2014 (12) TMI 266 - HC - Income Tax

Recovery of dues - Invocation of section 178 Company in liquidation - Dues to be paid in priority over other dues or not Company in the process of winding up - Whether the Department has a preferential right in matter of payment of dues over the right of the secured creditors (including the workmen) from the proceeds received upon sale of assets Held that - The Department has taken out the summons to counter the liquidator s request for permission to disburse the sale proceeds amongst the creditors covered under section 529A of the Companies Act - the liquidator has proposed to disburse the proceeds received from sale of assets which were loaded with charge created by the company in favour of the Banks / Financial Institutions - there is nothing in the 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 it confer preferential ranking or higher priority in favour of Government or the Department or tax dues, and it does not place tax dues or the dues of State / Department in a position higher or better than what is conferred by and what is available under Companies Act. There is an additional feature viz. the Department has not even passed any order u/s 178(2) - The Department s affidavit does not claim that the competent assessing officer has passed order under section 178(2) of the Income Tax Act. That is not the case or claim even of the Department - the obligation cast on the liquidator u/s 178(3) will arise after he is notified by the authorised assessing officer under sub-section (2) of section 178 - section 529A is a non obstante clause and the 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. The costs, charges and expenses properly incurred in winding up may stand ahead in the order of priority prescribed u/s 530 of the Companies Act but the dues covered within purview of section 529A of the Companies Act will have priority and overriding effect - The priority and preference conferred in favour of secured creditors (and the workmen whose dues rank pari passsu with that of secured creditors) under section 529A of the Companies Act is a superior right and ranks higher compared to all other priorities and they cannot be made subject to the payment of costs and charges covered within purview of section 520 of the Companies Act - the claim of the Department that payment of its dues should be given priority and preference over the dues of secured creditors and workmen militates against the provision u/s 529A of the Companies Act and is contrary to the scheme of the Companies Act and cannot be allowed. Workmen get rights pari passu with those of the secured creditors on the assets of the company in liquidation - Purpose of the section is to ensure that workmen should not be deprived of their rights in the event of liquidation of the company - Section 529A has employed a non obstante clause which says that notwithstanding anything contained in any other provision of the Companies Act or any other law for the time being in force - The non obstante clause whittles down the priority of even the crown debts thus, the claim of the Income Tax Department, except so far as the Department s request relates to the liquidator s obligation to inform the Department about liquidator s appointment in each case, cannot be sustained and the claim and submissions of the Department is to be rejected. The request made by the Department and the submission made by the Official Liquidator are in consonance with the obligation imposed by virtue of section 178 of Income Tax Act and that, therefore, appropriate intimation to the Department in each case when order appointing liquidator is passed and when the process for disposal of assets and/or disbursement of sale consideration received by liquidator begins, ought to be given to the concerned authority / officer of the Department. The Department has nominated one officer as Nodal Officer who may be informed about the appointment of liquidator and/or about the process of sale of properties or about disbursement of sale proceeds - such intimation is not a substitution of the obligation u/s 178 of Income Tax Act - the liquidator is obliged to regularly file the returns and that, therefore, the liquidator shall take necessary action in all cases Decided against revenue.

Summary

Issues Involved:
1. Priority of Income Tax Department's claim for tax dues over secured creditors and workmen.
2. Application of Section 178 of the Income Tax Act.
3. Application of Sections 520, 476, 529A, and 530 of the Companies Act.
4. Obligation of the Official Liquidator to inform the Income Tax Department and file tax returns.

Detailed Analysis:

1. Priority of Income Tax Department's Claim for Tax Dues Over Secured Creditors and Workmen:
The Department claimed that tax dues should be paid before disbursing any amount to secured creditors and workmen, arguing that tax dues are costs in the winding up process and should be given priority. However, the court held that the dues of secured creditors and workmen have priority over the tax dues by virtue of Section 529A of the Companies Act, which has an overriding effect due to its non-obstante clause. The court emphasized that the secured creditors' rights, including mortgage rights, are superior and must be settled first. The Department's claim was rejected as it could not override the statutory priority given to secured creditors and workmen under Section 529A.

2. Application of Section 178 of the Income Tax Act:
The Department invoked Section 178, which requires the liquidator to notify the assessing officer and set aside an amount for tax dues. However, the court noted that the Department had not passed any order under Section 178(2), which would notify the liquidator of the tax amount to be set aside. The court clarified that Section 178 does not confer any preferential right to tax dues over the claims of secured creditors and workmen. The proviso to Section 178(3) allows the liquidator to part with assets for paying secured creditors whose debts have priority over government dues. Therefore, the Department's claim under Section 178 was not sustainable.

3. Application of Sections 520, 476, 529A, and 530 of the Companies Act:
The court analyzed Sections 520 and 476, which deal with costs and charges in winding up, and found that these sections are subject to the rights of secured creditors as per Section 529A. Section 529A, introduced later and containing a non-obstante clause, overrides other provisions and ensures that secured creditors and workmen's dues are paid in priority. The court held that the Department's claim for tax dues as costs under Sections 520 and 476 cannot take precedence over the secured creditors' and workmen's dues. Additionally, Section 530, which provides for preferential payments, is also subject to Section 529A, further reinforcing the priority of secured creditors and workmen.

4. Obligation of the Official Liquidator to Inform the Income Tax Department and File Tax Returns:
The court directed the Official Liquidator to inform the Income Tax Department about the appointment of the liquidator and the commencement of the process of disbursement. The liquidator is also required to file regular tax returns as per Section 178 of the Income Tax Act. The court emphasized that proper intimation to the Department's Nodal Officer should be given to facilitate the process, ensuring compliance with the statutory obligations.

Conclusion:
The court concluded that the claims of the Income Tax Department for priority payment of tax dues over secured creditors and workmen are not sustainable. The secured creditors and workmen have statutory priority under Section 529A of the Companies Act, which overrides other claims. The Official Liquidator is directed to proceed with disbursements in accordance with Section 529A, after seeking appropriate court permissions and directions. The Department's applications were disposed of, and the Official Liquidator was reminded to comply with the obligation to inform the Department and file tax returns regularly.