TaxTMI 
TaxTMI 
1996 (3) TMI 397
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....gment the Official Liquidator representing the Imperial Chit Funds (P.) Ltd. has come up in appeal. 2. The Imperial Chit Funds (P.) Ltd. is a private company. It was wound- up as per orders passed by the High Court dated 1-6-1973 in C.P. No. 7 of 1973. After the commencement of the winding-up proceedings the ITO finalised the assessment of the company for the year 1972-73 by his order dated 31-3-1975. He assessed the company to income-tax in the sum of Rs. 934 and levied an interest of Rs. 93 payable under section 220(2) of the Income-tax Act, 1961. The total amount thus payable was Rs. 1,027. The Official Liquidator intimated the ITO by his letter dated 8-5-1975 that the tax and interest constituted debt provable in the winding up proceedings. He stated that he was not in a position to pay the amounts straightaway. According to the liquidator, the tax was due and payable within 12 months before the relevant date mentioned in section 530(8)(c) of the Companies Act, 1956 and so, section 530(1)(a) will not apply to the instant case. The ITO ignored the above intimation of the Official Liquidator. He issued a certificate to the TRO and by his letter dated 8-12-1976 demanded a sum o....
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....178 of the Income-tax Act will not be available for distribution in accordance with the provisions of the Companies Act and should be first applied to the satisfaction of the tax liability and gets priority over other debts of the company, in the same way, as a secured creditor, who stands outside the winding-up. The said decision was affirmed in appeal by a Division Bench in A.S. No. 225 of 1968. A Division Bench of the Andhra Pradesh High Court in ITO v. Official Liquidator [1975] 101 ITR 470, has taken the same view. On the other hand, the High Courts of Mysore, Calcutta, Rajasthan, Gujarat and Delhi, in the decisions in ITO v. Official Liquidator [1967] 63 ITR 810 (Mys.), Official Liquidator v. CIT [1971] 80 ITR 108 (Cal.), CIT v. Official Liquidator, Golcha Properties (P.) Ltd. (In Liquidation) [1974] 95 ITR 488 (Raj.), Baroda Board & Paper Mills Ltd. (In Liquidation) v. ITO [1976] 102 ITR 153 (Guj.), ITO v. Narula Finance (P.) Ltd. (In Liquidation) [1978] 114 ITR 645 (Delhi), and ITO v. Official Liquidator, National Conduits (P.) Ltd [1981] 128 ITR 228 (Delhi) have taken a contrary view and have held, that the provisions of section 178 of the Income-tax Act do not affect or a....
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....yment over debts due to Government on the date of liquidation or for meeting such costs and expenses of the winding up of the company as are in the opinion of the Chief Commissioner or Commissioner reasonable. (4) If the liquidator fails to give the notice in accordance with sub-section (1) or fails to set aside the amount as required by sub-section (3) or parts with any of the assets of the company or the properties in his hands in contravention of the provisions of that sub-section, he shall be personally liable for the payment of the tax which the company would be liable to pay: Provided that if the amount of any tax payable by the company is notified under sub-section (2), the personal liability of the liquidator under this sub-section shall be to the extent of such amount. (5) Where there are more liquidators than one, the obligations and liabilities attached to the liquidator under this section shall attach to all the liquidators jointly and severally. (6) The provisions of this section shall have effect not withstanding anything to the contrary contained in any other law for the time being in force." [Emphasis supplied] Provisions of the Companies Act "446.....
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....o such application, shall unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company." Inserted by the Companies (Amendment) Act, 1985 : "529. Overriding preferential payments.-(1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding-up of a company- (a)workmen's dues; and (b)debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of section 529 pari passu with such dues, shall be paid in priority to all other debts. (2) The debts payable under clause (a) and clause (b) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions." "530. Preferential payments.-(1) In a winding-up, subject to the provisions of section 529A, there shall be paid in priority to all other debts- (a)all revenues, taxes, cesses and rates due from the company to the Central or a State Government or to a local authority at the relevant date as defined in clause (c) of sub-section (8), and having become du....
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....t in any way providing for priority of payments regarding income-tax dues and the view expressed by the Kerala and the Andhra Pradesh High Courts to the contrary does not lay down the correct law. On the other hand, the Counsel for the revenue submitted that the decisions of the Kerala and the Andhra Pradesh High Courts have given due importance to the legislative history and background leading to the enactment of section 178 and the crucial words contained in the section to hold that section 178 of the Income-tax Act is a special provision and the amount which is to be set aside as per the said section, stands outside the winding-up proceedings and is not available for distribution in accordance with the provisions of the Companies Act at all. The counsel for the revenue further argued that the preferential payment specified in section 530(1)(a) of the Companies Act and the mandate under section 178 of the Income-tax Act behoving the liquidator to set aside the amount notified by the ITO, sufficient to provide for any tax which is then or is likely thereafter to become due and payable by the company are of different import and the view taken by the Kerala and Andhra Pradesh High C....
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....78 of the Income-tax Act. Under section 530(1)(a) all taxes which have 'become due and payable' alone are entitled to preferential payment. The amount should have been crystal- lized into a liability. Under section 178(2) read with section 178(3), provi-sion should be made for any tax which is then or is likely thereafter to become payable. Even the amounts which have not been crystallized into a liability, but which are 'likely to become due thereafter' should be taken note of. And, we should also bear in mind, the non obstante clause section 178(6). 7. In the judgment under appeal, the Full Bench has followed the judgment of a learned Single Judge of the Kerala High Court in Indian Traders Bank Ltd. (In Liquidation)'s case (supra). In the said decision Raman Nair, Acting Chief Justice, a Judge with considerable experience in company law, dealt with section 178 of the Income-tax Act and sections 529 and 530 of the Companies Act, and observed in his characteristic style, thus: "One wishes that section 178 of the Income-tax Act, 1961 were more explicit, but, as I read that provision, I do not think that it affects the scheme of priority in section 530 of the Companies Act alth....
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.... yet have been determined, and therefore not provided, is hardly in keeping with the wording of the section defective though it be. Sub-section (2) of the section, it may be noted, speaks of the tax payable by the company, and, sub-section (4), of the payment of the tax on behalf of the company, not of the dividends payable in respect of the tax liability. What the section contemplates is the payment of the tax eventually found due out of the amount set aside, not the payment of dividends in respect of the tax eventually found due. And, if this brings the section into conflict with section 530 of the Companies Act, the section must prevail by reason of sub-section (6) thereof-the question why income-tax alone of all Government dues should ride this high horse is not for me to answer. But, for the purposes of section 530 of the Companies Act, the tax liability is an ordinary and not a preferential claim and it is only out of the amount set aside under sub-section (3) of section 178 of the Income-tax Act, that the revenue can claim payment of its debt to the exclusion of other creditors. And the Division Bench in A.S. No. 225 of 1968, affirming the above decision, observed thus: ....