Sabka Vishwas Scheme and Insolvency: Supreme Court Ruling in M/S Shekhar Resorts Limited Case

The Supreme Court of India recently ruled on the case of M/S Shekhar Resorts Limited (Unit Hotel Orient Taj) vs. Union of India & Others. This case revolves around the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019, a tax dispute settlement scheme, and the legal implications of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). The Court examined whether a company under a legal moratorium could be denied benefits under the scheme due to an inability to make payment within the stipulated timeframe.

Background of the Case

The appellant, M/S Shekhar Resorts Limited, was engaged in providing hospitality services and was registered with the Service Tax Department. The department conducted investigations regarding evasion of service tax and issued show cause notices for various service categories, including Accommodation in Hotels, Restaurants, and Mandap Keeper Services.

Before resolving these tax disputes, proceedings under the IBC were initiated against the appellant. On September 11, 2018, the National Company Law Tribunal (NCLT), Delhi, admitted an application filed by the appellant’s financial creditors under Section 7 of the IBC. Consequently, a moratorium was imposed under Section 14, prohibiting any payments.

The company’s Committee of Creditors approved a resolution plan on June 4, 2019, and the NCLT subsequently approved the plan on July 24, 2020, thus ending the moratorium period.

Meanwhile, the Sabka Vishwas Scheme, 2019 was introduced on September 1, 2019. The appellant applied under this scheme on December 27, 2019, within the deadline. The tax authorities issued Form No.3 on February 25, 2020, determining a settlement amount of Rs.1,24,28,500, which was required to be paid within 30 days.

However, due to the COVID-19 pandemic, the government extended the payment deadline to June 30, 2020. The appellant was unable to make the payment because the insolvency moratorium was still in effect. Once the moratorium ended on July 24, 2020, the appellant immediately sought to make the payment, but the tax authorities refused, stating that the deadline had expired.

After failing to obtain relief from the tax authorities, the appellant approached the Allahabad High Court, which dismissed the petition, stating:

The court could not issue a directive that contradicted the scheme.
The Designated Committee responsible for processing payments under the scheme no longer existed.

The appellant then approached the Supreme Court.

Arguments by the Appellant

The appellant, represented by senior counsel, argued:

Their inability to make payment was due to a legal moratorium under the IBC, which prevented any financial transactions.
The tax authorities continued processing applications for other taxpayers beyond the deadline through manual processing, as per a circular issued by the Central Board of Excise and Customs (CBEC) on March 17, 2021.
Courts across the country had previously directed tax authorities to reconsider cases where applications were erroneously rejected under the scheme.
The appellant had already deposited the tax amount into an escrow account, as per the resolution plan, within the stipulated six months.
As per Supreme Court rulings in Principal Commissioner of Income Tax vs. Monnet Ispat & Energy Ltd., the IBC has precedence over tax laws, and any proceedings against the debtor are prohibited during a moratorium.
No law can compel a person to do something that is legally impossible (Calcutta Iron Merchants’ Association vs. Commissioner of Commercial Taxes).

Arguments by the Respondent

The tax authorities, represented by the Additional Solicitor General, argued:

The last date for payment under the scheme was June 30, 2020, and no further extensions were allowed.
Extending the scheme for one entity would set a precedent, leading to administrative complications.
The appellant should have planned payments better, knowing the moratorium would end soon.
The High Court had rightly refused to interfere with a closed scheme.

Supreme Court’s Observations

The Supreme Court observed:

“It is undisputed that the appellant applied under the scheme in time and was otherwise eligible for relief.”
“Due to the moratorium under IBC, the appellant was legally prohibited from making payments until July 24, 2020.”
“If the appellant had made payments before this date, it would have violated IBC provisions.”
“No person should be penalized for an inability to comply with a law due to legal restrictions.”

The Court noted that courts exist to do justice and must address exceptional circumstances where statutory deadlines create unreasonable hardships.

Final Judgment

The Supreme Court ruled in favor of the appellant:

Set aside the High Court’s judgment.
Directed tax authorities to appropriate the Rs.1,24,28,500 already deposited by the appellant towards settlement under the Sabka Vishwas Scheme.
Ordered the issuance of a discharge certificate to the appellant.

This ruling sets a crucial precedent on the intersection of tax laws and insolvency laws, reinforcing that statutory relief cannot be denied due to legal constraints beyond a taxpayer’s control.

Petitioner Name: M/S Shekhar Resorts Limited.
Respondent Name: Union of India & Others.
Judgment By: Justice M.R. Shah, Justice B.V. Nagarathna.
Place Of Incident: Allahabad.
Judgment Date: 05-01-2023.

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