Liquidation tax liability counts as winding-up expense, but not as a contingent debt or preferential claim.

Tax liability arising from income or capital gains generated by a liquidator during a proper winding up is not a contingent debt existing at the date of winding up and does not qualify as a preferential claim under section 178 of the Income-tax Act, a priority debt under section 530(1)(a) of the Companies Act, or an admissible contingent debt under section 528. However, where the tax results from the liquidator's realisation of assets in the course of liquidation, it is treated as a cost, charge or expense properly incurred in the winding up and is payable in priority out of the company's assets before distribution to unsecured creditors.

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Issues: (i) Whether the tax demand could be treated as a preferential claim under section 178 of the Income-tax Act or as a priority debt under section 530(1)(a) of the Companies Act, and whether it was admissible as a contingent debt under section 528 of the Companies Act. (ii) Whether the tax liability arising from the liquidator's realisation of assets was an , charge or expense incurred in the winding up payable in priority under sections 520 and 476 of the Companies Act.

Issue (i): Whether the tax demand could be treated as a preferential claim under section 178 of the Income-tax Act or as a priority debt under section 530(1)(a) of the Companies Act, and whether it was admissible as a contingent debt under section 528 of the Companies Act.

Analysis: Section 178 was held inapplicable because the liability related to income arising after winding up and the statutory notice procedure had no relevance to such post-winding-up income. The claim also did not fall within section 530(1)(a) because the tax did not become due within twelve months before the winding-up date. Further, the demand was not a contingent liability on the date of winding up, since no legal obligation existed then to pay tax on future income or capital gains that might or might not arise after liquidation.

Conclusion: The claim was not payable as a preferential claim under section 178, was not covered by section 530(1)(a), and was not admissible as a contingent debt under section 528.

Issue (ii): Whether the tax liability arising from the liquidator's realisation of assets was an , charge or expense incurred in the winding up payable in priority under sections 520 and 476 of the Companies Act.

Analysis: Income-tax arising from acts done by the liquidator in a proper liquidation was treated as part of the costs, charges and expenses of winding up. Tax resulting from realisation of the company's assets was regarded as a necessary consequence of the liquidation process and therefore fell within the expression covering expenses properly incurred in the winding up. Since the company was insolvent, the court could direct payment of such expenses out of the assets before distribution to unsecured creditors.

Conclusion: The tax demand was payable as an expense of winding up in priority to distribution among unsecured creditors.

Final Conclusion: The liquidator was required to satisfy the balance tax liability from the company's assets before distribution, and the department's application succeeded.

Ratio Decidendi: A tax liability arising from income or capital gains generated by the liquidator in the course of a proper winding up is not a contingent debt existing at the date of winding up, but it is an expense properly incurred in the winding up and therefore payable in priority out of the company's assets.

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