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of <h1>Priority of Secured Creditors in Liquidation: Income-tax Claims Denied</h1> The court held that income-tax claims do not have priority over the claims of secured creditors and workmen in liquidation proceedings. Secured creditors, ... Company In Liquidation Issues Involved:1. Priority of income-tax claims in liquidation proceedings under the Companies Act and the Income-tax Act.2. Distribution of sale proceeds of a company's assets among secured creditors, workmen, and other creditors.3. Applicability of sections 476 and 529A of the Companies Act and section 178 of the Income-tax Act.Detailed Analysis:1. Priority of Income-Tax Claims in Liquidation Proceedings:The primary issue was whether income-tax claims against a company in liquidation could be satisfied from the proceeds of the sale of the company's assets either as 'costs, charges, and expenses incurred in the winding-up' under section 476 of the Companies Act or as an amount set aside under section 178 of the Income-tax Act, in priority to claims under section 529A of the Companies Act.The court examined whether income-tax dues could be considered as costs incurred in the winding-up process. It was noted that the claim of the workmen under section 529A of the Companies Act takes priority over all other debts, including income-tax dues. The court referenced several precedents, including the Full Bench decision in ITO v. Official Liquidator, Palai Central Bank Ltd., which held that the sanction of the winding-up court is required for the realization of income-tax.The court concluded that income-tax dues do not form part of the 'costs, charges, and expenses incurred in the winding-up' and thus cannot be given priority over the claims of secured creditors and workmen under section 529A.2. Distribution of Sale Proceeds:The court addressed the claims of the secured creditor (Canara Bank), workmen, and other creditors in the distribution of the sale proceeds of the company's assets. It was emphasized that the mortgage right of the bank, as a secured creditor, takes precedence over other claims. The court noted that the companies in liquidation had only a limited right over the properties sold, specifically full title minus the mortgage right in favor of the Canara Bank.The court cited the case of Raja Bahadur Motilal Shivlal v. Poona Cotton and Silk Manufacturing Company Ltd., which clarified that the assets available for distribution are those remaining after satisfying the claims of secured creditors. The court reiterated that the secured creditors' claims must be satisfied before any other claims, including those of the income-tax department.3. Applicability of Sections 476 and 529A of the Companies Act and Section 178 of the Income-tax Act:The court analyzed section 476 of the Companies Act, which allows the court to order payment of costs, charges, and expenses incurred in the winding-up from the company's assets. However, it was clarified that this does not include the mortgage right, which belongs to the secured creditor.Section 529A of the Companies Act was highlighted as the sole statutory provision granting priority to workmen's dues and secured creditors' dues over all other debts. The court noted that income-tax dues, even if considered winding-up costs, cannot be paid from the mortgage right, which does not belong to the company in liquidation.Regarding section 178 of the Income-tax Act, the court noted that the assessing officer did not serve any notice on the liquidator under this section. The court referenced the Full Bench decision in Imperial Chit Funds Ltd. v. Income-tax Department, which held that the amount set aside under section 178 is outside the winding-up proceedings. However, it was clarified that section 178 does not confer priority for income-tax dues over the claims of secured creditors and workmen under section 529A.Conclusion:The court directed the official liquidator to declare further dividends to the workmen and Canara Bank under section 529A of the Companies Act, from the amounts provisionally set apart for capital gains tax. The liquidator was also instructed to reimburse Canara Bank for the amounts advanced and expenses incurred.Applications Disposed of Accordingly.
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