1986 (1) TMI 97 - HC - Income Tax

Summary

Issues Involved:
1. Recognition of tax arrears as debt in liquidation proceedings.
2. Claim for interest under section 220(2) of the Income-tax Act.
3. Applicability of section 220(2) of the Income-tax Act to companies in liquidation.
4. Priority of tax arrears and interest claims under section 530 of the Companies Act.
5. Jurisdiction of the liquidator and company court over tax arrears and interest claims.

Detailed Analysis:

1. Recognition of tax arrears as debt in liquidation proceedings:
The liquidator recognized the demand for arrears of tax for the assessment years 1955-56 to 1958-59. Although the period in question is prior to the winding-up order, assessments were completed only thereafter. Therefore, the claim for arrears of income-tax would be a debt provable in liquidation proceedings by the Department. The proof has been accepted, and consequently, the Department would be treated as an unsecured creditor and would be treated pari passu.

2. Claim for interest under section 220(2) of the Income-tax Act:
The dispute in the appeal relates to the claim for interest under section 220(2) of the Income-tax Act. Section 156 of the Income-tax Act states that when any tax, interest, penalty, fine, or any other sum is payable in consequence of any order passed under the Act, the Income-tax Officer shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable. The liquidator did not and could not comply with the demands made in the demand notices issued under section 156 of the Income-tax Act. Payment was not made within 35 days or even thereafter. According to the Department, in these circumstances, sub-section (2) of section 220 came into operation, and the assessee is liable to pay interest. The liquidator held that the claim cannot be recognized for want of sanction under section 446 of the Companies Act, and this view has been upheld by the learned single judge.

3. Applicability of section 220(2) of the Income-tax Act to companies in liquidation:
The learned single judge held that the claim for interest under section 220(2) of the Income-tax Act cannot be recognized because that provision is in conflict with the provisions and the scheme of the Companies Act in regard to companies in liquidation and, therefore, the provision is not applicable to such companies in liquidation. The scheme of the provisions of the Income-tax Act found in sections 156, 220, and other provisions would clearly indicate that the liability to pay interest is incurred on default to meet a valid demand made under section 156 of the Income-tax Act. This is a statutory liability incurred by the assessee under this provision. When a company is not in liquidation, this provision of the Income-tax Act would apply to the company, and a claim for interest would be valid. However, this cannot be the consequence where the assessee is a company in liquidation within the control of the liquidator and the company court.

4. Priority of tax arrears and interest claims under section 530 of the Companies Act:
Arrears of tax and interest claimed became due long after the winding-up order was passed, that is, long after the relevant date mentioned in section 530(1)(a). Hence, priority under section 530 will not apply to these claims. Therefore, the Department is to be treated only as an unsecured creditor who can look to payment of the debt only in liquidation proceedings. The Department is subject to the jurisdiction of the liquidator and the company court. This is the consequence naturally flowing from the provisions of the Companies Act. That is why the Department moved the liquidator for recognizing the claim for arrears of tax and interest.

5. Jurisdiction of the liquidator and company court over tax arrears and interest claims:
Provisions of the Companies Act clearly indicate that an unsecured creditor must prove his debt, and all such debts are to be paid pari passu. Consequently, the claim of the Department for arrears of tax has to be proved in liquidation proceedings. The Department also must stand in the queue to receive its due. The liquidator is not a free agent to make payment of arrears of tax. It is only where an assessee has no legal impediment to pay the arrears of tax but nevertheless fails to pay the tax that the liability to pay interest under section 220 can be said to have been incurred. That certainly cannot apply to a company in liquidation or the liquidator. Therefore, it is evident that the provisions of section 220 cannot apply to a company in liquidation governed by the provisions of the Companies Act. The fundamental basis of section 220 of the Income-tax Act is in clear conflict with the scheme and provisions of the Companies Act. Therefore, section 220 of the Income-tax Act cannot apply to a company in liquidation which is governed by the provisions of the Companies Act.

The appeal was dismissed with costs, affirming that the provisions of section 220 of the Income-tax Act do not apply to a company in liquidation governed by the Companies Act.