Hero Fincorp Limited Vs. The State (NCT of Delhi) & Anr - The complaint of the Petitioner discloses a cognizable offence i.e. criminal breach of trust in respect of the terms of contract that was agreed upon, which requires to be investigated by the police despite taking into account the fact that borrowed amounts stand repaid to the Petitioner.

  High Court Delhi (04.01.2022) in Hero Fincorp Limited Vs. The State (NCT of Delhi) & Anr.  [CRL.M.C. 736/2021] held that;

• Undisputedly loans have been taken by the respondent No.2 for purchase of machineries. The machineries have not been purchased and the money, which had been taken for purchase of machinery, has been misappropriated for the use of respondent No.2. The facts on the face of it prima facie discloses a cognizable offence. 

• The complaint of the Petitioner discloses a cognizable offence i.e. criminal breach of trust in respect of the terms of contract that was agreed upon, which requires to be investigated by the police despite taking into account the fact that borrowed amounts stand repaid to the Petitioner or the fact that proceedings before the arbitral tribunal are ongoing.

• It is relevant to mention that Section 39 of the Code (Cr.P.C.) casts a statutory duty on every person to inform about commission of certain offences which includes offences covered by Sections 121 to 126, 302, 64-A, 382, 392, etc. of the Penal Code. 

• It would be incongruous to suggest that though it is the duty of every citizen to inform about commission of an offence, but it is not obligatory on the officer in charge of a police station to register the report. 

• The word “shall” occurring in Section 39 of the Code (Cr.P.C.) has to be given the same meaning as the word “shall” occurring in Section 154(1) of the Code.

 

Excerpts of the order;

# 1. The present petition is filed under Section 482 CrPC praying for setting aside the order dated 22.01.2021 passed by the Learned Principal District & Sessions Judge, Patiala House in Criminal Revision No. 369/2020 whereby, the Ld. PDJ dismissed the Revision and upheld order dated 10.11.2020 passed by the Chief Metropolitan Magistrate which had rejected the application for registration of an FIR under Section 156(3) CrPC.

 

# 2. The Petitioner herein is a Non-Banking Finance Company(NBFC), incorporated under the Companies Act,1956 and registered with the Reserve Bank of India as an institution providing financial assistance. The Respondent No. 2 is Sunil Sharma, Director of M/s Benlon India Ltd. The facts leading upto the present case are given as hereunder-

i. Mr. Balbir Sharma, Mrs. Sudesh Sharma and Mr. Balbir Sharma in their capacity as Directors of M/s Benlon India Ltd. approached the Petitioner in October 2014 for grant of a loan of Rs. 12.25 Crores stating that their company required to purchase 18 winding machines with standard accessories. Three agreements, namely the Master Facilities Agreement, Supplementary Agreement and Personal Guarantees were executed between both the parties. The loan was sanctioned by the Petitioner vide sanction letter reference No. HFCL/MTL/1007/2014 dated 24.10.2014.

ii. Mr. Balbir Sharma, Mrs. Sudesh Sharma and Mr. Sunil Sharma in their capacity as Directors of M/s Benlon India Ltd. again approached the Petitioner in December 2014 for the grant of a loan of Rs. 10 Crores stating that their company required to purchase 12 sets of Spinning (Winding)Machine, Model- TH-9C. Three agreements, namely the Master Facilities Agreement, Supplementary Agreement and Personal Guarantees were executed between both the parties. The loan was sanctioned by the Petitioner vide sanction letter reference No. HFCL/MME/01-07/20145 dated 06.02.2015.

iii. Mr. Balbir Sharma, Mrs. Sudesh Sharma and Mr. Sunil Sharma in their capacity as Directors of M/s Benlon India Ltd. again approached the Petitioner in October 2014 for the grant of a loan of Rs.15 Crores stating that their company required to purchase further equipment i.e. 6 Chennile Machines- PAFA SPIRAFIL 2FR (2) 1 PET FDY Production Spinning Line with JWA 15/1500.Three agreements, namely the Master Facilities Agreement, Supplementary Agreement and Personal Guarantees were executed between both the parties. The loan was sanctioned by the Petitioner vide sanction letter reference No. HFCL/MME/02-04/2016 dated 13.2.2016.

iv. The Respondent No. 2, Mr. Balbir Sharma and Mrs. Sudesh Sharma agreed to create a first pari passu charge on fixed assets in favour of the Petitioner on the land and building at Plot No. 122, 123, 124, 506, 508, 509, 510 HSIDC Industrial Area, Kundli, Sonipat, Haryana. Further, it was agreed that Mr. Balbir Sharma will create an equitable charge on a property situated at Punjabi Bagh in favour of the Petitioner and a Memorandum of Deposit of Title Deed dated 13.2.2016 was executed in the Petitioner’s favour.

v. The Respondents made payments of their loan instalments to the Petitioner until May 2018 when the Respondents started defaulting on their payments. It is indicated that the Respondents’ business/company suffered a huge financial loss in a fire at their official premises and they were not in a position to repay their debts/liabilities. The company was liquidated and proceedings were initiated before the NCLT and a liquidator was appointed. The Petitioner also filed their claim before the NCLT and the Committee of Creditors. The Petitioner took possession of the Flat at Punjabi Bagh that was mortgaged in their favour. The Petitioner further invoked the arbitration clause in the agreement against the Respondents on 11.1.2019. Respondent No. 2 filed a securitization application (No.4/2019) before the Debt Recovery Tribunal which is pending.

vi. The Petitioner on 13.12.2018 filed a complaint to Deputy Commissioner of Police, Economic Offences Wing stating that the Respondent No.2 hatched a criminal conspiracy whereby they defrauded the Petitioner by taking loans on the pretext of purchasing machines and equipment, and actually utilized the money for illegal purposes and caused a wrongful loss to the Petitioner of Rs.37.25 Crores. It is stated therein that before sanctioning of the loans the Respondent No.2 had agreed to a contract whereby he would utilize the loan amount only towards purchase of machines and would further timely send invoices to the Petitioner showing purchase of machinery. It was alleged by the Petitioner that the Respondents in order to keep availing of the loans fabricated and forged documents to substantiate their end of the agreement and gave incomplete documentation regarding the machinery.

vii. The Assistant Commissioner of Police, EOW sent a letter dated 08.07.2019 to the authorized representative of the Petitioner, Mr. Kisalay Kartikey which stated that the complaint of the petitioner could not be established and intimated that they were closing the complaint.

viii. The Petitioner addressed a complaint dated 11.7.2019 to the Commissioner of Police, EOW intimating in greater detail the allegations as were stated in the letter dated 11.7.2019 and annexed allegedly forged proforma invoices, showing the buying of machines, that were sent to the petitioner by Respondent No.2 as per their agreement.

 

# 3. The Petitioner filed an application under Section 156(3) Cr.P.C before the Magistrate calling upon her to direct the Police to register a FIR against the Respondent No.2 on the charges of cheating, forgery, criminal breach of trust and misappropriation for a sum of Rs. 7,35,22,719/- which Respondent No.2 and his parents Mr. Balbir Singh and Mrs. Sudesh Singh induced the Petitioner to grant them as a loan for buying machinery instrumental for their business. It was stated therein that the Respondent No.2 stopped paying the interest instalments and failed to adhere to the repayment schedule as per their agreement and when the Petitioner’s went to inspect the factory site of the Respondent No.2 they were not allowed to inspect the premises out of there. It is stated that the respondent No.2 and his parents in furtherance of the criminal conspiracy dishonestly misappropriated the loan amount for their own gains in complete contravention in specified terms of the loan agreement.

 

# 4. The learned CMM, Patiala House Court vide order 10.11.2020 dismissed the application under Section 156(3) Cr.P.C of the petitioner and held that the commission of a cognizable offence shall require the registration of an FIR, but every cognizable offence does not require investigation by the police.

 

# 5. Aggrieved by the above order, the petitioner filed a revision before the learned Principal District and Sessions Judge, Patiala House Courts, New Delhi challenging the order dated 10.11.2020, passed by the learned CMM, Patiala House Courts, New Delhi. The Revisionist Court by a detailed order dated 22.01.2021 analyzed the scope of Section 156(3) Cr.P.C and powers that are conferred on the Magistrate to take cognizance of a complaint under Section 190 Cr.P.C or direct the police to conduct an investigation of a cognizable offence, after due application of mind under Section 156(3) Cr.P.C. The learned Revisionist Court upheld the order the ld. CMM dismissing the prayer for the registration of an FIR and held that the said order did not suffer from any infirmity, impropriety or illegality.

 

# 6. Heard the parties and perused the material placed on record.

 

# 7. Mr. Sanjeev Singh, appeared for the petitioner. Ms. Meenakshi Chauhan, learned APP appeared for the State. Mr. Ashok Kumar Goyal appeared for Respondent No.2.

 

# 8. Mr. Sanjeev Singh, learned Counsel, submits that the orders passed by the revisionist court and the ld. CMM suffer from a non-application of judicial mind. He submitted that the respondent No.2 has usurped the loan amounts granted to him for his own purposes and has gone violated the loan agreements dated 25.10.2014, 11.02.2015 and 13.02.2016 under which bona fides large sum of monies were disbursed for the purposes of procuring machinery and appliances for the business of respondent No.2.

 

# 9. He submits that the respondent No.2 consciously deviated from the terms agreed upon in the master facility agreements and the supplementary agreements, and in furtherance of his motives to use the money for extra-legal purposes, to show a perfunctory compliance of the terms of the contract submitted concocted and fabricated purchase invoices to show that the loans were being utilized only towards purchase of machinery.

 

# 10. He submits that the Respondent no. 2 had since early 2016 willfully defaulted on the instalments on the payment of loan and violated the repayment schedule as agreed upon in the terms of the contract. He further contends that when the respondents started defaulting the officials of the Petitioner company visited the factory of the respondent no.2 for a surprise inspection and the said officials were not allowed to enter the premises and later found out that the machinery had been sold and a few of the machines had been moved to another location. He submits that the shifting of machinery had to be done with prior intimation to the financier a.k.a the Petitioner, and it was an express obligation under the contract.

 

# 11. He submitted that the Respondent No.2 have admitted to this fact that machines had not been purchased with the loans sanctioned before this Court in OMP(I) (COMM.) 423/2018 and this fact has been recorded in the Court order dated 19.12.2018. He contends that the orders passed by the Ld. Courts below neglected to take into account this categorical admission of non-purchase of machinery by Respondent No.2 before this Hon’ble Court.

 

# 12. Mr. Ashok Kumar Goyal, learned counsel for respondent No.2, submitted that the orders passed the ld. PDJ and the ld. Chief Metropolitan Magistrate were reasoned orders made with the application of judicial minds and taking into account relevant factors such as the various ongoing proceedings waiting adjudication. He submitted that there was no intention to cheat or deceive the petitioner’s company and loans were disbursed after a comprehensive verification by the petitioner and after furnishing of substantial personal guarantees by the respondent’s company. 

 

# 13. He vehemently argued that the loans were being timely repaid and the bills of machinery obtained were being submitted to the petitioner until May, 2018. He submitted that he suffered losses in his business due to a deteriorating business climate and demonetization which was aggravated by a fire that took place in his factory, destroying 180 Crore Rupees worth of machinery. He finally submitted that the total loan amount of 37.5 Crore Rupees stands fully repaid pursuant to the proceedings before the NCLT and, therefore, since the loan amount has been remitted, the contract binding the terms and conditions of the loan stands performed and no offence is made out.

 

# 14. The material on record discloses that the petitioner advanced three loans to the respondent for the sole purpose of procuring machinery and other accessories thereof and based on this understanding Loan agreements were entered into, and three loans of Rs.12.25 Crores, Rs.10 Crores and Rs.15 Crores were given by the petitioner. The relevant terms of the Supplementary Agreement have been reproduced below:-

• “2. Facility Terms 

• 2.1 Disbursement 

• a. The nature of the Facility is "Machinery purchase funding". The Borrower desires to purchase certain Machineries (as specifically set forth in Schedule (I) in relation to the sanctioned Purpose and has approached HFCL vide the utilization Request to finance the Machinery); basis which HFCL has agreed to sanction the Facility, in respect thereof, pursuant to the Facilities Agreement. 

• b. Pursuant to the above, HFCL will make payment under/disburse the Facility to the borrower and/or any third party, being the supplier of Machinery in the manner as set forth in Schedule I. That any disbursement of Facility to a third party, being the supplier of Machinery (who is entitled to receive money from Borrower basis the sanctioned Purpose) shall be against the account of the Borrower, under the Facilities Agreement and accordingly shall be deemed as Disbursement made to the Borrower under the Agreement"

 

# 15. The relevant portion of Section 405 and 406 IPC which defines criminal breach of trust and the punishment of criminal breach of trust are as under: 

• "Criminal breach of trust.—Whoever, being in any manner entrusted with property, or with any dominion over property, dishonestly misappropriates or converts to his own use that property, or dishonestly uses or disposes of that property in violation of any direction of law prescribing the mode in which such trust is to be discharged, or of any legal contract, express or implied, which he has made touching the discharge of such trust, or wilfully suffers any other person so to do, commits “criminal breach of trust” -

• Illustration:

• a) xxx

• b) xxx

• c) A, residing in Calcutta, is agent for Z, residing at Delhi. There is an express or implied contract between A and Z, that all sums remitted by Z to A shall be invested by A, according to Z’s direction. Z remits a lakh of rupees to A, with directions to A to invest the same in Company’s paper. A dishonestly disobeys the direction and employs the money in his own business. A has “committed criminal breach of trust."

• 406. Punishment for criminal breach of trust.—Whoever commits criminal breach of trust shall be punished with imprisonment of either description for a term which may extend to three years, or with fine, or with both.

 

# 17. The ingredients of the offence of criminal breach of trust is that:

• i) Entrustment of property.

• ii) The use/discharge of such property being specified by express or implied contract.

• iii) A dishonest misappropriation in using or disposing such property.

 

# 18. The Hon’ble Supreme Court in Jaswant Rai Manilal Akhanay Vs. State of Bombay, AIR 1956 SC 575 has interpreted the provision of Section 405 IPC as follows:

• “But when section 405 which defines "criminal breach of trust" speaks of a person being in any manner entrusted with property, it does not contemplate the creation of a trust- with all the technicalities of the law of trust. It contemplates the creation of a relationship whereby the owner of property makes it over to another person to be retained by him until a certain contingency arises or to be disposed of by him on the happening of a certain event. The person who transfers,, possession of the property to the second party still remains the legal owner of the property and the person in whose favour possession is so transferred has only the custody of the property to be kept or disposed of by him for the benefit of the other party, the person so put in possession only obtaining a special interest by way of a claim for money advanced or spent upon the safe keeping of the thing or such other incidental expenses as may have been incurred by him.”

 

# 19. The Hon’ble Supreme Court in Sardar Singh vs. State of Haryana, (1977) 1 SCC 463 has expanded the facets of the criminal breach of trust as follows:

• “The offence of criminal breach is defined in Section 405 and an essential ingredient of this offence is that the accused being in any manner entrusted with property or with dominion over property, dishonestly misappropriates or converts to his own use that property or dishonestly uses or disposes of that property in violation of any direction of law prescribing the mode in which such trust is to be discharged or of any legal contract, express or implied, which he has made touching the discharge of such trust.”

 

# 20. The allegations made by the petitioner against respondent No.2’s company in its application under Section 156 (3) Cr.P.C reveals that the loans were given pursuant to a written contract and it appears prima facie that the respondent No.2 did not conform to all the terms and conditions that they agreed to at the time of seeking loan from the petitioner. It is correct that there are multiple proceedings that are presently being adjudicated before the sole arbitrator, liquidation proceedings before the NCLT and a claim that was decided by the Debt Recovery Tribunal. It is an admitted position, which has been verified by the State that the respondent No.2 incurred losses due to a fire that broke out at the factory of the petitioner causing him financial stress.

 

# 21. It has been held by the Supreme Court of India in Trisuns Chemical Industry V. Rajesh Agarwal (1999) 8 SCC 686 invoking an arbitration clause does not preclude filing of criminal proceedings and these two proceedings can be pursued parallely and independently, without affecting each other. In other words, there is no bar of pursuing criminal proceedings once arbitration has commenced.

 

# 22. Section 154 Cr.P.C provides for the registration of the First Information Report in respect of cognizable offences, which the police is mandated by law to register in writing and thereafter investigate into it. If the police refuses to file a First Information Report then a complaint can be filed with the Magistrate to direct the police to probe into the commission of a cognizable offence. The remedy under Section 156 (3) Cr.P.C can only be exercised to report the commission of a cognizable offence and not non-cognizable offences.

 

# 23. The Apex Court in Lalita Kumari vs. State of U.P., (2014) 2 SCC 1 has emphatically held that the police is duty bound to register an FIR on receiving information on the commission of a cognizable offence. The police has no other option but to register an FIR when such information pertaining to a cognizable offence and has to mandatorily investigate into the allegations of the FIR.

• "49. Consequently, the condition that is sine qua non for recording an FIR under Section 154 of the Code is that there must be information and that information must disclose a cognizable offence. If any information disclosing a cognizable offence is led before an officer in charge of the police station satisfying the requirement of Section 154(1), the said police officer has no other option except to enter the substance thereof in the prescribed form, that is to say, to register a case on the basis of such information. The provision of Section 154 of the Code is mandatory and the officer concerned is duty-bound to register the case on the basis of information disclosing a cognizable offence. Thus, the plain words of Section 154(1) of the Code have to be given their literal meaning. 

• “Shall” 

• 50. The use of the word “shall” in Section 154(1) of the Code clearly shows the legislative intent that it is mandatory to register an FIR if the information given to the police discloses the commission of a cognizable offence. 

• 53. Investigation of offences and prosecution of offenders are the duties of the State. For “cognizable offences”, a duty has been cast upon the police to register FIR and to conduct investigation except as otherwise permitted specifically under Section 157 of the Code. If a discretion, option or latitude is allowed to the police in the matter of registration of FIRs, it can have serious consequences on the public order situation and can also adversely affect the rights of the victims including violating their fundamental right to equality. 

• 54. Therefore, the context in which the word “shall” appears in Section 154(1) of the Code, the object for which it has been used and the consequences that will follow from the infringement of the direction to register FIRs, all these factors clearly show that the word “shall” used in Section 154(1) needs to be given its ordinary meaning of being of “mandatory” character. The provisions of Section 154(1) of the Code, read in the light of the statutory scheme, do not admit of conferring any discretion on the officer in charge of the police station for embarking upon a preliminary inquiry prior to the registration of an FIR. It is settled position of law that if the provision is unambiguous and the legislative intent is clear, the court need not call into it any other rules of construction.

• 55. In view of the above, the use of the word “shall” coupled with the scheme of the Act lead to the conclusion that the legislators intended that if an information relating to commission of a cognizable offence is given, then it would mandatorily be registered by the officer in charge of the police station. Reading “shall” as “may”, as contended by some counsel, would be against the scheme of the Code. Section 154 of the Code should be strictly construed and the word “shall”should be given its natural meaning. The golden rule of interpretation can be given a go-by only in cases where the language of the section is ambiguous and/or leads to an absurdity. 

• 56. In view of the above, we are satisfied that Section 154(1) of the Code does not have any ambiguity in this regard and is in clear terms. It is relevant to mention that Section 39 of the Code casts a statutory duty on every person to inform about commission of certain offences which includes offences covered by Sections 121 to 126, 302, 64-A, 382, 392, etc. of the Penal Code. It would be incongruous to suggest that though it is the duty of every citizen to inform about commission of an offence, but it is not obligatory on the officer in charge of a police station to register the report. The word “shall” occurring in Section 39 of the Code has to be given the same meaning as the word “shall” occurring in Section 154(1) of the Code."

 

# 24. Applying the law to the facts of this case, undisputedly loans have been taken by the respondent No.2 for purchase of machineries. The machineries have not been purchased and the money, which had been taken for purchase of machinery, has been misappropriated for the use of respondent No.2. The facts on the face of it prima facie discloses a cognizable offence. The learned CMM and the learned PDJ have erred in not directing the registration of the FIR as the offence alleged of directly comes within the four corners of the Constitution Bench Judgement of Lalita Kumari vs. State of U.P. (Supra). The complaint of the Petitioner discloses a cognizable offence i.e. criminal breach of trust in respect of the terms of contract that was agreed upon, which requires to be investigated by the police despite taking into account the fact that borrowed amounts stand repaid to the Petitioner or the fact that proceedings before the arbitral tribunal are ongoing. Therefore, this Court is of the opinion that a cognizable offence has been alleged against respondent No.2 and the same should be investigated after the registration of an FIR.

 

# 25. This Court directs the Economic Offences Wing to register an FIR against the respondent No.2 under the appropriate Sections.

 

# 26. This petition is accordingly disposed of along with the pending application(s), if any.

 

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Blogger’s comments; In the present case the financier has made payment direct to the supplier of the machineries. The financier has contended that the borrower has misappropriated the money without bringing out the supplier’s complicity in the transaction. When financier had made payments direct to the supplier, a duty is cast upon the financier to ensure supply of machinery to the borrower. How financer can wriggle out of this duty?

 

As far as immunity under section 32A of IBC, 2016, is concerned following observations of Hon’ble Supreme Court in Manish Kumar Vs. Union of India & Ors. [Writ Petition (C) No.26 of 2020] are quite significant;

 

# 258. It must be remembered that the immunity is premised on various conditions being fulfilled. There must be a resolution plan. It must be approved. There must be a change in the control of the corporate debtor. The new management cannot be the disguised avatar of the old management. It cannot even be the related party of the corporate debtor. The new management cannot be the subject matter of an investigation which has resulted in material showing abetment or conspiracy for the commission of the offence and the report or complaint filed thereto. These ingredients are also insisted upon for claiming exemption of the bar from actions against the property. Significantly every person who was associated with the corporate debtor in any manner and who was directly or indirectly involved in the commission of the offence in terms of the report submitted continues to be liable to be prosecuted and punished for the offence committed by the corporate debtor. The corporate debtor and its property in the context of the scheme of the code constitute a distinct subject matter justifying the special treatment accorded to them. Creation of a criminal offence as also abolishing criminal liability must ordinarily be left to the judgement of the legislature. Erecting a bar against action against the property of the corporate debtor when viewed in the larger context of the objectives sought to be achieved at the forefront of which is maximisation of the value of the assets which again is to be achieved at the earliest point of time cannot become the subject of judicial veto on the ground of violation of Article 14. We would be remiss if we did not remind ourselves that attaining public welfare very often needs delicate balancing of conflicting interests. As to what priority must be accorded to which interest must remain a legislative value judgement and if seemingly the legislature in its pursuit of the greater good appears to jettison the interests of some it cannot unless it strikingly ill squares with some constitutional mandate suffer invalidation. 

 

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Electrosteel Steels Limited V/s The State of Jharkhand & Ors. - VAT collected and not deposited with Exchequer, shall certainly amount to Criminal Misappropriation of the Government Money by the Company.

 High Court Jharkhand (01.05.2020) in  Electrosteel Steels Limited  V/s The State of Jharkhand & Ors.  [W.P.(T). No. 6324 of 2019] held that;

• # 18. . . . . . Learned AAG accordingly, submitted that since the notice was never published in the State of Jharkhand, the State authorities had no knowledge of any such corporate insolvency resolution process and accordingly, the State Government was deprived from making any claim in the corporate insolvency resolution process. “

• # 22. We however, find force in the submissions of the learned Additional Advocate General that the tax amount, which had been sought to be realised from the petitioner Company, had already been realised by the petitioner Company from the customers which was to be deposited in the Government Exchequer, but that having not been done by the Company and the amount having been utilized for its business purposes, throughout after the years 2011-12 and onwards, shall certainly amount to criminal misappropriation of the Government money by the Company, and the State Government is entitled to realize the same with the penalty due thereon.

• # 23. . . . . This Tax liability can very well be treated as the amount of tax already realised by the petitioner Company from its customers, on behalf of the State Government, and not the direct debt of the petitioner Company towards the State Government, in which case the tax liabilities of the petitioner Company, for realising which the impugned garnishee order has been issued, may not come within the definition of "operational debt", as defined in the IB Code.

• # 28.  . . .Since the State Government was not involved in the resolution process, the resolution plan cannot be said to be binding on the State Government under Section 31 of the IB Code,

 

Excerpts of the order;

# 2. Heard learned counsel for the petitioner, learned Additional Advocate General for the respondent State and learned counsel for the respondent Bank.

 

# 3. In all these writ applications, the petitioner Company has challenged the garnishee order bearing No.727 dated 21.11.2019, issued under Section 46 of the Jharkhand Value Added Tax Act, 2005 (hereinafter referred to as the 'JVAT Act'), as contained in Annexure-4 to the writ applications, issued by the respondent No.3, Deputy Commissioner of Commercial Taxes, Bokaro W.P.(T). No. 6324 of 2019 and analogous matters Circle, Bokaro, to the Respondent No.5, State Bank of India, in its branch situated in the campus of the petitioner Company, asking the respondent Bank to pay into the Government Treasury, the sum of Rs.37,41,41,602/-, on account of tax / penalty due under the JVAT Act, from the petitioner Company, who failed to deposit the taxes for the period from 2011-12 & 2012-13, from the Bank account of the Company. The petitioner Company has also challenged the letter No.733 dated 22.11.2009, as contained in Annexure-5 to the writ applications, issued by the State Tax Officer, Bokaro Circle, Bokaro, to the Respondent Bank, to deposit the amount of Rs.75,57,000/- by way of demand draft in favour of the Deputy Commissioner, Commercial Taxes, Bokaro Circle, Bokaro, in view of the fact that pursuant to the aforesaid garnishee order dated 21.11.2019, the respondent Bank had furnished the information that only the amount of Rs.75,57,000/- was available in the petitioner's account.

 

# 5. Admittedly, in the present writ applications, there is no challenge to the tax liabilities of the petitioner Company, though the re-assessment orders dated 17.08.2018 passed by the Assessing Authority, i.e., Assistant Commissioner of State Tax, Bokaro Circle, Bokaro, have been brought on record as Annexures-3 to the writ applications, pursuant to which the impugned garnishee order has been issued. Learned counsel for the petitioner has vehemently argued that the State Government, whose tax dues could not be paid by the petitioner Company, was also the 'operational creditor' within the meaning of Section 5 (20) of the IB Code, but no claim was made by the State Government during the corporate insolvency resolution process, and accordingly, upon an approval of the resolution plan by the NCLT, any claim of the State Government stood barred under Section 31 of the IB Code.

 

# 6. It is submitted by learned counsel for the petitioner that in spite of the fact that the claim of the State Government now stands barred, the garnishee order has been issued by the Deputy Commissioner of Commercial Taxes, Bokaro Circle, Bokaro, which is absolutely illegal, void ab-initio and wholly without jurisdiction and cannot be sustained in the eyes of law. As the resolution plan has already been approved by the NCLT, and the management of the petitioner Company has been taken over by M/s. Vedanta Limited, the resolution plan is now binding upon the corporate debtor, i.e., the petitioner Company, and its creditors, including the State Government, to whom any debt had accrued under any law, including under the JVAT Act, by virtue of Section 31 of the IB Code.

 

# 7. It is pointed out by learned counsel for the petitioner, that Section 238 of the IB Code has an overriding effect on all other laws for the time being in force, which reads as follows:-

• "238. The provisions of this Code shall have effect, W.P.(T). No. 6324 of 2019 and analogous matters notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. "

 

# 8. In support of his contention, learned counsel for the petitioner Company has placed reliance upon the decision of the Hon'ble Apex Court in Innovative Industries Limited Vs. ICICI Bank & Anr, reported in 2018 (1) SCC 407, wherein it has been held that IB Code is a Parliamentary Law and is an exhaustive Code on the subject matter of insolvency in relation to the corporate entities.

 

# 9. Learned counsel for the petitioner has also submitted that even the tax liabilities payable to the Government would come within the meaning of the expression "operational debt" under Section 5 (21) of the IB Code, making the Government an "operational creditor" in terms of Section 5(20) thereof, and shall be governed by the approved resolution plan. In support of his contention learned counsel has placed reliance upon the decision of the Hon'ble Apex Court in Embassy Property Developments Pvt. Ltd. Vs. State of Karnataka & Ors., reported in Manu/SC/1661/2019, wherein it has been held as follows:-

• "36. ----------------. Let us take for instance a case where a corporate debtor had suffered an order at the hands of the Income Tax Appellate Tribunal, at the time of initiation of CIRP. If Section 60(5) (c) of IBC is interpreted to include all questions of law or facts under the sky, an Interim Resolution Professional/Resolution Professional will then claim a right to challenge the order of the Income Tax Appellate Tribunal before the NCLT, instead of moving a statutory appeal under Section 260A of the Income Tax Act, 1961. Therefore, the jurisdiction of the NCLT delineated in Section 60(5)cannot be stretched so far as to bring absurd results. (It will be a different matter, if proceedings under statutes like Income Tax Act had attained finality, fastening a liability upon the corporate debtor, since, in such cases, the dues payable to the Government would come within the meaning of the expression "operational debt" Under Section 5 (21), making the Government an "operational creditor" in terms of Section 5(20). The moment the dues to the Government are crystalized and what remains is only payment, the claim of the Government will have to be adjudicated and paid only in a manner prescribed in the resolution plan as approved by theAdjudicating Authority, namely the NCLT.)" (Emphasis supplied).

 

# 10. In this connection learned counsel has further placed reliance upon the decision of the Hon'ble Apex Court in Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors., reported in (2019) 4 SCC 17, wherein it is held as W.P.(T). No. 6324 of 2019 and analogous matters follows:-

• "42. 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 dues arising under any law and payable to the Government or any local authority."

(Emphasis supplied).

 

# 11. Learned counsel has also placed reliance upon an order of the Hon'ble Apex Court in Pr. Commissioner of Income Tax Vs. Monnet Ispat & Energy Ltd. (Special Leave to Appeal (c) No.6483 of 2018, decided on 10.08.2018), wherein, similar view has been taken by the Apex Court, holding as follows:-

• "Given Section 238 of the Insolvency and Bankruptcy Code, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment, including the Income Tax Act. We may also refer in this connection to Dena Bank Vs. Bhikhabhai Prabhudas Parekh and Co. & Ors. (2000) 5 SCC 694 and its progeny, making it clear that income-tax dues, being in the nature of Crown debts, do not take precedence even over secured creditors, who are private persons."

 

# 12. It is submitted by the learned counsel for the petitioner that had the claim of the State Government been made at the stage of the corporate insolvency resolution process, even in that case, the claim of the State Government could have been settled only in the manner prescribed in the resolution plan as approved by the Adjudicating Authority namely the NCLT, but in the present case, as no such claim was made by the State Government at the time of corporate insolvency resolution process, the claim of the State Government now stands completely barred under Section 31 of the IB Code, and after the approval of the resolution plan, no fresh claim can be entertained. In support of this connection, learned counsel has placed reliance upon the decision of the Hon'ble Apex Court in Committee of Creditors of Essar Steel India Limited, through authorized Signatory Vs. Satish Kumar Gupta & Ors., reported in 2019 SCC OnLine SC 1478, wherein it has been held as W.P.(T). No. 6324 of 2019 and analogous matters follows:-

• "88. For the same reason, the impugned NCLAT judgment in holding that claims that may exist apart from those decided on merits by the resolution professional and by the Adjudicating Authority/Appellate Tribunal can now be decided by an appropriate forum in terms of Section 60(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly be faced with "undecided" claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove. For these reasons, the NCLAT judgment must also be set aside on this count." (Emphasis supplied).

 

# 13. Placing reliance on these decisions, learned counsel concluded that the garnishee order issued by the respondent No.3, Deputy Commissioner of Commercial Taxes, Bokaro Circle, Bokaro, is in teeth of the terms of the approved resolution plan, and the garnishee order is wholly without jurisdiction and void ab-initio and cannot be sustained in law.

 

# 14. Per contra, learned Additional Advocate General has opposed the prayer and has submitted that the main order of re-assessment is not under challenge in these writ applications by the petitioner. Learned AAG has drawn our attention towards the statement made in the supplementary affidavit filed by the petitioner, in which, it is stated that without prejudice to the present writ applications, the petitioner by way of abundant precaution has filed revision petition along-with stay petition before the Revisional Authority, i.e., the Commissioner of State Tax, Jharkhand. Learned AAG, accordingly, submitted that the petitioner has already availed the alternative remedy before the Revisional Authority and accordingly, the present writ applications cannot be maintained in the eyes of law and are fit to be dismissed on this score alone.

 

# 15. Learned AAG has also drawn our attention towards Section 79 of the JVAT Act, and has submitted that the re-assessment orders were subject to appeal upon deposit of 20% of the tax assessed, which remedy has not availed by the petitioner Company, in order to escape the 20% tax liability, and as such, W.P.(T). No. 6324 of 2019 and analogous matters these writ applications cannot be entertained on this score as well. It is submitted by learned AAG that the case of the petitioner does not fall within the categories of cases in which the alternative remedy is not a bar for exercising the writ jurisdiction. In support of his contention learned AAG has placed reliance upon the decision of the Hon'ble Apex Court in Harbanslal Sahnia & Anr. Vs. Indian Oil Corpn. Ltd. & Ors., reported in (2003) 2 SCC 107, laying down the law as follows:-

• "7. -----------. In an appropriate case, in spite of availability of the alternative remedy, the High Court may still exercise its writ jurisdiction in at least three contingencies: (i) where the writ peti- tion seeks enforcement of any of the fundamental rights; (ii) where there is failure of principles of natural justice; or (iii) where the orders or proceedings are wholly without jurisdiction or the vires of an Act is challenged. ----------."

 

# 16. It is also pointed out by the learned AAG that admittedly, the petitioner Company had collected the tax from its purchasers / customers in the name of VAT, but has not deposited the same in the State Exchequer, thus, amounting to criminal misappropriation of the Government money entrusted to the petitioner Company by its purchasers / customers, and has thus committed the offence of criminal breach of trust.

 

# 17. Learned AAG has also pointed out that in the present case, the corporate insolvency resolution process was started on 21.07.2017. The right of the State Government to recover the tax from the petitioner Company accrued in the years 2011-12 & 2012-13. The IB Code itself was enacted in the year 2016 and accordingly, the tax liability of the petitioner, which the petitioner Company ought to have discharged in the years 2011-12 and 2012-13, cannot be said to be affected by the IB Code.

 

# 18. Learned Additional Advocate General has also pointed out that Section 31 of the IB Code clearly states that the approved resolution plan shall be binding on the stake-holders involved in the resolution plan. It is submitted that the State Government was never involved in the resolution process and there was a valid reason for the same, inasmuch as, the notice required to be issued under Section 13 of the IB Code, which ought to have been issued in the State of Jharkhand, where the petitioner Company is having its registered office as well as the principal place of business, but the said notice was never published in the State of Jharkhand, rather the notice which has been brought on record as Annexure-7 to the supplementary affidavit filed by the petitioner, W.P.(T). No. 6324 of 2019 and analogous matters clearly shows that it was published only in the Kolkata Edition of Business Standard on 24.07.2017. Learned AAG accordingly, submitted that since the notice was never published in the State of Jharkhand, the State authorities had no knowledge of any such corporate insolvency resolution process and accordingly, the State Government was deprived from making any claim in the corporate insolvency resolution process. Learned AAG thus, submitted that the writ applications are fit to be dismissed on this score as well.

 

# 19. The respondent State Bank of India has also filed its counter affidavit, and it is pointed out by learned counsel for the respondent Bank from the counter affidavit that pursuant to the garnishee order, the Bank account of the petitioner has been freezed, and the following amounts have already been remitted to the State Exchequer:-

• (a) Rs. 75.67 lacs on 28.11.2019,

• (b) Rs. 12.00 lacs on 02.12.2019 and

• (c) Rs 61.00 lacs on 3.12.2019.

 

# 20. In reply, learned counsel for the petitioner Company has placed stress upon paragraph 3.6 of the resolution plan, which has been brought on record as Annexure-1 to the writ applications, wherein it is stated that all the claims of taxes and liabilities whether admitted or not, due or contingent, whether or not set out in the provincial balance sheet, shall stand extinguished by virtue of the order of the NCLT, approving the resolution plan, and the Company shall not be liable to pay any tax against such dues, and such liabilities shall stand extinguished and be considered as not payable by the Company by virtue of the order of the NCLT, approving the resolution plan. Learned counsel has submitted that the resolution plan of the company, now stands approved up to the Hon'ble Apex Court, by virtue of the order dated 27.11.2019 passed in Civil Appeal Nos.1133-9081 of 2019. Learned counsel accordingly, reiterated that the taxes, even if accrued in the years 2011-12 and 2012-13, can no more be realized from the petitioner Company after approval of the resolution plan by the NCLT.

 

# 21. Having heard the learned counsels for both sides and upon going through the record, we find that in the present cases, the State Government shall fall within the definition of 'operational creditor', and the taxes payable by the petitioner shall fall within the definition of 'operational debt', as defined in the IB Code as follows:-

• "Section 5 (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;

• Section 5 (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;"

As such, there can be no doubt that the case of the petitioner shall be governed by the provisions of the IB Code.

 

# 22. We however, find force in the submissions of the learned Additional Advocate General that the tax amount, which had been sought to be realised from the petitioner Company, had already been realised by the petitioner Company from the customers which was to be deposited in the Government Exchequer, but that having not been done by the Company and the amount having been utilized for its business purposes, throughout after the years 2011-12 and onwards, shall certainly amount to criminal misappropriation of the Government money by the Company, and the State Government is entitled to realize the same with the penalty due thereon.

 

# 23. There is yet another aspect of the matter. The amount of VAT must have already been realised by the petitioner Company from the customers. In that view of the matter, it is debatable whether the amount of VAT shall be covered by the expressions "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", so as to bring it within the definition of "operational debt", as defined in the IB Code. This Tax liability can very well be treated as the amount of tax already realised by the petitioner Company from its customers, on behalf of the State Government, and not the direct debt of the petitioner Company towards the State Government, in which case the tax liabilities of the petitioner Company, for realising which the impugned garnishee order has been issued, may not come within the definition of "operational debt", as defined in the IB Code. The decisions cited by learned counsel for the petitioner in Embassy Property Developments Pvt. Ltd.'s case (supra) and in Monnet Ispat and Energy Ltd.'s case (supra), are of no help to the petitioner Company, as they related to Income Tax dues, which were the direct debts of the corporate debtors in those cases.

 

# 24. We also find from the record that the re-assessment orders were passed on 17.08.2018 as contained in Annexure-3 to the writ applications, by W.P.(T). No. 6324 of 2019 and analogous matters which date the resolution plan was already approved by the NCLT on 17.04.2018, but the same was never brought to the knowledge of the Commercial Tax officials by the Company, even though the petitioner Company was given a hearing by the Assessing Authority, i.e., respondent No. 4 Assistant Commissioner of State Tax, Bokaro Circle, Bokaro, before passing the re-assessment orders.

 

# 25. We also find from the record that the notice under Section 13 of the IBC Code was never published in the State of Jharkhand, rather the notice was published only in the Business Standard of Kolkata Edition on 24.07.2017 as contained in Annexure-7 to the supplementary affidavit. There is no denial to the fact that such notice was never published in the State of Jharkhand.

 

# 26. Section 13 of the IB Code reads as follows:-

"13. (1) The Adjudicating Authority, after admission of the ap- plication under section 7 or section 9 or section 10, shall, by an order--

(a) declare a moratorium for the purposes referred to in section 14;

(b) cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims under section 15; and

(c) appoint an interim resolution professional in the manner as laid down in section 16.

(2) The public announcement referred to in clause (b) of sub-section (1) shall be made immediately after the appointment of the interim resolution professional."

 

# 27. The detailed procedure for public announcement, as required under Section 13(1)(b) of the IB Code, is provided in Regulation 6 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate persons) Regulations, 2016. Even the notice which has been brought on record as Annexure-7 to the supplementary affidavit filed by the petitioner, shows that it was published under this provision. Relevant portion of Regulation 6 thereof reads as follows:-

"6. Public announcement. 

(1) An insolvency professional shall make a public announcement immediately on his appointment as an interim resolution professional.

Explanation: 'Immediately' means not later than three days from the date of his appointment.

(2) The public announcement referred to in sub-regulation (1) shall:

(a) be in Form A of the Schedule;

(b) be published-

(i) in one English and one regional language newspaper with wide circulation at the location of the registered office and princi- pal office, if any, of the corporate debtor and any other location where in the opinion of the interim resolution professional, the corporate debtor conducts material business operations;

-----------------."

# 28. Thus, a conjoint reading of Section 13(1)(b) of the IB Code read with Regulation 6 aforesaid, clearly shows that the public announcement had to be made in the newspapers with wide circulation at the location of the registered office and principal office, of the petitioner Company. Admittedly, the registered office of the petitioner Company is at Ranchi, and its principal place of business is in the District of Bokaro, both of which are situated in the State of Jharkhand, but no public announcement of the corporate insolvency resolution process was made in the State of Jharkhand. We are conscious of the fact that since the resolution plan is approved by the NCLT, and not interfered with even by the Hon'ble Apex Court as pointed out above, we are not required to look into the legality or otherwise of the resolution process, but the fact remains that due to non publication of the public announcement of the corporate insolvency resolution process in the State of Jharkhand, the authorities of the Commercial Taxes Department had no occasion to have any knowledge about the corporate insolvency resolution process of the Company, and they were deprived of making their claim before the interim resolution professional. Since the State Government was not involved in the resolution process, the resolution plan cannot be said to be binding on the State Government under Section 31 of the IB Code, relevant portion of which reads as follows:-

• "31. (1)- If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan;" (Emphasis is ours).

 

# 29. We also find from the record that though it is the specific case of the petitioner that the management of the petitioner company has been taken over by M/s Vedanta Limited on 04.06.2018, but the fact remains that M/s. Vedanta Limited is not the petitioner before us, rather it is the original Company which had the tax liabilities to be discharged in the years 2011-12 and 2012-13, after having realized the amount from its customers, is only the petitioner before us. We are of the clear view that the petitioner Company has not approached this Court with clean hands.

 

# 30. In that view of the matter, we are not inclined to entertain these writ applications, even though there is a resolution plan in favour of the petitioner Company, approved by the Adjudicating Authority, i.e., the NCLT, for the simple reason that it was never brought to the knowledge of the Commercial Tax authorities of the State of Jharkhand that the corporate insolvency resolution process had been initiated against the petitioner Company, and no public announcement of the corporate insolvency resolution process was made in the State of Jharkhand. Section 31 of the IB Code clearly lays down that the approved resolution plan shall be binding only on those stakeholders who were involved in the resolution plan. Admittedly, the State Government was never involved in the corporate insolvency resolution process, and as such, the resolution plan cannot be said to be binding on it.

 

# 31. For the aforesaid reasons, we find that the writ petitioner is not entitled to any relief whatsoever, There is no merit in these writ applications and all these writ applications are accordingly, dismissed.

 

(H. C. Mishra, J.) 

 

Deepak Roshan, J.:- 

I have gone through the detailed Judgment authored by my esteemed Brother H.C. Mishra, J. I fully subscribe to the views expressed therein, but I also wish to add a few reasons of my own, which are as follows:-

 

(i). Much has been argued by the learned counsel for the petitioner Company that since no claim was made by the respondent State as regards the tax liability in the corporate insolvency resolution process, the claim of the tax authority is barred under Section 31 of the IB Code. In this regard, even at the cost of repetition it is pertinent to mention few dates. The petitioner Company was originally assessed to tax for the period 2012-13 u/s 35(6) of the VAT Act vide order dated 21.01.2016. The said assessment order was challenged by the W.P.(T). No. 6324 of 2019 and analogous matters petitioner Company by way of revision, being Revision Case No. CC(S)-311 of 2016. The revision case was disposed on 11.08.2016 and the assessment order dated 21.01.2016 was set aside and the case was remanded back to lower Court for passing the order afresh. Subsequently, the revised assessment order was passed on 17.08.2018. Thus, from 11.08.2016 till 17.08.2018, there was no dues standing against the petitioner Company and as such there was no occasion to make any claim by the respondent State as regards the tax liability in the corporate insolvency resolution process and / or the moratorium period which starts from 21.07.2017 when the application u/s 7 of the IP Code was admitted till the date of approval of the resolution plan by the NCLT i.e. on 17.04.2018.

 

(ii). It is also pertinent to mention here that Section 31(1) of the IB Code, 2016 was amended vide IBC (Amendment) Act, 2019, to make the approved resolution plan binding on the Government Authorities in relation to the statutory dues. It is pursuant to this amendment that the rights of the Government Authorities for statutory dues were affected and such right was made subject to the approved resolution plan. The said amendment was made effective from 16.08.2019, which is prospective in nature, and no express retrospective effect was given to the said amendment. The said amendment takes away a substantive right of the Government Authorities in relation to the statutory dues and thus any interpretation, which shall give a retrospective effect to the said amendment, would be unreasonable and unjust.

 

(iii). In the present case the resolution plan of the petitioner Company was approved by the NCLT vide its order dated 17.04.2018 which is much prior to the aforesaid amendment. Accordingly, the said amendment in Section 31(1) of the IB Code, 2016 shall not apply to the resolution plan of the petitioner Company. Therefore, the assessment order dated 17.08.2018 which was passed by the respondent Commercial Tax Authorities, cannot be made subject to the approved resolution plan of the petitioner Company.

 

I accordingly, agree with the Judgment authored by Brother H.C. Mishra, J.

 

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Blogger’s comments; Following observations of the Hon’ble High Court are quite significant in light of the provisions of the Code, mentioned below.

• # 22. We however, find force in the submissions of the learned Additional Advocate General that the tax amount, which had been sought to be realised from the petitioner Company, had already been realised by the petitioner Company from the customers which was to be deposited in the Government Exchequer, but that having not been done by the Company and the amount having been utilized for its business purposes, throughout after the years 2011-12 and onwards, shall certainly amount to criminal misappropriation of the Government money by the Company, and the State Government is entitled to realize the same with the penalty due thereon.

 

Provisions of the Code.

# Section 18. Duties of interim resolution professional. -

XXXXX

(f) take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets including -

XXXXXX

Explanation. – For the purposes of this section, the term “assets” shall not include the following, namely: -

(a) assets owned by a third party in possession of the corporate debtor held under trust or under contractual arrangements including bailment;

(b) assets of any Indian or foreign subsidiary of the corporate debtor; and

(c) such other assets as may be notified by the Central Government in consultation with any financial sector regulator.

 

The ownership of  VAT, collected by the CD from the customers, lies with the respective State Govt., irrespective of the period concerned, and are not the assets of the CD. Accordingly IRP/RP was not authorised to take into his possession the VAT collected by CD, which was held by CD in trust for the Govt. pending onward depositing the same (VAT) with the Govt. & and secondly the same (VAT) cannot be passed on to the successful resolution applicant as part of the assets of the CD.

 

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