undertakings Act Though various notifications extending this notification are not produced at this stage, the court is not going into the controversy whether the notifications under the Relief Undertakings Act were properly extended or not. Exhibit P-2 is the notification issued u/s 4 of the Relief Undertakings Act. As the protection given under the Relief Undertakings Act expired before issuing exhibit P-12, it is unnecessary for this court to go into the question of the extension of the notifications issued under exhibits P-1 and P-2. Exhibit P-3 is the Special Acquisition Act enacted for bringing into existence the petitioner-company. Under the scheme of this Act, Section 3 contemplates transfer and vesting in the Government of the undertakings of the company. Section 4 gives the general effect of vesting. Clause (a) of Sub-section (1) of Section 4 specifies what are all the assets which would vest under this Act. Section 5 clearly lays down that the Government is not to be liable for certain prior liabilities. The section reads as follows :

"Government not to be liable for certain prior liabilities.--No liability incurred by the company before the appointed day, for the contravention of any provision of law for the time being in force, shall be enforceable against the Government, or where the undertakings of the company are directed u/s 6, to vest in a Government company, against that Government company."

The language of Section 5 makes it amply clear that only liabilities which arose as a result of the contravention of law will not be enforceable. Section 6 is the most important section, and I shall presently point out that, in the various documents, the Government as well as the petitioner always overlooked the provisions of Section 6. u/s 6, the Government has the power to direct vesting of the undertakings of the company in a Government company. Sub-section (1) clearly lays down that all undertakings of the company, and the right, title, interest and liabilities of the company in relation to its undertakings which have vested in the Government u/s 3, except any undertaking or undertakings specified in the notification and the right, title, interest and liability in relation to the undertaking or undertakings so specified shall, instead of continuing to vest in the Government, vest in a Government company either on the date of the notification or on such earlier or later date (not being a date earlier than the appointed day) as may be specified in the notification. Section 6 makes it clear that the liabilities also vest in the Government company. Sub-section (2) of Section 6 lays down that where the right, title, interest and liabilities of the company in relation to all or any of its undertakings vest in a Government company under Sub-section (1), the Government company shall, on and from the date of such vesting, be deemed to have become the owner in relation to the undertaking so vested, and all the rights and liabilities of the Government in relation to such undertaking shall, on and from the date of such vesting, be deemed to have become the rights and liabilities of the Government company. It is very significant to remember that both in Sub-section (1) as well as in Sub-section (2) of Section 6, liabilities are specifically mentioned. The liabilities vest in the Government company. Section 7 speaks of payment of amounts. u/s 7(1), the Government determined an amount of Rs. 10,43,245.97 as the amount to be given by the Government, for the transfer to, and vesting in the Government. Sub-section (2) provides for payment of interest. Sub-section (3) speaks of specified liabilities which are mentioned in the Schedule to the Act. Sub-section (4) deals with unspecified liabilities. While the specified liabilities are to be discharged from the amount referred to in Sub-section (1) in accordance with the rights and interests of the creditors of the company, with regard to the unspecified liabilities, the Government shall discharge them as and when they fall due for payment. Taking advantage of the language of Sub-section (4) it is being contended by the petitioner that the Government has the liability to pay the amount. At the same time, the Kerala State Government claims that its liability is only to the future unspecified liabilities, and not to the past liabilities. The proviso to Section 7 makes it clear that the liability assumed by the Government shall not exceed the amount shown in the audited balance-sheet of the company as on December 31, 1975. It is interesting to see that, under the Schedule to the Act, "paid up capital of the company", "sundry creditors as per the audited balance-sheet", "other liabilities as per the audited balance-sheet", and "unsecured loans as per the audited balance-sheet" alone are mentioned. The Income Tax dues are not at all mentioned. It is an admitted fact that, in the balance-sheet also, the Income Tax arrears were not mentioned. Exhibit P-4 is a notification u/s 6. Originally, it was issued under the Ordinance, the notified date being November 5, 1983. It is interesting to see that under paragraph 3 of this notification, the Kerala State Industrial Enterprises Limited will transfer all the undertakings of the Super Clays and Minerals Mining Company and the right, title, interest and liabilities of the company in relation to its undertakings to the newly formed Kerala Clays and Ceramic Products Limited. The notification clearly mentions that rights and liabilities stood transferred to the petitioner.

A reading of exhibit P-5 issued on January 8, 1985, by the first respondent to the petitioner indicates that the Income Tax Department has refrained from collecting the arrears of tax on the ground that the company enjoyed a moratorium under the Relief Undertakings Act. The first respondent claimed that Rs. 50,281 arrears of tax together with interest u/s 220(2) of the Income Tax Act is payable and early payment will be appreciated. Exhibit P-5 is replied to under exhibit P-6 on February 15, 1985. The petitioner claimed that, by virtue of Section 7(4) of the Acquisition Act, unspecified liabilities are to be discharged by the Government of Kerala and the Tax Recovery Officer was directed to approach the State Government. It is interesting to see that, in this communication, though reference is made to Section 7(4), no reference is made to Section 6 of the Act. When exhibit P-7 demand was given to the Commissioner and Secretary, Industries Department, and he was asked to make early payment, he gave a reply, exhibit P-8. In exhibit P-8, the State Government refers to Sections 5 and 7(4) of the Acquisition Act and claims that the Government is not liable to pay any liability which arose before the vesting. Section 6 is overlooked in this communication also. An alternative plea is raised to the effect that, in any case, by reason of Section 6 of the Act, the Government is not liable to pay interest u/s 220(2) of the Income Tax Act. Exhibit P-9 is another letter from the Commissioner and Secretary of the Industries Department to the managing director of the petitioner giving a clarification as to the legal position. In this, it is reiterated that the Government is not bound to pay liabilities which arose prior to the date of vesting, and u/s 7(4), the Government is liable only for unspecified liabilities which arise in future. On the basis of exhibit P-9, clarification given by the Government, the petitioner sent a detailed reply dated December 31, 1986, to the first respondent. In this, it is reiterated that the liabilities vested with the Government do not include the liability to pay Income Tax. But, at the same time, the letter admits that the liabilities of the company shall stand transferred to and vest in the Government or Government company. Then, after making reference to the amount entrusted with the Commissioner of Payments and to Section 7(4), it is stated that the Government is liable only for future liabilities, and as Super Clays and Minerals Mining Company (P.) Ltd. is still in existence, the Tax Recovery Officer may proceed against the fourth respondent. It is interesting to see that in exhibit P-10 also, Section 6is overlooked and the reply is drafted overlooking Section 6 of the Acquisition Act and the transfer of liabilities to the Government company. As a consequence of exhibit P-10, the first respondent approached the Commissioner of Payments, the District Collector, Cannanore, under exhibit P-11 on January 14, 1987, It is now admitted that, till the filing of this original petition, there was no reply from the Commissioner of Payments for this exhibit P-11 letter. The enclosures to exhibit P-11 clearly indicate that Rs. 50,281 is due as tax and Rs. 53,064 due as interest making a total of Rs. 1,03,345. As there was no response from the Commissioner of Payments, exhibit P-12 was addressed again to the petitioner threatening coercive action, if payment is not made promptly. Then, the present original petition is filed.

It should be remembered that, u/s 6 of the Acquisition Act, the assets and liabilities have vested in the Government company. By excluding Section 6'', the petitioner cannot escape liability for the Income Tax arrears and the interest due. It should be remembered that protection is given only for the amounts specified in the balance sheet audited as on December 31, 1975. The tax dues were not shown in the balance-sheet. A statutory liability cannot be evaded by the petitioner. The petitioner is the successor-in-interest for the fourth respondent which was taken over by the Government. As successor-in-interest, the petitioner is certainly liable to pay the amount.

Looking at the entire fuels of the case, it looks as if the Income Tax authorities have unnecessarily granted too much lenience and went into prolonged correspondence with the petitioner and the Government to realise what is legitimately due to them. It looks as if they proceeded on the footing that there was a moratorium and hence they should not take coercive steps. The petitioner should thank them for the undue lenience shown to it. The petitioner is certainly bound to pay the amount as it constitutes a liability of the taken-over company. It should be remembered that the assets and liabilities of the fourth respondent, have vested in the petitioner-company. The petitioner is not entitled to any relief in this original petition.

In the result, the original petition is dismissed as devoid of merit, Respondents Nos. 1 to 3 are entitled to their costs. The fourth respondent shall bear its own costs. The advocate''s fee fixed at Rs. 1,500.