1991 (2) TMI 331 - SC - Companies Law

What is the ambit of the State s claim to priority in relation to revenues, taxes, cesses and rates, due from a company in liquidation? Held that - Allow the appeal of the company in liquidation and direct the liquidator to re-examine the claim for priority in accordance with the interpretation of the provision, that is to say, he must first ascertain whether the liability to sales tax belongs to and is founded within the period of 12 months next before June 26, 1967, and as such due and payable but preserving, however, the order of the Division Bench in relation to the view it has taken about penalties.

Issues Involved:
1. Ambit of the State's claim to priority in relation to revenues, taxes, cesses, and rates due from a company in liquidation.
2. Interpretation of the term "due" in Section 530(1)(a) of the Companies Act, 1956.
3. Conditions for claiming priority under Section 530(1)(a).
4. Conflicting judgments on the interpretation of Section 530(1)(a).

Issue-Wise Detailed Analysis:

1. Ambit of the State's Claim to Priority:
The primary issue revolves around the scope of the State's claim to priority concerning revenues, taxes, cesses, and rates due from a company in liquidation. The question arises within the framework of Section 530(1)(a) of the Companies Act, 1956, which states, "In a winding up, 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 due and payable within the twelve months next before that date."

2. Interpretation of the Term "Due":
The term "due" in Section 530(1)(a) has been a subject of varied interpretations. The learned judge initially interpreted the term "due" to imply different meanings in different parts of the same clause. In the first part, "due" means "outstanding at the relevant date," while in the latter part, "having become due" means that the event bringing the debt into existence occurred and it became payable, i.e., its payment could have been enforced against the company within the twelve months before the relevant date.

3. Conditions for Claiming Priority:
Three specific conditions must be satisfied for any debt to claim priority under Section 530(1)(a):
- The debt must be outstanding on the relevant date.
- The debt must have been incurred within the twelve months next before the relevant date.
- The debt must have become payable within the twelve months next before the relevant date.

The learned judge concluded that the tax becomes due when the taxing event occurs, not when the assessment orders are passed. The claim for priority was rightly rejected by the liquidator because the amount of tax arrears was due for a period much prior to the twelve months next before the relevant date, even if it became payable upon the assessment order being made and demand notice being issued.

4. Conflicting Judgments on the Interpretation of Section 530(1)(a):
The Division Bench of the High Court differed from the initial interpretation by holding that "due" means "presently due" and the words "due and payable" mean the same thing, i.e., presently payable. The Division Bench held that all revenues, taxes, cesses, and rates due from the company must be presently payable and must have become presently payable within the twelve months immediately preceding the relevant date. The appeal of the Sales Tax Officer was allowed to the extent that sales tax due under the Bombay Sales Tax Act and the Central Sales Tax Act, for which assessment orders were passed within the twelve months immediately preceding June 26, 1967, were held to have priority.

The Supreme Court, after reviewing both judgments, concluded that the relevant and important considerations and material were overlooked. The Court emphasized that the debts due and payable, so as to claim priority, must be appropriated to the period within the twelve months next before the relevant date and their liability for payment must be founded during that period. The Court agreed with the interpretation put by the Court of Appeal to Section 264 of the English Companies Act in Airedale Garage's case, analogous to the provision at hand.

Conclusion:
The Supreme Court allowed the appeal of the company in liquidation and directed the liquidator to re-examine the claim for priority in accordance with the interpretation provided. The liquidator must ascertain whether the liability to sales tax belongs to and is founded within the period of twelve months next before June 26, 1967, and is due and payable. The order of the Division Bench regarding penalties was preserved. No order as to costs was made.

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