Priority of advance tax payments: statutory demand within twelve months before winding up creates preferential tax liability in winding up.

Advance payments under the advance tax regime, where a statutory notice of demand has been served within twelve months before a winding up order, qualify as a tax that is "due and payable" for purposes of preferential payment in winding up. The court relied on the statutory demand and recovery machinery, the pay-as-you-earn character of instalments, and the deeming of default to treat such demands as enforceable tax liabilities; a later final assessment does not defeat the priority vested at the date of the winding up, although any eventual overpayment remains refundable.

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Issues: (i) Whether advance payment demanded under section 18A of the Income-tax Act is a tax within the meaning of section 230(1)(a) of the Indian Companies Act and, if so, whether such advance tax demanded within twelve months before the winding up order is entitled to preferential payment in the winding up.

Analysis: The Court analysed the nature and statutory machinery of advance payments under section 18A, including the instalment dates, the statutory deeming of an assessee in default under section 18A(10), provisions for interest, penalty and recovery (including section 29 notices and recovery under section 46), and the meaning of when a tax becomes "due and payable" under the Income-tax Act. The Court observed that the advance payment regime is founded on the "pay as you earn" principle but is backed by formal demand machinery: a notice of demand under section 29 makes the sum payable and a statutory recovery process exists (section 46), so the liability is enforceable. The Court rejected arguments that absence of final assessment or of the Finance Act rates renders advance payments non-tax in nature, and distinguished cases concerning returns and provisional payments (such as sales tax return regimes) where no demand is made until final assessment. The Court held that a demand under section 18A issued within the twelve months prior to the winding up order becomes a tax due and payable for the purposes of section 230(1)(a). It further held that a subsequent final assessment after the winding up order does not defeat the priority that had already vested at the material date (date of winding up order), although any excess ultimately paid may be refundable.

Conclusion: The advance payment demanded under section 18A of the Income-tax Act, when a notice of demand has been served within twelve months before the winding up order, is a tax that became due and payable for the purposes of section 230(1)(a) of the Indian Companies Act, and is therefore entitled to preferential payment in the winding up. The appeal is dismissed (decision in favour of the Revenue).

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