TaxTMI 
TaxTMI 
1973 (4) TMI 20
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....e-tax by the company to the department and, therefore, he was specifically directed to set apart this amount under section 178 of the Income-tax Act, 1961 (hereinafter called "the Act"). The official liquidator wrote back to the Income-tax Officer, vide his letter dated 3rd October, 1968, that such a direction could be issued to him only after obtaining leave of the High Court under section 446 of the Companies Act, 1956, but the Income-tax Officer did not agree with this suggestion. The official liquidator was under the circumstances forced to move an application before the High Court under section 460(4) of the Companies Act and stated in his application that out of the amount of Rs. 41 lakhs of the estimated tax as pointed out by the Income-tax Officer, the claim of the tax liability was admitted by him only to the extent of Rs. 1,12,583 and the balance claim amounting to Rs. 39,87,417 had been rejected for reasons set forth in his order dated 30th October, 1971. He also mentioned in that application that the amount of tax found payable after the assessments shall be treated as ordinary claim and not as preferential claim under section 530 of the Companies Act and, accordingly, ....
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....anies Act and, therefore, the requirements of section 178 of the Act cannot in any manner be whittled down by taking resort to the provisions of section 530 or 446 of the Companies Act. He also contended that the Income-tax Act is a complete code in itself and the act of quantifying the tax against the company in liquidation cannot in any manner be subjected to the jurisdiction of the company judge under section 446 of the Companies Act. According to Mr. Gupta, the official liquidator was under a statutory duty to comply with the requirements of sub-section (3) of section 178 when the amount of tax was duly quantified by the Income-tax Officer and notified to the official liquidator under sub-section (2) of section, 178 of that Act. Mr. Rastogi, appearing on behalf of the official liquidator, on the other hand, argued that the provisions of sub-section (3) of section 178 of the Act, which deal with the step in aid of the recovery of tax, cannot operate independently of the provisions of the Companies Act. His argument is that simply because the amount of tax has been notified under sub-section (2) of section 178 it does not place the tax liability of the company at a footing highe....
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....e provisions of section 446 of the Companies Act of 1956. In order to understand the true scope and the nature of the provisions of section 178 of the Act it will be relevant to examine the scheme of this section. Section 178 of the Act reads as follows : "178. (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 Income-tax Officer who is entitled to assess the income of the company. (2) The Income-tax Officer shall, after making such enquiries 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 Income-tax Officer, would be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company. (3) The liquidator (a) shall not, without the leave of the Commissioner, part with an....
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....that if the liquidator has to part with the assets of the company or has to sell its properties in his hands, then he can do so before the receipt of the estimated tax liability of the company with the leave of the Income-tax Commissioner. After the estimated tax liability is notified to the liquidator, then it becomes incumbent under sub-section (3)(a) for the liquidator to set aside the amount equal to the amount so notified to him and not to part with that amount or the assets of the company in his hands. There is, however, one exception to this rule that the liquidator has the liberty to part with the assets or the properties of the company for making any payment to secured creditors whose debts are entitled under the law to get priority over debts due to the Government. Sub-section (4) of this section deals with the contingency as to what will be the consequences if the liquidator fails to comply with the mandate of law contained in sub-section (3) and the legislature makes the liquidator personally liable for tax if he fails to set aside the amount of tax duly notified to him and he is also made punishable for the contravention of this provision under section 276A of the Comp....
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.... any priority over the debts of other unsecured creditors. His argument, therefore, is that if the tax liability of the company as notified by the Income-tax Officer under section 178 of the Act is given any preference to the other unsecured debts and the entire amount of Rs. 41 lakhs is set aside by the liquidator, then the unsecured creditors in this case would not get any dividends from the liquidator, and the department would also not receive any payment till the assessments are completed and the position of the tax liability vis-a-vis other unsecured debts is determined by the liquidator and, therefore, this heavy amount shall remain frozen for the benefit of none and eventually the revenue shall not get the whole amount as the debt relating to tax shall stand at par with other unsecured debts. In these circumstances, Mr. Rastogi contends that by keeping this amount of Rs. 41 lakhs idle with the liquidator, neither the revenue nor shall the unsecured creditors be benefited and in that event when the Income-tax Commissioner did not pay any heed to the request of the official liquidator, he was left with no alternative but to apply to the company judge under section 460(4) read ....
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....tained in any other law for the time being in force, be transferred to and disposed of by that court. (4) Nothing in sub-section (1) or sub-section (3) shall apply to any proceeding pending in appeal before the Supreme Court or a High Court." A careful examination of section 178 of the Act reveals. that subsection (3) of that section casts a statutory duty on the liquidator to set aside an amount equal to the amount notified under sub-section (2) of that section and till it was done the liquidator is debarred from parting with any of the assets of the company. The object of this provision of law is to ensure the ultimate recovery of the tax which may eventually be found due against the company. The argument of Mr. Rastogi is that the provisions of sub-section (3)(b) of section 178 of the Act is a step in aid of recovery of tax from the company as it guarantees the preservation of funds to the extent to which the company is likely to pay the amount of tax as notified to the liquidator and any step taken by the liquidator in accordance with this provision of the statute would, therefore, fall within the expression "legal proceeding" so as to attract the application of subsection (1....
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....at agencies not knowing the true state of affairs of the winding-up of the company may not interfere with the functioning of the liquidator who has to wind up the company under the direct supervision of the winding-up court. It is with this view that the legislature has centralised the power of supervision in the company judge and a statutory ban is put on the institution of suits or initiation of legal proceedings without the leave of the court. It is in this scheme of the statute that we have to see whether provisions of section 446 of the Companies Act are attracted to the circumstances of the instant case. If during the course of the winding-up the official liquidator is required by the Income-tax Officer to deal with the assets of the company in a particular manner and to set aside the funds of the company exclusively for the payment of tax liability then would this direction of the Income-tax Officer, which is undoubtedly issued under a statutory provision, take away the supervisory jurisdiction of the company judge so as to render him a helpless and a silent spectator to the developments which take place on account of the action of the Income-tax Officer under section 178 of....
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....pany. The tax due under the Act also falls within the expression "debt" and after the same has been quantified by the department it is also admissible to proof before the liquidator. The effect of all these statutory provisions is, inter alia, that all the unsecured debts are to rank pari passu and in the matter of payment no preference is to be given to the debt relating to the tax liability unless it falls within the provisions of section 530(1) of the Companies Act. Therefore, when the claim of the revenue is proved in the liquidation proceedings, it is treated as the unsecured debt and the department cannot claim any preference over other creditors in the matter of payment because certain amount has been set aside to ensure the payment of the debt under sub-section (3) of section 178 of the Act. It is also clear that while setting aside the notified amount under the provision of section 178(3) of the Act, the department does not get any immunity from the operation of the provisions of the Companies Act as the liability of tax also ranks pari passu with other debts and it has accordingly to be paid to the revenue treating the debt as an unsecured creditor like other creditors. I....
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....all within the supervision of the company judge under section 446 of the Companies Act. The question raised before the Supreme Court in that case was whether the assessment of tax under the Act against a company in liquidation was also subject to the jurisdiction of the company court under section 446 of the Companies Act. Considerable stress was laid on the expression "suit or legal proceeding" to bring the action of the Income-tax Officer in the matter of assessment or reassessment of tax against the insolvent company in liquidation, but their Lordships rejected that argument by observing: "Turning now to the Income-tax Act, it is noteworthy that section 148 occurs in Chapter XIV which beginning with section 139 prescribes the procedure for assessment and section 147 provides for assessment or reassessment of income escaping assessment. This section empowers the Income-tax Officer concerned subject to the provisions of sections 148 to 153 to assess or reassess escaped income. While holding these assessment proceedings the Income-tax Officer does not, in our view, perform the functions of a court as contemplated by section 446(2) of the Act. Looking at the legislative history an....