1975 (10) TMI 22 - HC - Income Tax

Priority for Sales Tax Dues in Liquidation Proceedings

Baroda Board And Paper Mills Limited (In Liquidation) Versus Income-Tax Officer, Circle I, Ward-E, Ahmedabad, And Others

The court allowed O.J. Appeal No. 2 of 1975, granting priority to specific sales tax dues and directing the liquidator in Company Application No. 26 of ... Income Tax Act, Levy Of Penalty, Sales Tax Issues Involved:1. Preferential claims under section 530(1)(a) of the Companies Act.2. Interpretation of 'due and payable' in the context of tax liabilities.3. Applicability and interpretation of section 178(6) of the Income-tax Act.4. Priority of sales tax and income-tax dues in liquidation proceedings.5. Validity of penalties imposed on the company in liquidation.Detailed Analysis:1. Preferential Claims Under Section 530(1)(a) of the Companies Act:The primary legal issue pertains to the preferential claims under section 530(1)(a) of the Companies Act. The section mandates that in a winding-up, all revenues, taxes, cesses, and rates due from the company to the Central or State Government or to a local authority at the relevant date, and having become due and payable within the twelve months next before that date, shall be paid in priority to all other debts.2. Interpretation of 'Due and Payable':The court examined the meaning of the words 'due' and 'due and payable' within the context of section 530(1)(a). It was determined that these terms imply that the taxes, cesses, etc., must be presently payable, meaning the liability could be enforced as at the relevant date. The court emphasized that both conditions must co-exist: the taxes must be due from the company at the relevant date and must have become due and payable within the twelve months immediately preceding the relevant date.3. Applicability and Interpretation of Section 178(6) of the Income-tax Act:Section 178(6) of the Income-tax Act, which contains a non-obstante clause, was discussed. The court clarified that this section does not confer any higher rights or wider priorities to the Government than those under the Companies Act. It ensures that the Government's existing rights and priorities are not defeated by the sale of the company's assets. The section does not override the provisions for preferential payments contained in section 530 of the Companies Act.4. Priority of Sales Tax and Income-Tax Dues in Liquidation Proceedings:The court analyzed the priority of sales tax and income-tax dues in the context of liquidation proceedings. It concluded that only those tax dues that became due and payable within the twelve months immediately preceding the relevant date would be granted priority. For instance, in O.J. Appeal No. 2 of 1975, the relevant date was June 26, 1967, and only the sales tax dues assessed within the twelve months before this date were given priority.5. Validity of Penalties Imposed on the Company in Liquidation:The court addressed the issue of penalties imposed on the company for non-payment of sales tax dues by the official liquidator. It held that penalties imposed without considering whether there was a reasonable cause for non-payment are not admissible claims. The court emphasized that the liquidator could not have paid the amount as demanded by the sales tax authorities due to the provisions of the Companies Act, and thus, the penalties were not justified.Conclusion:The court allowed O.J. Appeal No. 2 of 1975 to the extent of granting priority to specific sales tax dues and directed the liquidator in Company Application No. 26 of 1973 to prioritize sales tax and income-tax dues in accordance with the judgment. There was no order as to costs, and Company Application No. 26 of 1973 was remanded to the learned single judge for further proceedings in light of the judgment.