The NCLAT Bench of Justice S J Mukhopadhaya and Justice Bansi Lal Bhat were hearing appeals filed by the Income Tax Department and the Sales Tax Department against order passed by various NCLT’s admitting the insolvency petitions against the connected respondents. The Bench framed the following issues that required adjudication as follows:

(i)            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? and;

(ii)          Whether the Central Government, the State Government or the legal authority having statutory claim, come within the meaning of ‘Operational Creditors’?

The appellants argued that taxes are statutory in nature and do not fall within the scope and ambit of an ‘Operational Debt’ as an ‘Operational Debt’ is a claim in respect of goods and services including employment or a debt in respect of payment of dues of the Central Government, State Government and Local Authorities. Reliance was placed on the judgment of the Hon’ble Supreme Court in Life Insurance Corporation of India vs D. J. Bahadur & Ors.─ (1981) 1 SCC 315 thereby submitting 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 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 Bench referred to judgment of the Hon’ble Supreme Court in Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors. Writ Petition (Civil) No. 99 of 2018, wherein the interpretation of the various provisions of the IBC was involved and the following was held:

“23. A perusal of the definition of “financial creditor” and “financial debt” makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, an ‘operational debt” would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local authority.

The Bench dismissed the appeals on the basis of its findings as follows:

“29. ‘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’.”

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Judgment: Tax Authorities Versus Others