AI Drafter 
TaxTMI 
TaxTMI 
2014 (12) TMI 266
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....No.35/2012. 2.1 In the said Company Petition No.253 of 2000, the learned Company Court passed winding up order on 12.3.2008. 2.2 From the details mentioned by the Official Liquidator in the captioned OLR No.35/2012, it has emerged that subsequently somewhere in 2009, the liquidator, pursuant to an order passed by the Hon'ble Company Court, put up for auction - sale some assets of the company in liquidation viz. certain parcels of land. 2.3 It has also emerged that upon completion of process of auction sale, Hon'ble Company Court confirmed the sale vide order dated 30.7.2009 in OLR No.92/2008. 2.4 Subsequently, after seeking permission from the learned Company Company, Official Liquidator published an advertisement somewhere in September 2010 and invited claims from the secured creditors and workmen. 2.5 In response to the said advertisement, some workmen and ARCIL, as assignee of State Bank of India, ICICI Bank Ltd., IDBI Bank Ltd., Bank of India, Indus Ind Bank, IFCI Ltd., Bank of Baroda, etc., submitted their claims. 2.6 It also appears that after the Official Liquidator received the sale proceeds upon sale of certain parcels of land, the Department appr....
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....;" 4. The learned senior counsel for the Department submitted that in backdrop of similar facts and for almost similar relief, the Department has taken out identical applications which also may be heard and decided together. Therefore, with consent of the official liquidator and learned advocates for the workmen and secured creditors, the said applications are also heard and decided by this common order. 5. During the hearing of the said OLR, the Department filed an affidavit dated 30.3.2012 stating, inter alia, that: "2. I submit that the Official Liquidator has sold the land of the company in liquidation for a sale consideration of Rs. 11.50 crores. I submit that there is no exemption provided under the Income Tax Act in respect of a company in liquidation and the provisions of the Act are equally applicable to the said assessee. I submit that the taxability of capital gains under the Income Tax Act on sale of the said land, is required to be examined upon the Official Liquidator filing return of income and offering capital gain for tax. 3. I submit that the department does not agree to the assertions made in para 7 of the report to the effect that the Income Tax Depa....
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.... the amounts to the secured creditors and/or the workers. I humbly submit that taxes as aforesaid would be the costs in the winding up and are required to be paid prior to disbursement to secured creditors/workers." 5.2 The contentions raised by the department have been opposed by the Assets Reconstruction Company (India) Ltd. (hereinafter referred to as 'ARCIL') assignee of certain Banks / Financial Institutions, viz. State Bank of India, ICICI Bank Ltd., IDBI Bank Ltd., Bank of India, Bank of Baroda, Axis Bank, etc. who was filed an affidavit dated 20.4.2012. In response to the said affidavit by ARCIL, the assessing officer of the department filed further affidavit dated 2.7.2012, wherein it is averred, inter alia, that: "2. I submit that subsequent to the order of winding up, the Official Liquidator, after having been so appointed by this Hon'ble Court, has initiated steps for sale of the assets of the company in liquidation and in that process, has realized sale proceeds. As per the averments made in the report, an amount of Rs. 11.50 Crore has been received pursuant to the sale of company's assets. 4. I humbly submit that on realization of the sale pro....
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....the Department relied on the decision by Hon'ble Apex Court in the case of Imperial Chit Funds (P) Ltd. [(1996) 86 Company Cases 555]. He also submitted that since the official liquidator / the company has not filed returns, the Department has issued notices under the Income Tax Act asking the liquidator to file the returns. Learned senior counsel for the Department contended that the dues of the Department i.e. the taxes should be classified and considered as costs and charges incurred in the winding up and that, therefore, in view of section 520 of the Companies Act, the dues of the Department qualify for payment out of the assets of the company in priority to other claims. It is also claimed that Official Liquidator is not exempted from obligation to file return and/or payment of selfassessment tax. Learned senior counsel appearing for the Department further submitted that the Official Liquidator appears to have received income which are liable to be classified and treated as (i) capital gain and (ii) interest on fixed deposit which are subject to tax liability which also qualify for preference. He further submitted that the Official Liquidator may be directed to file return....
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....e" created by the company in favour of the Banks / Financial Institutions. So as to support its claim the Department has invoked provision under section 178 of Income Tax Act and claimed that its dues should be paid in priority over other dues and for that purpose the liquidator should set aside amount equal to its dues before making payment to any creditor or workmen. The said section 178 reads thus: The Income Tax Act, 1961 "178. Company in liquidation. - (1) Every person (a) who is the liquidator of any company which is being wound up, whether under the orders of a court or otherwise; or (b) who has been appointed the receiver of any assets of a company, (hereinafter referred to as the liquidator) shall, within thirty days after he has become such liquidator, give notice of his appointment as such to the Assessing Officer who is entitled to assess the income of the company. (2) The Assessing Officer shall, after making such inquiries or calling for such information as he may deem fit, notify to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the Assessing Officer,....
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....ount notified and until he so sets aside such amount, he shall not part with any of the assets of the company or the properties in his hands. Differently put, until the liquidator makes provision for tax liability as assessed by the Assessing Officer the liquidator is prohibited from parting with the assets and properties of the company in his hands. 13. When the claim and submission of the Department and rival submissions are examined in light of the relevant provisions, it emerges that first and major answer or explanation is available in the section itself, i.e. in the proviso of sub-section (3). As regards the said section 178 what is relevant is that the proviso of sub-section (3) provides, inter alia, that nothing in sub-section (3) shall debar the liquidator from parting with such assets or properties of the company for the purpose of payment of the tax payable by the company or for making any payment to the secured creditors whose debts are, under law, entitled to priority of payment over the dues of the 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 Commiss....
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.... overlook the object, scope and effect of said section 178. The said section aims at reserving sufficient assets for recovering tax dues and it is enacted for the purpose of ensuring that the Government's existing rights and the tax liability are not defeated by sale of the company's assets, or distribution of divided among the shareholders and/or creditors. 15.4 However, the Department wants to read something more into said section than what is contemplated. In light of its own perception and understanding about the section, the Department claims that the said section creates preference in favour of tax - dues over all other dues, whereas in effect it does not give any right of priority to the tax - dues over and above the preference granted under the Companies Act, 1956. 16. On examination and analysis of the said section 178 it emerges that throughout the section there is nothing in the said section which, apart from asking the liquidator to set aside assets sufficient to meet possible tax liabilities (or to set aside sufficient amount), commands the liquidator to pay the tax dues in preference over all other dues and it neither creates any special right nor does i....
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....7.3 Thus, unless and until the liquidator is notified by order under section 178(2) any occasion to claim and enforce payment/recovery does not arise. 17.4 Hence, at this stage, the claim and demand by the Department is, even otherwise, not sustainable. 17.5 From the foregoing discussion, it follows that the submission and claim raised by the Department on strength of the said section 178 cannot be entertained and it must fail. 18. So as to support the claim and submissions the learned senior counsel for the Department relied on the decision in case of Imperial Chit Fund (supra) so far as the said decision is concerned, it is relevant to mention that in the said case, the issue for consideration did not arise in light of section 529A of the Act. Moreover, as observed in the decision in the case of Re Ktc Tyres (India) Ltd. vs. Unknown [(2002) 125 Taxman 899], the issue under consideration before Hon'ble Apex Court was whether the order passed under section 178 of the Income Tax Act would have preference over right of unsecured creditors. In that context, Hon'ble Apex Court held that the Income Tax Department is to be treated as secured creditor and amongst the unse....
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....essing officer, in present case, has not passed any order under section 178(2). 19. Now I may turn to the other contention of the Department, which is raised on the strength of section 520 and section 476 of the Companies Act. 19.1 In light of the sections 520 and 476, learned senior counsel for the Department would submit that capital gain tax and other tax dues claimed by the Department are costs and charges in the winding up and that, therefore, by virtue of the said provision, they enjoy priority. According to the learned senior counsel for the Department, the liquidator is, consequently, obliged to pay costs and charges incurred in the winding up, in priority to other claims and dues. The said section 520 and section 476 read thus: "520. Costs of voluntary winding up. - All costs, charges and expenses properly incurred in the winding up, including the remuneration of the liquidator, shall subject to the rights of secured creditors, if any, be payable out of the assets of the company in priority to all other claims." "476. Power to order costs. - The Court may, in the event of the assets being insufficient to satisfy the liabilities, make an order for the payment ou....
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....s in the process of winding up and before payment of other dues, but subject to rights of secured creditors. 19.11 The rights of secured creditors referred to in section 520 of Companies Act (and also in section 178 of Income Tax Act) are created by virtue of section 529A of the Companies Act. 20. The scheme of the Companies Act and more particularly the provision under sections 529A and 530 of the Companies Act make it clear that the priority under section 520 is subject to the right of preference and priority in the matter of payment of dues created by virtue of section 529A of the Companies Act. The said relevant part of sections 529A and 530 of the Companies Act reads thus: "529A. Overriding preferential payment. - 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 subsection (....
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....rity prescribed under section 530 is itself subject to the preference and priority conferred by section 529A in favour of the dues specified under the said section i.e. section 529A of the Companies Act. 20.2 Therefore, any claim on the strength of section 476 and/or section 520 of the Companies Act in disregard to the order of priority mentioned under section 530 and right of preference created by section 529A of the Companies Act, cannot be sustained. 20.3 In view of the fact that section 529A is a nonobstante clause and since the said section 529A is introduced and brought in force subsequently (i.e. From 24.5.1985) it will have overriding effect, and it shall prevail, over other provisions. Therefore (as observed hereinabove earlier with reference to section 178 of the Income Tax Act) all other rights and claims would be subservient to, and must yield to, the superiority of section 529A and the priority and preference conferred in favour of secured creditors and workmen covered under section 529A of the Companies Act. 20.4 Thus, the claim and contention that the cost, charges and expenses contemplated under section 520 of the Companies Act should be paid in priority ov....
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....stitutions held charge over the said properties and assets and they also hold charge over various properties, they are "secured creditors" contemplated under sections 520, 529A and 530 of Companies Act as well as under the proviso of sub-section (3) of section 178 of the Income Tax Act. 22. In this context, it is pertinent that the banks / financial institutions declared their consent and agreed for sale of the properties in question while reserving their right as holder of first charge over the properties in question. 22.1 As mentioned earlier, in response to the advertisement by the liquidator the secured creditors submitted their claim and while submitting their claim they also pressed in service their "charge" and claimed that they hold first charge over the properties in question and that, therefore, their dues must be paid before payment of other dues is allowed. 22.2 The "creditors" covered under section 529A of the Companies Act are, statutorily, entitled for priority and preference in matter of payment of dues. The said provision being late entrant in the Act introduced in 1985 and brought in force w.e.f. 24.5.1985) and being non-obstante provision confers overrid....
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....r of the secured creditors cannot be entertained until the dues of secured creditors are fully paid and the said claim by the Department cannot be allowed to steal march over the preferential right of secured creditors. Furthermore, the dues of workmen, which rank pari passu with the dues of secured creditors, will, in view of section 529A, get the same treatment as the dues of secured creditors. 23.1 The dues of State do not fall within the category of, and they cannot be categorized as 'secured debt / dues' for the purpose of sections 520, 476, 529, 529A and 530. In this context, profitable reference can be made to the decision by the Federal Court in the case of Governor-General in Council v. Shiromani Sugar Mills Ltd, [1946] 14 ITR 248. While considering the general position of debts due to the Crown and the prerogative rights of the Crown in the liquidation of a company under the Companies Act, 1913, Federal Court observed, inter alia: "We have no hesitation in coming to a conclusion and holding that the Crown is bound by the provisions of the Indian Companies Act, 1913, and is bound, in regard to the provisions relating to the liquidation of companies, 'to a statuto....
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....ts and charges' covered within purview of section 520 of the Companies Act. 23.3 From conjoint reading of section 520, section 476, section 529A and section 530 of the Companies Act, it also becomes clear that the priority of the State is qua the creditors within the purview of section 530 and not qua the secured creditors under section 529A of Companies Act and that, therefore, even if the tax liability and the claim of the Department is, as mentioned earlier, treated as cost, charge and expenses in winding up, then also, the Department's claim will not be payable before the dues of the secured creditors and workmen are paid, but the said claim would qualify for priority and preference qua the creditors under section 530, but after the liability under section 529A is fully discharged. In this context, the Court may hasten to clarify that only those dues of secured creditors and workmen will qualify for such priority and preferential treatment which can be termed as "secured" for the purpose of section 529A read with section 125 of Companies Act. 23.4 Besides this, the Department has failed to point out any provision which, by eclipsing section 529A confers preferenti....
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.... (c) the respective rights of secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent: 1 Provided that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen' s portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debt, opts to realise his security,- (a) the liquidator shall be entitled to represent the workmen and enforce such charge; (b) any amount realised by the liquidator by way of enforcement of such charge shall be applied ratably for the discharge of workmen' s dues; and (c) so much of the debt due to such secured creditor as could not be realised by him by virtue of the foregoing provisions of this proviso or the amount of the workmen' s portion in his security, whichever is less, shall rank pari passu with the workmen' s dues for the purposes of section 529A.]" 25.2 However, under the same Act, i.e. under the Companies Act order of priority is created, by virtue of section 530. Now, so far as said section 530 i....
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.... that the liquidator would pay tax demanded for distributing the dividend. We may now examine whether the point raised by the Official Liquidator, is covered by the decision of the Apex Court in Imperial Chit Funds (P) Ltd.'s case (supra). What was raised before the Apex Court was whether order passed under section 178 of the Income Tax Act would have preference over rights of unsecured creditors. The Apex Court held that Income Tax Department is to be treated as secured creditor and would get priority in the matter of payment. Imperial Chit Funds (P) Ltd.'s case (supra), is an authority for the proposition that between unsecured creditors the claim of tax due under section 178 of the Income Tax Act would have preference over all other claims of unsecured creditors." The Department contended before the Court that: "the tax demanded is capital gain tax on the amount incurred for the winding-up of the company as per section 520 of the Act and section 476 and that tax is payable as "cost, charges and expenses incurred in the winding-up." In this connection we may refer to section 520 also." In that context, the Court observed, inter alia, that: "We are of the view,....
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....ncur. Finally, counsel for the Income Tax Department contended that the amount due to the department by way of capital gain tax is not a debt within the expression "debt" used in section 529A. Section 529A has used the expression "workmen's dues". Further, the expression "debt" is used to mean any pecuniary liability. In CWT v. Ahmed Tea Co. (P) Ltd. (1963) 48 ITR 943 (Assam), the court held any liability to pay income-tax and the assessee has set apart certain amount thought to be necessary for discharging the tax liability, the same has been ascertained it cannot be said that the amount is not a debt. Therefore, the tax liability may also come within the expression "debt" under section 529A. The Apex Court in Imperial Chit Fund's case (supra), or the Division Bench in Swaraj Motors case (supra) had no occasion to examine the scope of section 529A which was introduced by the legislature by employing a non obstante clause which overrides other provisions under the Companies Act as well as under other legislations." This Court is in respectful agreement with the above quoted view and the view in this decision is fortified by the said decision. 28. It would be appropria....