UNION OF INDIA Vs. RAJESWARI AND CO

JUDGEMENT

(1.) This appeal by special leave arises out of a suit instituted by the appellant for a declaration that a sale deed of immoveable properties and the transfer of moveables belonging to the respondent limited company in favour of the respondent firm are invalid, inoperative and not binding on the appellant and other creditors of the respondent limited company.

(2.) A suit was instituted by the Union of India, the appellant before us, alleging that the Krishna Oil Mills and Industries Ltd., a public limited company registered under the Indian Companies Act, 1913 was carrying on business in the manufacture and sale of tin cans and aerated water. It entered into a partnership in September 1952 with Rajeswari and Co., which was carrying on business in the pressing of cotton bales. Under the partnership agreement Rajeswari and Co. was to install a cotton baling press in the buildings of the company and the business would be carried on under the name Rajapalayam Cotton Pressing Factory, with the profits being divided between the Company and Rajeswari and Co. in the ratio of 7 to 9 respectively. This was replaced by another agreement in 1954, but the business was carried on in the same name and the profits divided in same shares. It was alleged that the Company incurred losses in its own business year after year and from 1954 the only income derived by it flowed from the shares held by it in the partnership business. It was alleged that the Company had in fact ceased to carry on its own business, but in computing the income of the Company from the assessment year 1956-57 to the assessment year, 1959-60 the losses suffered during the previous years from the Company's own business were allowed to be carried forward and set off against its share of income from the partnership Firm. Subsequently the Income-tax authorities decided to reopen the assessment proceedings under S. 34 of the Indian Income Tax Act, 1922 and, it is said, this was communicated to the Company. The processing of the case took time and the notices under S. 34 were issued for the different assessment years on March 6, 1961 and March 7, 1961. It was alleged that meanwhile, the Company, having come to know of the proposed re-opening of its income-tax assessments, began to dispose of its moveable and immoveable assets with a view to defeat the claim of the Union of India and to place the properties beyond the reach of the creditors of the company. The assets of the company were transferred in favour of Rajeswari and Co. and the sale proceeds were employed for paying off the debts due to various creditors who, it is said, included also the close relations and friends of the Directors of the Company. In the result, there was nothing left for paying off the tax arrears of the Company.

(3.) The suit was resisted by the Company, which in its written statement, admitted that it was working at a loss for some years and was obliged to replace its original business of seed crushing and oil extraction by a more modest business activity, and in its circumstances it entered into a partnership with Rajeswari and Co. for carrying on the business of pressing cotton bales. It denied that when disposing of its assets it was aware of the intention of the income-tax authorities to reopen its assessments. It pleaded that because of action threatened by the Registrar of Joint Stock Companies in 1959 it was compelled to consider its position and to decide in a General Body meeting in June 1960 to dispose of the assets of the company. It was also stated that the partnership agreement of 19,54 between the Company and Rajeswari and C0., stipulated that Rajeswari and Co., should have first preference if the Company proposed to sell its assets. The right of pre-emption was pressed by Rajeswari and Co. and, therefore, a resolution was passed in February 1961 at another Extraordinary Meeting of the Company to sell the lands and buildings at a valuation to be fixed by expert opinion. It was asserted that the assets were sold to Rajeswari and Co. and the sale proceeds were distributed to the creditors so that all the creditors were paid off.