IMPERIAL CHIT FUNDS LIMITED Vs. INCOME TAX DEPARTMENT

JUDGEMENT

(1.) The Imperial Chit Funds (P) Ltd. is a private company which was wound up as per orders dated 1-6-1973 of this Court on C P. No. 7 of 1973 filed by a creditor. After winding up commenced, proceedings for assessment for the year 1972 73 were finalised by the Income Tax Officer by his order dated 31-3-1975. A sum of Rs. 934 was assessed as tax payable by the Company and Rs. 93/- as interest payable under S.220(2) of the Income Tax Act. The total amount thus payable was Rs 1,027/-. The Official Liquidator of the Company intimated the Income Tax Officer by his letter dated 8 5 1975 that tax and interest constituted a debt provable in the winding up proceedings and he was not in a position to pay the amounts straight away. The tax was due and payable within twelve months before the relevant date mentioned in S.530(b)(c) of the Companies Act - vide S.530(1)(a) of the Act. A notice to pay the amount was received from the Tax Recovery Officer on 8-12-1976; whereupon, the Official Liquidator filed Report No. 53 seeking the direction of Court that the tax claimed is not payable at this stage, as the Income Tax Officer will have to wait and prove his claim when the list of creditors is settled; and that the interest amount was not payable as it was against the provisions of the Companies Act and the Rules. A learned Judge of this Court referred to the judgment of this Court in A.S. No. 224 of 1968 which had taken the view that the amount set aside under S.178 of the Income Tax Act will not be available for distribution in accordance with the provisions of the Companies Act, and that therefore there was no question of any priority in the distribution of assets. The learned Judge felt that certain aspects of the Company Law were apparently not brought to the notice of the Court and that the decision required reconsideration. The learned Judge referred to the view taken in some of the other High Courts that S.18 of the Income Tax Act does not affect or alter the existing law of priority; nor override the provisions for preferential payment under S.530 of the Companies Act. Reference was made to the decision of the Gujarat High Court in Baroda Board & Paper Mills Ltd. v. I.T.O. (102 ITR 153), Income Tax Officer v. Official Liquidator, Mysore High Court (63 ITR. 810), Official Liquidator, Calcutta High Court v. Commissioner of Income Tax (80 ITR. 108); and Commissioner of Income Tax v. Official Liquidator, Golcha Properties Ltd. (95 ITR 488). As against these the Andhra High Court in Income Tax Officer v. Official Liquidator (101 ITR. 470) had taken a view similar to the one in A.S. No. 224 of 1968. It was in view of this, that the question was adjourned for hearing by a Division Bench and the Division Bench in its turn adjourned the matter for hearing by a Full Bench.

(2.) S.446 of the Companies Act provides that when a winding up order has been made or the Official Liquidator has been appointed as provisional Liquidator, no suit or other legal proceeding shall be commenced or proceeded with against the Company except by leave of Court. Counsel for the Official Liquidator drew our attention to S.447 of the Act that the effect of a winding up order shall operate in favour of all the creditors and all the contributories as if it had been made on the joint petition of all of them He also invited our attention to S.448 (a), 44, 451 and 456(2), 457(e), 511, 528 & 529 of the Act to show that after the winding up, the Official Liquidator is in full charge of the assets of the Company, is to conduct or proceed on behalf of the Company, and that all the property and the assets of the Company are in the custody of the Court He referred next to S.178 of the Income Tax Act which reads:

(3.) In Baroda Board & Paper Mills Ltd.'s case (102 ITR 153), a Division Bench of the Gujarat High Court surveyed the position and held that under S.530(1)(a) of the Companies Act, priority was extended only to taxes "due" and "payable" by the Company. These expressions, it was held, meant that the amount must be presently payable. It was held that the Income Tax for a particular assessment year becomes a debt due to the Crown only when the tax is calculated and assessed and thereafter a demand is made under the relevant provisions of the Act. It is only in this sense that the words in S.530(1)(a) had to be interpreted. It was further ruled that S.178 of the Income Tax Act did not sanction any priority of payments, and that the same is provided only in the Companies Act. The provision in S.178 of the Income Tax Act only required the Liquidator to intimate the Income Tax Officer about his appointment, and the latter to give notice to the Liquidator of the approximate amount that would suffice to meet the demand for any tax "then due, or likely to become due". It does require the Liquidator not to part with any assets of the Company, until he had been notified by the Income Tax Officer under sub-s.(2); and on being so notified, he is to "set aside" the amount equal to what has been notified; and until be thus sets aside, be is not to part with any of the assets of the company. The Gujarat High Court pointed out that the provision for setting aside did not require the Liquidator to give priority to the Income Tax liability different from the order of priority indicated by S.530(1)(a) of the Companies Act; and that the provisions of S.178(6) did not interfere with S.530(1)(a). It was pointed out that S.17 of the Central Sales Tax Act 1956 was in terms similar to, if not identical with. S.178 of the Income Tax Act, and that with respect to the same, the same principle had to be followed. In the result, it was held that all sales tax due in respect of which assessment orders were made within a period of twelve months from the relevant date, would have priority; but those beyond the said date would not qualify for any priority and it would not be open to the Liquidator to pay up the liabilities under the demand unless the claims are scrutinised and ascertained and the dues paid under orders of the Liquidation Court. The Liquidation Court had to decide how far the amounts of tax liability due by the Department should be accepted as a lawful liability. It was held that the sales tax authorities were not entitled to recover the amount of sales tax or penalties. This, in substance, is the principle of the ruling of the Gujarat High Court. It emphasised the meaning of the expression "due and payable" as explained in judicial decisions. We have noticed the sense in which these words were explained. The decision noticed the passage in Sampath Iyengar's Income Tax, Sixth Edition, at page 1732 with respect to S.178 (6) of the Income Tax Act. The learned Author observed that under the provisions of the Act, a tax is payable only after notice of payment being served on the Assessee under S.156, and therefore the priority under the Companies Act is restricted only to cases where the notice has been served under S.156 within the period of one year immediately preceding the relevant date under S.530 (8) of the Companies Act. Thus, in the view of the Author though an order of assessment might have been made before the commencement of the winding up, still no priority would attach unless the notice of payment under S.156 had been served on the Assessee. The learned Author noted that the section secured for revenue, priority of payment over all unsecured creditors, for taxes payable in respect of periods upto the date of commencement of liquidation or date of appointment of Receiver. In regard to S.178(6), the learned author observes that the Section secures to the Revenue, priority of payment over all unsecured creditors, of taxes payable in respect of all periods up to the date of commencement of liquidation or the date of appointment of Receiver. In respect of taxes due for the years subsequent to the commencement of liquidation or the appointment of a Receiver, according to the learned author, there was no provision made in the Income Tax Act or the Companies Act. After noticing the above view of Shri Sampath Iyengar, the learned Judges of the Gujarat High Court disagreed with the Author's interpretation of S.178(6) of the Act. The learned Judges were of the view that S.178 did not sanction any priority of payments which is provided in the Companies Act, and all that S.178 requires is the giving of information by the Liquidator about his appointment to the Income Tax Officer and an intimation by the Income Tax Officer within three months of the date of intimation, about the approximate amount needed to cover the tax liability. The learned Judges were of the view that there is nothing in S.178 which provides for a rule of priority for the said tax liability, and therefore, the non obstante clause in S.178(6) did not interfere with S.530(1)(a) of the Companies Act.