1978 (8) TMI 69 - HC - Income Tax

Summary

Issues Involved:
1. Priority of tax dues in the winding-up process.
2. Interpretation of Section 178 of the Income Tax Act.
3. Applicability of Section 530 of the Companies Act.
4. Claim for interest under Section 220 of the Income Tax Act.

Detailed Analysis:

1. Priority of tax dues in the winding-up process:
The primary issue was whether the tax dues claimed by the Income Tax Officer (ITO) should be paid immediately by the liquidator or if the ITO should wait and prove his claim when the list of creditors is settled. The court examined the interplay between Section 178 of the Income Tax Act and Section 530 of the Companies Act. It was argued that Section 178 does not confer a right of priority for all income-tax dues nor recognize any preferential claim in favor of the ITO. The court referred to various judgments from different High Courts to analyze this issue.

2. Interpretation of Section 178 of the Income Tax Act:
Section 178 of the Income Tax Act requires the liquidator to notify the ITO of his appointment and set aside an amount sufficient to cover the tax liability. The court noted that this section, unless properly delimited, would set at naught the whole scheme and the object of the Companies Act regarding winding up. The court observed that the provision for setting aside did not require the liquidator to give priority to the income-tax liability different from the order of priority indicated by Section 530(1)(a) of the Companies Act.

3. Applicability of Section 530 of the Companies Act:
Section 530(1)(a) of the Companies Act provides for preferential payment of taxes due within twelve months before the relevant date. The court emphasized that the priority under the Companies Act is restricted only to cases where the notice of payment has been served under Section 156 within the period of one year immediately preceding the relevant date. The court referred to the Gujarat High Court's decision in Baroda Board & Paper Mills Ltd.'s case, which held that Section 178 of the Income Tax Act did not sanction any priority of payments, and that the same is provided only in the Companies Act.

4. Claim for interest under Section 220 of the Income Tax Act:
The liquidator objected to the claim for interest based on Rule 179 of the Companies (Court) Rules, 1959. However, the court found no substance in the objection, stating that Section 220 of the Income Tax Act clearly provides for interest in specified contingencies, and the "setting aside" directed by Section 178 of the Act would include a claim for the same.

Conclusion:
The court concluded that the amount "set aside" under Section 178 of the Income Tax Act is outside the winding-up proceedings and the jurisdiction of the winding-up court. The court rejected the prayers made by the liquidator in his report and held that the ITO's claim for tax dues and interest should be honored as per the provisions of Section 178 of the Income Tax Act. There was no order as to costs.