1978 (5) TMI 33 - HC - Income Tax

Summary

Issues Involved:
1. Recovery of outstanding tax demands against a company in liquidation.
2. Priority of income-tax dues in liquidation proceedings.
3. Application of section 178 of the Income-tax Act, 1961.
4. Jurisdiction of the liquidation court over income-tax assessments.
5. Powers of the official liquidator versus the Income-tax authorities.

Issue-wise Detailed Analysis:

1. Recovery of Outstanding Tax Demands Against a Company in Liquidation:
The application sought leave from the court under section 446 of the Companies Act, 1956, to recover outstanding tax demands against the company in liquidation by taking proceedings under the Income-tax Act, 1961. The court recognized that the income-tax authorities aimed to act outside the Companies Act by taking coercive steps under the Income-tax Act. The court held that income-tax authorities stand in the same position as any other creditor and must prove their debt before the court to be paid pari passu along with other creditors, as per sections 528 and 529 of the Companies Act.

2. Priority of Income-tax Dues in Liquidation Proceedings:
The court reiterated the legal position established by the Federal Court in Governor-General in Council v. Shiromani Sugar Mills Ltd. [1946] 14 ITR 248, that the Crown (and by extension, the income-tax authorities) is bound by the statutory scheme of administration under the Companies Act and does not have any prerogative priority or preferential rights in payment of its claims unless expressly conferred by the Act. The Supreme Court in S.V. Kondaskar v. V.M. Deshpande [1972] 83 ITR 685 also upheld this view, stating that the liquidation court has the power to scrutinize the claims of the revenue after income-tax has been determined.

3. Application of Section 178 of the Income-tax Act, 1961:
The court analyzed section 178 of the Income-tax Act, which requires the liquidator to inform the Income-tax Officer of their appointment and to keep apart a specified amount for income-tax liabilities. The court concluded that section 178 does not create any priority for income-tax dues. The section merely protects the amount specified by the Income-tax Officer from being utilized by the liquidator for other purposes. The actual payment to the Income-tax Officer must be determined through judicial adjustments under sections 528, 529, or 530 of the Companies Act.

4. Jurisdiction of the Liquidation Court Over Income-tax Assessments:
The Supreme Court in S.V. Kondaskar v. V.M. Deshpande held that the liquidation court does not have the power to stop assessment proceedings for determining the amount of tax payable by the company in liquidation. However, once the tax has been assessed, the liquidation court has the authority to scrutinize and decide the extent to which the assessed amount should be accepted as a lawful liability on the funds of the company in liquidation.

5. Powers of the Official Liquidator Versus the Income-tax Authorities:
The court noted that the official liquidator, appointed by the Central Government, has significant powers under the Companies Act, including the ability to get a summary judgment, take possession of assets, and execute recoveries through all courts in India. These powers are unique and not paralleled by the Income-tax Act. The court found that granting leave to the Income-tax authorities to make recoveries outside the liquidation proceedings would serve little purpose, especially since the company had been in liquidation for ten years and most claims were now time-barred.

Conclusion:
The court dismissed the application, emphasizing that the income-tax authorities must cooperate with the official liquidator to trace any remaining assets and make recoveries under the available powers of the Companies Act. The court also highlighted that no priority for income-tax dues exists in liquidation proceedings unless expressly provided by law.