Savan Godiawala vs G.Venkatesh Babu & Ors

Mr. Savan Godiawala, Liquidator of Lanco Infratech Ltd. Deloitte Touche Tohmastsu India LLP, 19th Floor, Shapath-V, S.G. Highway, Ahmedabad- 380015, India ...Appellant VERSUS 1. Mr. G. Venkatesh Babu, Managing Director of Lanco Infratech Ltd., Resident of 35A 1, Prithviraj Rad, New Delhi- 110003, Represented by its GPA Holder Mr. Cherujuri Anjaneyulu, r/o Plot No. B-34, Pachavati Colony, Manikonda, Hyderabad- 500089 ... Respondent No. 1 2. Lanco Infratech Ltd., Plot No. 4, Software Units Layout, Hitec City, Madhapur, Hyderabad-500081 ... Respondent No. 2 3. Chief Commissioner of Income Tax(TDS), Circle 75(1), 413-Ayakar Bhavan, District Centre, Laxmi Nagar, New Delhi-110092 ... Respondent No. 3 4. Assistant Commissioner of Income Tax (TDS), Circle 75(1), Ayakar Bhavan, District Centre, Laxmi Nagar, New Delhi-110092 ... Respondent No. 4 2

Present: For Appellant:- Ms. Misha, Mr. Vaijayant Paliwal, Advocates for Appellant.

For Respondent:-Mr. Yogesh K Jagia, Ms. Alisha Chopra, Ms. Sumedha Chadha and Mr. Surya Teja, Advocates for Respondent.

JUDGEMENT

[29th May, 2020]

Jarat Kumar Jain. J.

The Appellant Mr. Savan Godiawala being the liquidator of Linco

Infratech Ltd. (Corporate Debtor) (Respondent No. 2 herein) filed this Appeal

under Section 61 of Insolvency & Bankruptcy Code 2016 (In Brief I & B Code)

against the order dated 10.06.2019 passed by Adjudicating Authority (NCLT)

Bench at Hyderabad in Interlocutory Application No. 97/2019 in Company

Petition (IB) NO. 111/7/HDB/2017 whereby allowed the Application filed by

Mr. G.Venkatesh Babu (Respondent No. 1 herein) the erstwhile Managing

Director of the Corporate Debtor.

2. Brief Facts of this Appeal are that the Corporate Debtor (Respondent

No.2) is a company engaged in engineering, procurement and construction

activity and is one of the biggest player in the power and infrastructure sector.

Due to various country level power sector and infrastructure sector problems

the Corporate Debtor faced liquidity crises and consequently could not pay

salary to its employees. There was also delay in payment of Tax Deducted at

Source (TDS) to the relevant authorities. In the meantime Corporate Insolvency 3

Process was initiated against the Corporate Debtor on a Company Petition filed

by IDBI Bank under Section 7 of I&B Code, 2016 and after admission the

Corporate Debtor was under moratorium from 07.08.2017. The Adjudicating

Authority under Section 7 of the I & B Code appointed Mr. Savan Godiawala as

Interim Resolution Professional and subsequently confirmed as Resolution

Professional of the Corporate Debtor. The Resolution Professional took charge

of the Corporate Debtor Company and the powers of Board of Director were

suspended. Thereafter, Adjudicating Authority vide its order dated 27.08.2018

appointed Mr. Savan Godiawala (Appellant) as the official liquidator of the

Corporate Debtor. During the pendency of the liquidation proceedings erstwhile

Managing Director of the Corporate Debtor Respondent No. 1 filed an

Application under Section 33(5), 35(1) (k) read with section 60(5) of I&B Code,

2016 and Rule 11 of NCLT Rules 2016 seeking direction to liquidator

(Appellant) to keep on priority, the funds required for payment of compounding

fees on behalf of the Corporate Debtor before concerned authorities and filed

appropriate application for closing of proceedings pending before Additional

Chief Metropolitan Magistrate Tis Hazari Court New Delhi or alternatively

permit Respondent No. 1 to pursue and prosecute the Criminal Compliant No.

530366/2016 and further direction to liquidator to reimburse compounding

fees to the Respondent No. 1.

3. Above referred complaint case filed by Income Tax Office against the

Respondent No. 2 M/s Linco Infratech India Ltd. and Respondent No. 1, a

person responsible and in charge of day to day affairs of the Company being 4

Managing Director of Respondent No. 2 under Section 276-B read with 278-B

of the Income Tax Act for the Financial Year 2012-13 alleging that the

Respondent No. 1 has deducted Tax and source under various Sections of TDS

amounting to Rs. 37,90,87,796/- during the Financial year 2012-13 but has

not deposited the Tax deducted to the Government account within stipulated

period i.e., on or before 7 days from the end of the month in which the

deduction is made as per the provisions of Income Tax Act, read with rule 30 of

the Income Tax Rules. Thus, the Respondent No. 1 and 2 have committed

offence punishable under Section 276-B r/w 278-B of the Income Tax Act.

4. The Appellant herein opposed the Application on various grounds that

the Application is not maintainable under Section 33(5), 35(1)(k) read with

Section 60(5) of I&B Code. CIRP started on 07.08.2017 and order of liquidation

was passed on 27.08.2018 whereas, Criminal Proceedings were initiated

against the Corporate Debtor Company i.e., Respondent No. 2 and Respondent

No.1 on 31.3.2016 i.e. prior to CIRP and it is not in connection with any default

committed during CIRP. It is also contended that the Respondent no.1 the then

Managing Director has committed the offence therefore he has to defend the

case. The prayer so made is in complete contravention of the provisions of

Section 53 of the I & B Code.

5. After considering the submissions Ld. Adjudicating Authority allowed the

Application filed by the Respondent No. 1 and directed the liquidator to

reimburse to Respondent No. 1, the amount incurred towards payment of 5

compounding fee levied by the Court in connection with Criminal Case bearing

No. 530366/2016 filed against the Corporate Debtor, being aggrieved with this

order, liquidator has filed this Appeal.

6. Learned Counsel for the Appellant submits that the Adjudicating

Authority failed to consider that since the prosecution was initiated by the

Income Tax Department, against the Respondent No. 1 as he was the person

responsible and in charge of the day to day affairs of the Company being

Managing Director, therefore, the Respondent No. 1 is defending himself.

Learned Counsel for the Appellant further submits that learned Adjudicating

Authority has failed to appreciate the precedent i.e., judgment of Hon'ble

Kerala High Court in the case of ITO Vs. Joseph (1972) 83 ITR 362 which holds

that the Criminal Prosecution launched under the provisions of Section 276-B

of the Income Tax Act attached itself personally to the vender not to the

Company. Learned Adjudicating Authority erroneously held that the

prosecution was lodged against the Corporate Debtor thus compounding fees is

payable by Corporate Debtor.

7. Learned Counsel for the appellant further submits that if compounding

fees is paid on priority basis it will be in contravention of the mandate of

Section 53 of the I&B Code.

8. On the other hand, Learned Counsel for the Respondent supports finding

of the Adjudicating Authority and submits that it is the Corporate Debtor,

Respondent No. 2 which has defaulted in paying TDS on time and alleged 6

offence was not committed by the Respondent No. 1. In the Case of ITO Vs.

Joseph (Supra). Hon'ble High Court held that the principle employee should

have declared himself as a principle officer and has done the TDS deduction

personally and failed to pay the deducted Tax to the Department whereas, in

the instant case Respondent No. 1 did not declare himself as the Principle

Officer of the Company and he has not failed to deposit the Tax Personally and

secondly the reimbursement of money to the Respondent No. 1 can be made

as part of liquidation cost as compounding fees has to be paid first to save the

Corporate Debtor from facing the penalty. The payment of compounding fees is

part of liquidation cost as per the mechanism under Section 53 of the I&B

Code.

9. Learned Counsel for the Respondent further submits that the Judgment

of ITO Vs. Joseph (Supra) relied by the Appellant is misplaced and not

applicable to the facts of the present case. Hon'ble High Court has observed

that the person to be liable not the Company in different circumstances. It was

observed that if the Department has to drag anybody under the provisions of

Income Tax Act, they have to establish that deduction was done personally by

the particular officer of Company and the Officer did not deposit the TDS with

the Department. The Corporate Debtor i.e., Respondent No. 2 is at default and

is liable to make the payment of compounding fees. The liquidator in memo of

Appeal acknowledged that he has been put in charge of affairs and

management of the Corporate Debtor and is responsible to look after the

interest of Corporate Debtor during the process of liquidation. Therefore, the 7

liquidator cannot escape the liability to reimburse the compounding fees to

Respondent No. 1. The Adjudicating Authority is rightly held that the

Application is maintainable under Section 33, 35 and 60 of the I&B Code.

10. After hearing Learned Counsel for the Parties we have gone through the

record.

11. Admittedly the CIRP commenced vide order dated 07.08.2017 by the

Adjudicating Authority under Section 7 of the I&B Code and Mr. Savan

Godiawala was appointed as Interim Resolution Professional and subsequently

confirmed as Resolution Professional of the Corporate Debtor thereafter, vide

order dated 27.08.2018 passed by the Adjudicating Authority, the Appellant

Mr. Savan Godiawala was appointed as the Official liquidator of the Corporate

Debtor i.e., Respondent No. 2. It is also admitted fact that on 31.03.2016

Income Tax Office, Shri Mandip ACIT, Income Tax Department filed complaint

under Section 276-B read with Section 278-B of the Income Tax Act against the

Respondent No. 1 being Managing Director and person responsible and in

charge of day to day affairs of the Company and Respondent No. 2 i.e.,

Corporate Debtor with the allegation that the Tax deducted at source under

various sections of TDS amounting to Rs. 37,90,87,796/- during the financial

year 2012-2013 but has not deposited the said tax to the Government account

within the stipulated period i.e. on or before 7 days from the end of the month

in which the deduction is made as per the provisions of Income Tax Act read

with Rule 30 of the Income Tax Rules. Thus, the Respondent No. 1 and 2 have 8

committed offence punishable under Section 276-B read with Section 278-B of

the Income Tax Act for the offence the punishment is prescribed a minimum

imprisonment of 3 months which can be extended up to an imprisonment of 7

years. The said compliant filed on 31.03.2016 before Additional Chief

Metropolitan Magistrate Tis Hazari Court New Delhi bearing Criminal Case No.

530366/2016.

12. From the Above facts it is clear that much before CIRP Process the

alleged offence has been committed by the Respondent No. 1 and 2.

13. The question involved in this Appeal is that actually who has committed

the default by non-depositing the TDS in time certainly the alleged offence is

committed during the financial year 2012-13. Therefore, the person responsible

and in charge of the day to day affairs to the Company at relevant time has

committed the default. Therefore, he only can be punished. As per the

allegation, the Respondent No. 1 G Venketesh Babu was a person responsible

and in charge of day to day affairs of the Company being Managing Director.

Thus, as per the allegation, he has committed the offence therefore, if the

alleged offence is proved then the Company as well as Respondent No. 1 G

Venketesh Babu both will be convicted and the Company being a juristic

person cannot be punished with imprisonment only the Respondent No. 1 can

be punished with imprisonment, which is minimum three months maximum

seven years that is why the Respondent No. 1 filed an application for 9

compounding the offence and he wants to escape the consequences at the cost

of Company which is in liquidation.

14. It is true that as per Section 35(1)(k) of the I&B Code, it is duty of the

liquidator to institute or defend any suit, prosecution or other legal

proceedings, civil or criminal in the name of on behalf of Corporate Debtor.

Compounding of offence is a process whereby the person/entity committing

default will file an Application to the compounding authority accepting that it

has committed an offence and so that same should be condoned. In the instant

case as per the prosecution Respondent No. 1 has committed the offence under

Section 276 -B read with Section 278-B of the Income Tax Act, therefore, he

has filed the Application before the compounding authority. Liquidator has not

committed the alleged offence therefore; he is not required to file Application

before compounding authority accepting that he has committed an alleged

offence. However it is true that the liquidator has to defend the Respondent

No. 2 Company once he has taken the charge of the Company.

15. We are unable to convince with the findings of Ld. Adjudicating Authority

that the Respondent No. 1 is appearing in the Criminal Case filed against the

Company as he was the then Managing Director. Actually the prosecution is

launched against the Company as well as against the Respondent No. 1. in his

personal capacity. Therefore, even after the liquidation proceedings have been

started the Respondent No. 1 has to face the trial in his personal capacity and

ultimately if the offence is proved he will be punished. 10

16. With the aforesaid we are of the view that the Ld. Adjudicating Authority

has misconstrued the provisions of Section 35(1) (k) of I&B Code, and directed

the liquidator to reimburse the compounding fees to Respondent No. 1. Thus

the impugned order is not sustainable in law and facts, hence it is set aside

The Appeal is allowed, however, no order as to cost.

(Justice Jarat Kumar Jain) Member (Judicial)

(Mr. Balvinder Singh) Member (Technical)

(Dr. Ashok Kumar Mishra) Member (Technical) NEW DELHI SC