1980 (3) TMI 13 - HC - Income Tax

Issues Involved:
1. Rejection of claim for interest by the official liquidator.
2. Requirement of sanction under Section 446(1) of the Companies Act.
3. Applicability of Section 220(2) of the Income Tax Act to a company in liquidation.

Detailed Analysis:

1. Rejection of Claim for Interest by the Official Liquidator:
The appeal concerns the order of the official liquidator rejecting the proof of a claim raised by the Income Tax (I.T.) department for interest payable under Section 220(2) of the Income Tax Act, 1961. The Catholic Bank of India Ltd. was ordered to be wound up on October 3, 1961. The official liquidator invited proof of claims, and the list of creditors was settled and filed in court on July 5, 1962. The I.T. assessments for the years 1955-56 to 1958-59 were completed later, and demand notices were served on the liquidator on February 23, 1963. An additional demand for the year 1955-56 was served on February 5, 1967. Initially, the department believed that tax arrears would get priority under Section 530 of the Companies Act. However, the department later moved applications to vary the list of creditors, which were allowed by the court. The liquidator recognized the department's claim for tax arrears but did not recognize the claim for interest. The department's subsequent application to the company court was dismissed, and the appeal to the Division Bench allowed the department to prove the claim for interest as an unsecured debt. The matter was reconsidered by the liquidator, who rejected the claim on two grounds.

2. Requirement of Sanction under Section 446(1) of the Companies Act:
The liquidator rejected the claim for interest on the grounds that no sanction under Section 446(1) of the Companies Act had been obtained by the department for claiming interest. The liquidator's view that the department cannot prove the claim for interest without the leave of the winding-up court is supported by the decision in Official Liquidator v. ITO [1978] 111 ITR 398 (Ker) and the Division Bench in MFA No. 92/77 (ITO v. Offl. Liq., Swaraj Motors (P.) Ltd.). The Bench decision is binding, and the direction in A.S. No. 563/74 did not grant leave or sanction under Section 446. The liquidator's decision on this point is upheld.

3. Applicability of Section 220(2) of the Income Tax Act to a Company in Liquidation:
The liquidator also rejected the claim on the grounds that the special provisions of the Companies Act would prevail over the general provisions of the Income Tax Act, like those contained in Section 220(2), so that the department could not claim interest from a company in liquidation for periods subsequent to the winding-up. The Supreme Court in Union of India v. India Fisheries (P.) Ltd. [1965] 57 ITR 331 held that the statutory power under Section 49E of the Indian Income Tax Act, 1922, could not be exercised in a way that defeats the provisions of the Companies Act. Similarly, in Kondaskar v. Deshpande [1972] 83 ITR 685, the court distinguished between assessment proceedings and recovery proceedings, holding that the latter are linked to the distribution of assets in liquidation. The decision in Official Liquidator v. ITO [1978] 111 ITR 398 (Ker) held that interest under Section 220(2) pertains to the realm of recovery and collection, and the company court alone could scrutinize such claims. The liquidator's decision that Section 220(2) does not apply to a company in liquidation is upheld, as applying it would defeat the object of Sections 528 and 529 of the Companies Act.

Conclusion:
The application by the I.T. department fails and is dismissed, with no order as to costs. The liquidator's decision to reject the claim for interest under Section 220(2) of the Income Tax Act is upheld on both grounds: the lack of sanction under Section 446(1) of the Companies Act and the precedence of the special provisions of the Companies Act over the general provisions of the Income Tax Act.

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