1980 (10) TMI 45 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Income Tax Officer (ITO) can resort to Section 222 of the Income Tax Act, 1961, for recovery of tax without seeking leave under Section 446 of the Companies Act, 1956, after a winding-up order has been made.
2. The applicability of Section 537(2) of the Companies Act in the context of tax recovery.
3. The relevance and applicability of Section 178 of the Income Tax Act in the context of tax recovery from a company under liquidation.

Detailed Analysis:

1. Requirement of Leave under Section 446 of the Companies Act:
The primary issue was whether the ITO could recover tax under Section 222 of the Income Tax Act without obtaining leave from the company judge under Section 446 of the Companies Act after a winding-up order had been made. The court held that obtaining leave under Section 446(1) of the Companies Act was a condition precedent for seeking to recover tax by the ITO. Section 446(1) stipulates that no suit or other legal proceedings shall be commenced or proceeded with against a company in liquidation without the leave of the court. The judgment emphasized that the debt in question was not found to be a preferential payment under Section 530(1) of the Companies Act, and thus, the order refusing leave was justified.

2. Applicability of Section 537(2) of the Companies Act:
Mr. Verma argued that Section 537(2) of the Companies Act, which excepts proceedings for the recovery of any tax payable to the Government from the restrictions of Section 537(1), provided an independent power to the ITO to recover tax without adhering to Section 446. The court disagreed, stating that Section 537(1) only makes certain transactions void between the date of presentation of the petition for winding up and the date of the winding-up order. Section 537(2) does not override the requirement of obtaining leave under Section 446 for recovery proceedings initiated after the winding-up order. The court cited the Federal Court decision in Shiromani Sugar Mills Ltd., which established that leave must be obtained for recovery of tax as arrears of land revenue.

3. Relevance of Section 178 of the Income Tax Act:
Mr. Verma also invoked Section 178 of the Income Tax Act, which mandates the liquidator to inform the ITO of his appointment and to keep sufficient funds to cover tax liabilities. The court noted that this point was not raised before the single judge and was not included in the grounds of appeal. Moreover, even on merits, Section 178 does not interfere with the priority of debts as laid down in Section 530(1)(a) of the Companies Act. The court referred to Baroda Board & Paper Mills Ltd. and similar cases, which held that Section 178 does not alter the requirement of obtaining leave under Section 446. The court also acknowledged conflicting views from other High Courts but emphasized that the Federal Court's decision in Shiromani Sugar Mills remains authoritative.

Conclusion:
The court concluded that without obtaining leave under Section 446(1) of the Companies Act, the ITO cannot resort to Section 222 of the Income Tax Act for the recovery of tax due from a company in liquidation. The appeal was dismissed without costs, affirming the necessity of adhering to the requirements of the Companies Act in such cases.