INCOME TAX OFFICER Vs. OFFICIAL LIQUIDATOR

JUDGEMENT

(1.) THIS is an appeal against the order of the official liquidatar rejecting proof of a claim raised by the I.T. department in respect of interest payable under Section 220(2) of the I.T. Act, 1961.

(2.) THE Catholic Bank of India Ltd. was ordered to be wound up on October 3, 1961. THE official liquidator invited proof of claim and the list of creditors was settled and filed in court on July 5, 1962. It appears that income-tax assessment in respect of the company for the years 1955-56 to 1958-59 was completed only later. Demand notices were served on the liquidator on February 23, 1963. An additional demand for the year 1955-56 was made by notice served on February 5, 1967. THE department was apparently under the wrong impression that the tax arrears would get priority under Section 530 of the Companies Act. Later, however, it moved Application Nos. 3/64 and 248/68 for varying the list of creditors, and these were allowed by the court. Affidavit of proof of the debt was thus filed before the liquidator in August, 1969, and the liquidator recognised the department's claim for tax arrears by an order passed on July 27, 1973. In the meanwhile, the department had requested the liquidator by letter dated January 29, 1971, to make provision for over Rs. 23,000 by way of interest on the tax due, under Section 220(2) of the I.T. Act. But the liquidator's order dated July 27, 1973, did not recognise this claim for interest; it recognised only the claim for the tax assessed. THE department then filed Application No. 315/73 before the company court contending that interest also should have been allowed, but the application was dismissed, holding that no priority could be recognised under Section 530. THE department thereupon appealed to the Division Bench ; and by judgment dated September 27, 1978, in A. S. No. 563/74 (see p. 143 infra), the Bench allowed the appeal to the extent of permitting the department to prove the claim (for interest) before the liquidator as an unsecured debt. THE liquidator was directed " to adjudicate upon the said claim in accordance with law, more particularly in accordance with the provisions contained in the Companies Act and the Companies (Court) Rules ".

(3.) IN order to appreciate the rival contentions, it is necessary to refer to some of the decisions cited by counsel. IN Union of INdia v. INdia Fisheries (P.) Ltd. [1965] 57 ITR 331 ; 35 Comp Cas 669 (SC), the facts were these. The company in question was ordered to be wound up in October, 1950. IN December, 1950, the ITO assessed the company for 1948-49 for an amount exceeding Rs. 8,000. The ITO lodged a claim for this amount and the liquidator accepted proof of the same as an ordinary debt in 1952. And in 1954, when a dividend of 9 1/2 annas in the rupee was declared, the liquidator paid about Rs. 5,000 to the department, towards the tax liability. For a subsequent assessment year the department claimed and obtained payment from the liquidator of an amount of over Rs. 2,500 as advance tax. On regular assessment being made subsequently, the tax liability was found to be lower, and in consequence, about Rs. 1,400 became refundable. But instead of refunding the amount, the ITO set it off against the balance of tax due in respect of 1948-49. The question before the Supreme Court was whether the department was competent to set off the amount refundable under Section 49E of the INdian I.T. Act, 1922. It was contended for the department that on the terms of Section 49E, the power thereunder was not subject to any other provisions of law and that, therefore, it could enforce the set-off irrespective of the provisions of the Companies Act. The statutory power of the ITO under Section 49E, it was urged, remained uncontrolled by the provisions of the Companies Act. But the court rejected this argument, observing that the power could not be exercised "in such a way as to defeat the provisions" of the Companies Act. Their Lordships referred to Sections 228 and 229 of the INdian Companies Act, 1913 (corresponding to Sections 528 and 529 of the 1956 Act) and observed (page 334) (also see p. 672 of 35 Comp Cas):