1974 (3) TMI 70 - HC - Companies Law

Interpretation of Tax Dues vs. Preferential Claims: Income-tax Act Prevails Over Companies Act

The court held that Section 178 of the Income-tax Act, 1961, which requires setting aside funds for tax liabilities, overrides Section 530(1)(a) of the ... Winding up - Preferential payments Issues Involved:1. Preferential claim of tax dues by the Income-tax Officer.2. Applicability and interpretation of Section 530(1)(a) of the Companies Act, 1956.3. Applicability and interpretation of Section 178 of the Income-tax Act, 1961.4. Overriding effect of Section 178(6) of the Income-tax Act over Section 530(1)(a) of the Companies Act.5. Implied repeal of Section 530(1)(a) of the Companies Act by Section 178 of the Income-tax Act.Issue-wise Detailed Analysis:1. Preferential claim of tax dues by the Income-tax Officer:The Income-tax Officer submitted a claim for Rs. 4,028.50 against a company in liquidation, asserting it as a preferential claim. The official liquidator admitted the claim but declined to treat it as preferential, citing Section 530 of the Companies Act, 1956, which restricts preferential claims to amounts due within twelve months before the winding-up order.2. Applicability and interpretation of Section 530(1)(a) of the Companies Act, 1956:Section 530(1)(a) of the Companies Act provides that the Government is entitled to priority for arrears of tax owing by a company in liquidation, but this priority is confined to taxes due and payable within twelve months before the winding-up order. The liquidator relied on this section to reject the preferential claim since the tax dues were from periods beyond the twelve-month limitation.3. Applicability and interpretation of Section 178 of the Income-tax Act, 1961:Section 178 of the Income-tax Act, introduced in 1962, mandates that the liquidator of a company in winding-up must notify the Income-tax Officer within 30 days of his appointment. The Income-tax Officer, in turn, must notify the liquidator of the estimated tax liability within three months. The liquidator must set aside an amount to meet this liability and is prohibited from distributing any assets until this amount is set aside.4. Overriding effect of Section 178(6) of the Income-tax Act over Section 530(1)(a) of the Companies Act:Section 178(6) of the Income-tax Act states that its provisions shall have effect notwithstanding anything contrary in any other law. The court found a contrariety between Section 530(1)(a) of the Companies Act, which limits the preferential claim to taxes due within twelve months, and Section 178 of the Income-tax Act, which imposes no such restriction. The court held that Section 178, being a subsequent legislation, overrides Section 530(1)(a) of the Companies Act.5. Implied repeal of Section 530(1)(a) of the Companies Act by Section 178 of the Income-tax Act:The court reasoned that the subsequent legislation, Section 178 of the Income-tax Act, effectively submerges the limited preferential claim provided by Section 530(1)(a) of the Companies Act. The obligation to set aside the entire tax due implies an overriding effect, leading to an implied repeal of the earlier provision. The court emphasized that the legislative intent was to protect tax dues comprehensively, not just within the limited scope of Section 530(1)(a).Conclusion:The court directed the liquidator to set apart and pay off the tax dues as notified by the Income-tax Officer, rejecting the liquidator's view that the preferential claim was limited to taxes due within twelve months before the winding-up order. The judgment underscores the overriding effect of Section 178 of the Income-tax Act over Section 530(1)(a) of the Companies Act, ensuring comprehensive protection for tax dues in liquidation scenarios.