Preferential Payment Priority: tax claims from sale of charged assets are subordinated until secured creditors and workmen are paid in full.

Preferential payment priority under the Companies Act gives workmen's dues and specified secured creditor debts precedence over other claims, so tax liabilities arising from sale of charged assets (including capital gains, advance tax and additional tax under assessment procedures) are subordinated and cannot be satisfied from those sale proceeds until such preferential claims are paid in full. The non obstante provision effectuates this statutory subordination and preserves secured creditors' rights and winding-up costs; where assets are insufficient, preferential claims abate proportionately, delaying collection of tax demands from charged asset realizations.

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Issues: Whether income-tax (including capital gains tax, advance tax instalments and additional tax under section 143(1A)) is payable out of the sale proceeds of charged assets of a company in liquidation before the dues of secured creditors and workmen are paid in full.

Analysis: Section 529A of the Companies Act, 1956, introduced by Act 35 of 1985, creates overriding preferential payments by providing that workmen's dues and debts due to secured creditors (to the extent specified) shall be paid in priority to all other debts and, if assets are insufficient, shall abate in equal proportions. Section 520 preserves the rights of secured creditors by making costs of winding up payable subject to secured creditors' rights. The non obstante clause in section 529A overrides other provisions and other laws, thereby subordinating claims such as tax demands to the priority afforded to workmen and secured creditors. The statutory scheme and authoritative decisions interpreting section 529A and related provisions lead to treating capital gains tax or other income-tax claims arising from sale proceeds as not collectible until the preferential claims are satisfied.

Conclusion: Income-tax (including capital gains tax, advance tax instalments and additional tax under section 143(1A) of the Income-tax Act, 1961) is not payable out of the sale proceeds of charged assets of a company in liquidation until the dues of the secured creditors and workmen creditors are paid in full.

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