1973 (9) TMI 3 - HC - Income Tax

Tax deducted at source from director s salary but not paid to the Government- Winding up of company - whether the Government can claim the amount on a priority basis - since the Income-tax Officer did not show that he was entitled to be paid in priority either the whole or part of the outstanding amount under section 530(1)(a), he was not entitled to leave to proceed to recover the taxes

Issues Involved:
1. Whether the Income-tax Officer can take proceedings under the Income-tax Act for the realization of the tax amount.
2. Whether arrears of tax due should be treated as any other debt due from the company in liquidation.
3. Whether the demand for arrears of tax is a preferential debt.
4. Interpretation of Section 537(2) of the Companies Act, 1956.

Issue-wise Detailed Analysis:

1. Proceedings under the Income-tax Act:
The principal question is whether the Income-tax Officer can be permitted to take proceedings under the Income-tax Act for the realization of the amount in question. The court referred to the Supreme Court judgment in S. V. Kondaskar v. V. M. Deshpande, which stated that the provisions of Section 446 of the Companies Act, 1956, do not debar the income-tax department from taking reassessment proceedings. However, the realization of tax determined must be made in the same manner as any other debt of the company. The court concluded that the Income-tax Officer should be treated as a creditor of the company and must prove his debt in the same manner as any other creditor.

2. Arrears of Tax as Debt:
The court examined whether the arrears of tax due should be treated in the same way as any other debt due from the company in liquidation. It was observed that the realization of arrears of income-tax should be effected in the same manner as the realization of any other debt due from a company in liquidation. The Supreme Court in Kondaskar's case had stated that the liquidation court would have full power to scrutinize the claim of the revenue after income-tax has been determined and its payment demanded from the liquidator.

3. Preferential Debt:
The court addressed whether the demand for arrears of tax is a preferential debt. It referred to the Federal Court's judgment in Governor-General in Council v. Shironmani Sugar Mills Ltd., which held that debts owed to the Crown could not claim priority in the matter of payment due to the administrative scheme provided by the Companies Act. The court noted that Section 530 of the Companies Act, 1956, grants priority only to debts that became due and payable within 12 months before the winding-up order. Since the present claim did not stand on this footing, it was concluded that the income-tax authorities could not claim any priority for the realization of the debt.

4. Interpretation of Section 537(2):
The court analyzed Section 537(2) of the Companies Act, 1956, which states that any attachment, distress, or execution against the estate or assets of a company without leave of the court is void. However, this does not apply to any proceedings for the recovery of any tax or impost or dues payable to the Government. The court observed that there is an inconsistency between Sections 537 and 446 of the Companies Act. It held that the income-tax authorities could not proceed to realize arrears of tax without the leave of the court under Section 446(1). The court reiterated that the income-tax authorities cannot claim priority except as permitted by Section 530(1)(a) of the Companies Act, 1956.

Conclusion:
The court concluded that the income-tax authorities cannot proceed to realize arrears of tax without the leave of the court. The court refused leave under Section 446(1) of the Companies Act, 1956, because the debt in question was not entitled to priority. However, if the Income-tax Officer can show that any portion of the sum is entitled to priority under Section 530(1)(a), leave would be granted to that extent. The petition was dismissed with no order as to costs.

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