Supreme Court Allows Benefit of Sabka Vishwas Scheme Despite Moratorium: Shekhar Resorts vs. Union of India (2023)

Introduction

Date of the Judgment: 5 January 2023

Citation: (2023) INSC 14

Judges: M.R. Shah, J. and B.V. Nagarathna, J.

Can a company be penalized for failing to meet a tax settlement deadline when it was legally barred from making payments due to an insolvency moratorium? The Supreme Court of India recently addressed this question in a case involving M/s. Shekhar Resorts Limited and the Union of India. The core issue was whether the appellant company should be denied the benefits of the “Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019” because it could not make payments within the stipulated time frame due to a moratorium imposed under the Insolvency and Bankruptcy Code, 2016 (IBC). The Supreme Court, in this judgment authored by Justice M.R. Shah, ruled in favor of the appellant, holding that the company could not be penalized for failing to do the impossible.

Case Background

M/s. Shekhar Resorts Limited, a company providing hospitality services, faced investigations by the Service Tax Department for alleged tax evasion. Show cause notices were issued demanding payment of service tax under various categories. Simultaneously, insolvency proceedings were initiated against the company under the IBC.

On 11 September 2018, the National Company Law Tribunal (NCLT), Delhi, admitted an application filed by the financial creditors of the company, initiating the corporate insolvency resolution process and imposing a moratorium under Section 14 of the IBC. This moratorium legally restricted the company from making any payments.

The Committee of Creditors (CoC) approved a resolution plan on 4 June 2019. Subsequently, the “Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019” was introduced on 1 September 2019. The company, through its Resolution Professional, applied for the scheme’s benefits before the deadline of 31 December 2019 and received Form No. 1 on 27 December 2019. The Designated Committee issued Form No. 3 on 25 February 2020, determining the amount payable by the company under the scheme as Rs. 1,24,28,500. The payment deadline was initially 25 March 2020, but was extended to 30 June 2020 due to the COVID-19 pandemic.

The NCLT approved the Resolution Plan on 24 July 2020, ending the moratorium. Following this, the company informed the authorities of its readiness to pay the settlement amount. However, the authorities rejected the company’s request, stating that the payment deadline had passed. The company then approached the High Court of Judicature at Allahabad, which dismissed the writ petition, leading to the present appeal before the Supreme Court.

Timeline

Course of Proceedings

The appellant, M/s. Shekhar Resorts Limited, filed a writ petition (Writ Tax No. 328 of 2021) before the High Court of Judicature at Allahabad, seeking a direction to the respondents to consider their case under the “Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019.” The High Court dismissed the writ petition on the grounds that it could not issue a direction contrary to the scheme and that the Designated Committee under the scheme was no longer in existence. Aggrieved by this decision, the appellant filed the present appeal before the Supreme Court.

Legal Framework

The case revolves around the interpretation and application of the “Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019,” introduced under Section 125 of the Finance Act, 2019. This scheme aimed to resolve legacy disputes related to central excise and service tax.

The Insolvency and Bankruptcy Code, 2016 (IBC) is also central to this case. Specifically, Section 14 of the IBC imposes a moratorium upon the commencement of the corporate insolvency resolution process, which prohibits any payments by the company during this period.

The relevant provisions are:

• Section 125 of the Finance Act, 2019: This section introduced the “Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019” to resolve legacy disputes related to central excise and service tax.
• Section 14 of the Insolvency and Bankruptcy Code, 2016: This section imposes a moratorium upon the commencement of the corporate insolvency resolution process, which prohibits any payments by the company during this period.

Arguments

Appellant’s Submissions:

• The High Court erred in dismissing the writ petition and not directing the authorities to accept the payment under the Scheme.
• The Designated Committee under the Scheme continues to exist, as it is formed as per Rule 5 of the Scheme, 2019, and comprises officers of the Central Excise and Service Tax Department.
• The Designated Committees are being constituted on a need basis to comply with court orders, and the CBEC has issued instructions for manual processing of declarations under the Scheme.
• The appellant could not deposit the amount under the Scheme before 30 June 2020 due to the moratorium imposed under the IBC.
• The appellant was legally barred from making any payments during the moratorium period, and any payment would have been a breach of the IBC.
• The Resolution Plan required the Resolution Applicant to deposit all statutory dues within six months of the effective date (24 July 2020) into an escrow account, which was done on 8 January 2021.
• The IBC has precedence over any inconsistent statutes, and no person should be left remediless due to operation of law.
• The appellant’s inability to make the payment was due to a legal disability, and no one can be expected to do the impossible.
• The appellant should not be prejudiced for no fault of their own.

Respondent’s Submissions:

• The Scheme was valid only up to 30 June 2020, and the last date for payment was 30 June 2020.
• The Scheme was closed after 30 June 2020, and the Designated Committees were dissolved.
• The High Court has no jurisdiction to extend the Scheme, and extending it would create complications.
• No payment was made under the Scheme before 30 June 2020, and the request to extend the time limit was rightly rejected.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether, when it was impossible for the appellant to deposit the settlement amount due to the bar under the IBC, the appellant can be penalized for no fault of its own?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court allowed the appeal, setting aside the High Court’s judgment. The Court directed that the payment of Rs. 1,24,28,500 already deposited by the appellant be appropriated towards settlement dues under the “Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019,” and that a discharge certificate be issued to the appellant.

How each authority was viewed by the Court?

• Principal Commissioner of Income Tax vs. Monnet Ispat & Energy Ltd., (2018) 18 SCC 786: The Court relied on this case to emphasize that a moratorium prohibits any existing proceedings against the debtor.
• Sunil Vasudeva vs. Sundar Gupta, (2019) 17 SCC 385: The Court cited this case to reiterate that no party should be left remediless.
• United Air Travel Services vs. Union of India, (2018) 8 SCC 141 and Union of India vs. Asish Agarwak, (2022) SCC Online SC 543: These cases were used to support the application of general principles of equity and justice.
• Gyanichand vs. State of Andhra Pradesh, (2016) 15 SCC 164: The Court referred to this case to highlight that it is not fair to direct someone to do the impossible.
• Calcutta Iron Merchants Association vs. Commissioner of Commercial Taxes, (1997) 8 SCC 42: The Court cited this case to support the view that no law would compel a person to do the impossible.
• Anmol Kumar Tiwari & Ors. vs. State of Jharkhand, (2021) 5 SCC 424: The Court relied on this case to state that a party should not be prejudiced for no fault of their own.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the principle that a party should not be penalized for failing to do something that was legally impossible. The court emphasized that the appellant’s inability to make the payment within the stipulated time was due to the moratorium imposed under the IBC, which is a legal impediment. The Court also took into account that the appellant had applied under the scheme within the stipulated time, and had been issued Form No. 3. The Court also noted that the CBEC had issued a circular allowing for manual processing of applications in cases where court orders had set aside rejections under the Scheme.

Logical Reasoning:

The Court considered the argument that the High Court cannot extend the scheme, but clarified that this case was about taking remedial measures, not extending the scheme. The Court also considered the argument that the Designated Committees were dissolved, but noted that the CBEC had issued a circular allowing for manual processing of applications in cases where court orders had set aside rejections under the Scheme.

The Court’s decision was based on the following key points:

• The appellant was legally barred from making payments during the moratorium period.
• The appellant had applied for the scheme within the stipulated time and was issued Form No. 3.
• The CBEC had issued a circular allowing for manual processing of applications in cases where court orders had set aside rejections under the Scheme.
• No party should be penalized for failing to do the impossible.

The Court quoted the following from the judgment:

• “As per the settled position of law, no party shall be left remediless and whatever the grievance the parties had raised before the court of law, has to be examined on its own merits.”
• “no law would compel a person to do the impossible.”
• “the appellant cannot be punished for not doing something which was impossible for it to do.”

Key Takeaways

• A company cannot be penalized for failing to meet a tax settlement deadline if it was legally barred from making payments due to an insolvency moratorium.
• The principle of “impossibility” is a valid defense against non-compliance with deadlines when such non-compliance is due to legal restrictions.
• The courts will take remedial measures to ensure that parties are not left remediless due to legal impediments.
• Designated Committees under the “Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019” continue to function for manual processing of cases as per the CBEC circular.

Directions

The Supreme Court directed that the payment of Rs. 1,24,28,500 already deposited by the appellant be appropriated towards settlement dues under the “Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019,” and that a discharge certificate be issued to the appellant.

Development of Law

The ratio decidendi of this case is that a party cannot be penalized for failing to do something that was legally impossible due to a statutory bar, such as a moratorium under the IBC. This judgment reinforces the principle that no law would compel a person to do the impossible and that courts should take remedial measures to ensure that parties are not left remediless due to legal impediments. This case does not change the previous positions of law, but rather clarifies the application of existing legal principles in the context of insolvency and tax settlement schemes.

Conclusion

The Supreme Court’s decision in M/s. Shekhar Resorts Limited vs. Union of India & Ors. provides significant relief to companies facing similar situations where they are unable to meet tax settlement deadlines due to legal restrictions imposed by insolvency proceedings. The Court’s emphasis on the principle of “impossibility” and the need to avoid penalizing parties for circumstances beyond their control reinforces the principles of equity and justice in the Indian legal system. This judgment ensures that companies are not unfairly disadvantaged due to the operation of law and that remedial measures are taken to provide them with the benefits they are entitled to.