No Priority for Payment of Tax Dues of State over other Secured Creditors u/s 529 of Companies Act: Rajasthan HC [Read Order]

The single bench of Rajasthan High Court has held that no priority for payment of tax dues of state over other secured creditors u/s 529 of Companies Act.

The respondent, M/s. Punusumi India Limited, is under liquidation and the Officer Liquidator (OL) had invited claims with regard to outstanding dues against the said Company. The Commercial Taxes Department submitted its claim before the OL. The OL allowed a sum of Rs.3,19,351/- as preferential claim under Section 530(1) of the Companies Act, 1956 and Rs.32,32,337/- as ordinary claim under Section 529/530 of the Act of 1956. Against which the department filed a Company Application before the High Court.

Mr. M.S. Singhvi, Advocate General, submitted that Section 47 of the Act of 2003 is a special law with non-obstante clause and as such, even if there is a general law like the Companies Act, 1956, enacted by the Union of India, the law of State being a special law will prevail over the general law – the Companies Act, 1956. As per Section 47 of the Rajasthan Value Added Tax Act, 2003, first charge of the property was created in favour of the applicant-department and as such, request was made to pay the outstanding amount to the applicant-department. The Commercial Taxes Department seek priority and preference over other creditors and to release the amount said to be due in favour of the applicant-department.

Mr. Vijay Choudhary counsel appearing for the respondent submitted that the provisions contained in the Section 529A of the Act of 1956 has an overriding effect and the same has a non-obstante clause and as such in respect of the Company which is wound up, the provisions of the Companies Act will prevail and even if there is a provision in the erstwhile Rajasthan Sales Tax Act, 1994, or the Rajasthan Value Added Tax, 2003, the creditor cannot have a preferential treatment in respect of payment and the applicant-department is treated like any other creditor and the applicant-department cannot be treated as a secured creditor.

The High court observed that bare reading of the two relevant provisions i.e. Section 529A and 530 of the Act of 1956 make it very clear that priority has to be given to the workmen’s dues in winding up of a Company and further debts due to the secured creditor to the extent of debts under clause (c) of the proviso to sub-section (1) of Section 529 of the Act of 1956 are to be treated as pari passu with such due, and Section 530 of the Act of 1956 comes into play after priority is given to the dues of the workmen and debts due to the secured creditor and later on preferential payments are to be made in favour of the Central/State Government/local authority in respect of their dues, taxes, etc.

The High Court further observed that the State has full competence to

provide for creating first charge under Section 47 of the Act of 2003 for recovering the amount due to the State under the earlier Sales Tax Act and now VAT, however, the same cannot have priority, when it comes in conflict with the mandate of Section 529A, then the Sections 529A and 530 of the Act of 1956 will prevail due to force of the non-obstante clause in clause (1) of Article 246 of the Constitution of India, the Parliamentary legislation shall prevail notwithstanding the exclusive power of the State legislature to make a law with respect to the matter enumerated in the State List.

The Coram of Mr. Justice Ashok Kumar Gaur has held that “this Court finds that the claim of the applicant State to give them priority for payment of their dues over other secured creditors, cannot be granted. Their applications, in the facts & circumstances, stand dismissed”.

To Read the full text of the Order CLICK HERE

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