2003 (11) TMI 12 - HC - Income Tax

Insolvency Debts provable in insolvency - order of adjudication date of adjudication - The official assignee took over the assets of the insolvents and auctioned the properties of the insolvents. The sale proceeds thereof came in the hands of the official assignee -admittedly the adjudication order was made on November 3, 1987, declaring respondents Nos. 1 to 4 as insolvents. The order of penalty has been imposed in the year 1995, i.e., much after the order of adjudication was made, and respondents Nos. 1 to 4 were adjudged as insolvents. The liability of penalty, thus, was incurred after the date of adjudication and cannot be said to be provable under section 46(3) of the Presidency Towns Insolvency Act. The legal position has been consistent in this regard that debt to be provable under insolvency must be arising out of obligation incurred before the order of adjudication or the insolvent must become subject before discharge

Summary

Issues:
1. Interpretation of section 46(3) of the Presidency Towns Insolvency Act.
2. Determination of provable debts in insolvency proceedings.
3. Liability of penalty under the Income-tax Act post-adjudication.

Analysis:

Issue 1: Interpretation of section 46(3) of the Presidency Towns Insolvency Act
The judgment addressed the interpretation of section 46(3) of the Presidency Towns Insolvency Act, which states that debts and liabilities to be provable in insolvency must be related to the obligations incurred by the debtor before the date of adjudication. The court referred to past cases to establish that debts arising after the adjudication order or discharge are not provable. The court cited precedents to emphasize that obligations incurred post-adjudication do not constitute provable debts under the Act.

Issue 2: Determination of provable debts in insolvency proceedings
The court discussed the rejection of a claim by the official assignee amounting to Rs. 35,02,277 under the insolvency proceedings. The claim was made by the Tax Recovery Officer, which was rejected as it did not pertain to the liabilities existing before the adjudication date. The court upheld the decision of the official assignee, emphasizing that debts must relate to obligations incurred before the adjudication to be considered provable in insolvency.

Issue 3: Liability of penalty under the Income-tax Act post-adjudication
The judgment also delved into the liability of penalties imposed under the Income-tax Act after the adjudication order. It highlighted that penalties imposed post-adjudication do not constitute provable debts under the Presidency Towns Insolvency Act. The court cited a Supreme Court case to support the position that the liability for penalties arises only when the penalty is imposed, which, in this case, occurred after the adjudication order. Therefore, the court concluded that the appellants had no case on merits regarding the penalty liabilities incurred post-adjudication.

In conclusion, the High Court dismissed the appeal, stating that there was no merit in the appeal. The court affirmed that debts and liabilities to be provable in insolvency must be related to obligations incurred before the adjudication date, as per section 46(3) of the Presidency Towns Insolvency Act. The judgment provided a detailed analysis of past legal precedents to support the decision and emphasized the consistent legal position regarding provable debts in insolvency proceedings.