1973 (4) TMI 20 - HC - Income Tax

ITO issues notice under section 178 of Income-tax Act to the Official Liquidator to set apart the amount of tax dues - whether sanction of company court under section 446 of Companies Act would be necessary - we find support for the view that the process of recovery of tax which rank as a debt pari passu with other unsecured debts due from the company could not be taken away from the purview of section 446 of the Companies Act

Summary

Issues Involved:
1. Jurisdiction of the company judge under section 446 of the Companies Act.
2. Applicability of section 178 of the Income-tax Act.
3. Priority of tax liability over other unsecured debts.
4. Supervisory role of the company judge in winding-up proceedings.

Detailed Analysis:

1. Jurisdiction of the Company Judge under Section 446 of the Companies Act:
The primary issue was whether the official liquidator's actions under section 178(3)(b) of the Income-tax Act are subject to the control and supervision of the company judge, thereby attracting the provisions of section 446 of the Companies Act. The court held that the proceedings initiated by the official liquidator under section 178(3) of the Income-tax Act fall under the expression "legal proceeding" as used in section 446 of the Companies Act. Therefore, the liquidator's actions are subject to the supervisory jurisdiction of the company judge to ensure the winding-up process proceeds smoothly without external interference.

2. Applicability of Section 178 of the Income-tax Act:
Section 178 of the Income-tax Act mandates that the liquidator notify the Income-tax Officer of his appointment and set aside the amount of tax notified by the Income-tax Officer. The court examined the scheme of section 178 and concluded that while the quantification of tax liability is within the jurisdiction of the Income-tax Officer, the setting aside of the notified amount by the liquidator is a step in aid of recovery and thus falls under the purview of "legal proceedings" as per section 446 of the Companies Act.

3. Priority of Tax Liability Over Other Unsecured Debts:
The court addressed whether the tax liability of the company, as notified under section 178 of the Income-tax Act, should be given preference over other unsecured debts. It was held that the tax liability ranks pari passu with other unsecured debts as per section 530 of the Companies Act. The court emphasized that the tax liability does not get any preferential treatment unless it falls within the provisions of section 530(1)(a) of the Companies Act. Therefore, the amount set aside under section 178(3) of the Income-tax Act does not grant the tax liability any priority over other unsecured debts.

4. Supervisory Role of the Company Judge in Winding-up Proceedings:
The court underscored the importance of the supervisory role of the company judge to ensure that the winding-up proceedings are not hampered by external agencies. The statutory ban on initiating or continuing legal proceedings against the company without the leave of the court is to ensure that the winding-up process is conducted under the direct supervision of the company judge. The court held that the official liquidator's action of setting aside the amount notified by the Income-tax Officer under section 178(3) of the Income-tax Act must be supervised by the company judge to ensure compliance with the Companies Act.

Conclusion:
The court dismissed the appeal, affirming that the actions of the official liquidator under section 178(3) of the Income-tax Act are subject to the supervisory jurisdiction of the company judge under section 446 of the Companies Act. The tax liability does not get preferential treatment over other unsecured debts and must be treated pari passu. The supervisory role of the company judge is crucial to ensure the smooth conduct of the winding-up proceedings.