1944 (11) TMI 17 - HC - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the High Court under Section 226(1) of the Government of India Act, 1935.
2. Whether the Income-tax Department can proceed with tax recovery under Section 46 of the Income-tax Act despite the winding-up order.
3. Interpretation of Section 171 of the Indian Companies Act, 1913, concerning "suit or other legal proceeding."
4. The prerogative of the Crown in debt recovery in the context of the Indian Companies Act, 1913.

Issue-wise Detailed Analysis:

1. Jurisdiction of the High Court under Section 226(1) of the Government of India Act, 1935:
The Income-tax Department argued that the High Court lacked jurisdiction to entertain the application due to Section 226(1) of the Government of India Act, 1935, which restricts High Courts from having original jurisdiction in matters concerning revenue. The Court distinguished between "matter concerning the revenue" and "matter concerning any act ordered or done in the collection thereof according to the usage and practice of the country or the law for the time being in force." The Court concluded that the section does not preclude the High Court from determining whether an act in the collection of revenue is in accordance with the law for the time being in force.

2. Whether the Income-tax Department can proceed with tax recovery under Section 46 of the Income-tax Act despite the winding-up order:
The Court examined whether the Income-tax Department's rights under Section 46 of the Income-tax Act are subordinated to the winding-up provisions of the Indian Companies Act, 1913. It was argued that the prerogative of the Crown to prefer its debt is not taken away by the Companies Act. The Court referred to the principle of pari passu distribution of assets in a winding-up and concluded that the prerogative of the Crown does not override the statutory scheme of distribution under the Companies Act. Therefore, the Income-tax Department must seek leave under Section 171 of the Companies Act to proceed with recovery.

3. Interpretation of Section 171 of the Indian Companies Act, 1913, concerning "suit or other legal proceeding":
The Court considered whether the steps taken under Section 46 of the Income-tax Act constitute "suit or other legal proceeding" under Section 171 of the Companies Act. The Lahore High Court's restrictive interpretation in Shakuntla v. The Peoples' Bank of Northern India, Ltd. was not followed. The Court adopted a broader interpretation, concluding that "legal proceeding" includes any proceeding of a legal character, not limited to those analogous to a suit. The Court held that the recovery steps under Section 46 of the Income-tax Act are "legal proceedings" requiring leave under Section 171.

4. The prerogative of the Crown in debt recovery in the context of the Indian Companies Act, 1913:
The Court rejected the argument that the Crown's prerogative to prefer its debt remains unaffected by the Companies Act. It referred to the House of Lords decision in Food Controller v. Cork, which clarified that the prerogative right of the Crown to priority in debt recovery no longer exists under the statutory scheme of the Companies Act. The Court emphasized that the Indian Companies Act, 1913, provides for a pari passu distribution of assets, subject to statutory exceptions, and does not preserve the Crown's prerogative in this context.

Conclusion:
The Court allowed the petition, restraining the Income-tax Department from proceeding with the recovery under Section 46 of the Income-tax Act without leave of the Court. The respondents were given the option to provide an undertaking not to proceed with the recovery, failing which a formal injunction would be issued. The Court granted leave to appeal to the Federal Court.